What Everybody Gets Wrong About Retirement Saving
A friend recently mentioned he was not yet saving for retirement, and I promptly gave him a kick in the ass. The tax advantages of employer-sponsored 401k plans and individual retirement accounts (IRAs) are formidable, so it’s a no-brainer to open and fund these accounts. But I hate how narrow the options are in traditional 401k plans.
Diversification is the golden word, so advisors spice up our portfolios with different kinds of equity funds targeted at emerging markets or small cap companies or who knows what else. Each investment comes with its own unique risk factors and we definitely need to do our diligence. But the risk that we should all be worried about in the long run is our portfolio risk. It’s all our assets that we will retire on, not any one investment, so we need to focus on how a new investment will affect our total portfolio.
True diversification is about building a portfolio with uncorrelated (or negatively correlated) assets. Mutual funds diversify the risk that any particular company or sector might perform poorly. But what if the whole stock market drops? I’ve looked at the data, and stock markets are correlated across the whole world.
Bonds are the most popular way to hedge the risk of an untimely stock market decline. They’re negatively correlated with stock prices, so that’s good. They also have predictable returns: predictably shitty. Commodities are another hedge against stock market declines, but I think it’s just plain dumb to buy non-productive assets, like gold, for retirement. The longer we hold bonds or commodities, the less our portfolio can compound over the years, and the less comfortable we will be in retirement.
If you’re an investor looking to build a diversified nest egg, add some real estate to your portfolio. Real estate offers a wide variety of investment opportunities that correlate weakly with the stock market and produce returns that crush bonds. Investing in real estate takes more work than buying click-and-forget mutual funds, but I think it’s worth the effort.
There are several ways you can add real estate to your retirement portfolio. IRAs and some 401ks allow you to choose from a wider variety of publicly traded assets. This offers the easy opportunity to invest in Real Estate Investment Trusts (REITs), which are themselves diversified portfolios of real estate with steady cash flows. There are even REIT funds which let you spread your bets across the real estate industry. For example, the Vanguard REIT Index Fund (VGSIX) has a record of capital appreciation and a steady yield.
More risk-tolerant investors can look for even better deals. IRAs and self-directed 401ks increasingly allow us to invest our tax-advantaged retirement funds in new ways. There are now real estate investing platforms like Realty Shares that let us buy pieces of individual properties, so we can spread our bets and diversify our own specific portfolios.
The most sophisticated real estate investors can acquire whole properties (although not to live in or use ourselves) or invest in private real estate developments. I know several people who form limited partnerships with trusted real estate developers to directly invest in real estate projects. It’s not for the faint of heart, but there’s potential for big gains. And by using retirement funds, we can get those gains without having to pay tax.
As I told my friend, you must save, you should save in a tax advantaged IRA or 401k, and add real estate to diversify your portfolio. If you want to retire comfortably, make sure you do all three.
Call me at 847-317-0077, email me at [email protected], or tweet me at @benreinberg or @alliancecgc to submit us a property(s) for us to acquire. For further information on our approach to deals, please click here.
If you have an interest in investing in our opportunities please give me a call. For further information on investing with Alliance, please click here.
My Best,
Ben
