by Dear MarketWatch,
I am 38 years old and I wonder if I will ever be able to retire. In 2020 I bought a $649,000 house with 25% down payment. In 2022 I sold it for $1.3 million, took that money and reduced the cash payment. My total monthly housing expense is still $1,500 (taxes, insurance, HOA, utilities, etc.). I didn’t have a car until recently and now I have a $1000 down payment for the next 5 years.
My bonus income is $150,000. I have $150,000 in a Traditional IRA, $50,000 in Roth, and $50,000 in my 401(k) company (20% Roth, 80% Traditional). I’m currently maximizing my contribution, I have an employer match of $4000/year plus an additional $8000/year in the company after 401(k) taxes. I have about $1300 a month in additional income. Am I saving enough? Would it be better to buy an income-generating property and reduce my retirement savings?
Help!
To see: I am 36 years old with $435,000 and want to retire sooner – ‘the sooner the better’ – but without a frugal lifestyle
Dear reader,
First off, congratulations on being in your 30s, having so much saved, thinking deeply about your financial decisions, and really staying on top of your retirement security. That in itself is already a great achievement.
You are very lucky to be in a position where you earn the salary you earn and have the employer accounts and correspondence that you are offered. It’s a situation many young Americans don’t find themselves in, and you should make the most of it. With the country headed down a path where private sector pensions are being phased out, Social Security is in the midst of some sort of change (Congress has never let it falter, but it needs help right now) and retirees are primarily responsible by their own retirement income, the sooner workers think about the finances behind their retirements, the better. A 401(k), an employer match, and a good salary are key ingredients in doing so.
You ask if you’re saving enough, but truth be told, there’s no way to know what “enough” is right now. You’re 38, so unless you plan to retire substantially earlier than a traditional retirement sometime in your 60s, you probably don’t know what your retirement expenses will be. No one can know for sure how much housing, utilities, car payments, healthcare, emergencies, and so on will cost 20 or 30 years from now. You can try to calculate what you’d like to have in retirement income each year, factor in inflation, and work backwards to find a number to strive for, but that number will likely change several times between now and when you’re really close to retirement. . .
Check out the MarketWatch Column “Retirement Tricks” for practical advice for your own retirement savings journey
That said, at this point in your retirement journey, the focus should be on saving, saving, saving as much as you can without totally depriving yourself in the present. It looks like you are doing this.
If by income-generating property you mean focus on rental income, this is definitely a way to bring in extra cash, but it usually comes with a lot of work. There are months when you might not make money if you have vacancies, and then there are less-than-ideal times when you’re paying for repairs, replacements, and so on. Rental income is a great way to earn money – many people who retire early use it as one of their main sources of retirement income – but it’s more intensive than saving money in a 401(k) or IRA. You also need to find reliable and responsible tenants, otherwise it can be a huge headache for you as a landlord.
If you go this route, plan on keeping extra cash in case you need to fix anything, and if you decide to eventually get multiple properties, consider hiring a trusted manager to help keep up with day-to-day business. Before buying a property, be sure to look into the “bones” of the house or building and get the details of the roof, pipes, property history and so on.
You shouldn’t cut too much into your retirement savings instead of renting a property. Ideally, you would take some of that profit and put it in an account for the future. But I will say that you might want to diversify the types of accounts you have for the future.
See too: Should You Be a Landlord in Retirement?
You mentioned that you have Roth and traditional accounts. This is great, as tax diversification is a huge advantage in retirement. It gives you the ability to choose how you earn your retirement income, and therefore how much of a tax bill you could face, and that’s powerful. But it is not the only tool. Diversifying the types of accounts you have also helps. For example, you have a 401(k) and IRAs, but these accounts have restrictions such as the account holder needs to be 59 and a half years old to withdraw freely (Roths allows investor contributions to be distributed without penalty, but there are other rules of withdrawal to keep in mind).
Instead of putting all your retirement money into retirement accounts, you could try a brokerage account. Those are taxable, but there are fewer rules for distributions, and that might help if you retire early after all.
For now, keep up the good work. The fact that you’re already so invested in your retirement security is a good sign.
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