By Ken Holman
Recently, I read a book written by Chris Farrell entitled “Unretirement.” Chris is a senior economics contributor at Marketplace and an award-winning journalist. The main premise of his book is that aging boomers, those born during the Post-World War II era between the years 1946 and 1964, won’t overwhelm the government’s safety net of Social Security and Medicare because baby-boomers are not retiring at age 65. Instead, they are working well into their seventy’s which means they are continuing to pay into the system rather than take from it.
Farrell writes, “Debt! Deficit! Aging! Retirement crisis! Economic stagnation! Intergenerational warfare! Talk about a bad curve. Taken altogether, it appears an aging America is hurtling toward the dismal end of Shakespeare’s Seven Ages of Man—‘Sans teeth, sans eyes, sans taste, sans everything.’ No wonder people are fearful about retirement.
“Well, don’t be depressed. The dire jeremiads aimed at an aging America are wrong and deeply misplaced. The graying of America is terrific news. Living longer is good. Embrace the realization that boomers on average are healthier and better educated than previous generations. An aging population presents an enormous opportunity for society and for aging individuals to seize and exploit.”
The fact that Americans are living longer and are healthier is all good news but you can’t simply brush aside the fact that both the Social Security System and Medicare are in deep financial trouble. And since you have no control over either safety net, the thing you need to focus on is building your own safety net, which is a strong retirement nest egg.
Fortunately, there are some benefits to projecting a later retirement. “Social Security benefits are at their maximum at age seventy. . . . Claiming benefits at age sixty-two instead of seventy cuts the monthly benefit almost in half, notes Alicia Munnell, director of the Center for Retirement Research at Boston College, in ‘Social Security’s Real Retirement Age Is 70,’ She calculates that the net replacement rate of income for the median earner—taking into account Medicare, taxes, and full retirement age of sixty-seven in 2030—is 24 percent at age sixty-two and 43 percent at age seventy—almost double.”
I guess it’s encouraging to know that if you wait to retire until age seventy, instead of sixty-two, that the government will pay you 43 percent of your replacement income instead of 24 percent. Either way, that doesn’t do much to resolve where you’re going to find the income to replace the other 57 percent that government won’t fund.
The best way I know to fund the 57 percent income deficiency at retirement is by investing in income-producing real estate. Most retirement models suggest a heavy concentration in equities (stocks and mutual funds) in the early years and then, as you approach retirement, to shift from equities to cash, bonds and annuities. Little emphasis is given to the importance income-producing real estate can play in a retirement program. Investing in income-producing real estate is by far the most important investment you can make for future retirement. Nothing will give you more security or safety than real estate when it comes to a sound retirement program. It has the advantages of cash flow, leverage, equity buildup, appreciation and tax benefits. No other investment offers all of these combined benefits.
In his book, “How to Retire Happy,” Stan Hinden, former syndicated Washington Post “Retirement Journal” columnist, he wrote, “The fact is that when you face the question, ‘Am I ready to retire?’ your answer may have little to do with your fantasies and a lot more to do with your age, your health, your family, the nature of your job, your financial situation, and your outlook on life.”
Until the 2008-2009 market crash and recession significantly eroded the retirement savings of the 77 million baby boomers, many of this generation were set to retire. Now they find themselves still working because they can’t afford to retire. An AARP study in May 2008 reported that 27 percent of all workers 45 and older had postponed their plans to retire. That survey was taken before the U.S. unemployment rate hit 10 percent. The unemployment rate has come down to 5.8 percent, but that is due in part because of the reduction in workforce.
If you want to be happy when your retire, you need to develop an investment strategy that incorporates income-producing real estate. I advocate that as much as fifty-percent of your retirement savings should be invested in real estate. To many stockbrokers and financial planners that percentage seems ludicrous. Most financial pundits advocate less than fifteen-percent. Even then, the fifteen-percent is not really invested in real estate, but is invested in Real Estate Investment Trusts (REITs), which is really a type of stock investment rather than real estate.
Income-producing real estate is a great hedge against inflation. For every dollar you invest, you can buy four dollars of real estate assets. Not only does your dollar appreciate in value over time, but the four dollars of real estate assets you purchased increases in value over time.
If you’re thinking about making some changes to your investment portfolio that would permit you to begin investing in income-producing real estate, you might check into setting up a self-directed one-participant, solo or individual 401(k). If you do it before the end of the year, you can set aside as much as $23,000 in the account, if you are 50 years old or older and do it before December 31. Then, next year, you can transfer money out of your existing 401(k) into your solo 401(k) and begin investing in income-producing real estate. If you need help, I can show you how. Just send me an email or give me a call and I’ll help you get set up with a reliable custodian.
There’s no need to fret about retirement. If you’re part of the “Unretirement” generation, then embrace the fact, enjoy your work, and begin investing in income-producing real estate. I have clients who are well into their seventies who have found that real estate is the best way to go. So you have enough money to live on during retirement, having a steady stream of retirement income sure beats having to liquidate a stock portfolio. If you want to retire happy, start investing in income-producing real estate. It doesn’t need to be liquidated at retirement. If you’ve decided to postpone retirement, now you have more time to make the adjustments necessary to retire happy.