Following Traditional Retirement Investment Strategies May Not Help You Achieve Your Dreams
Our traditional education system teaches many important skills, but it often misses out on how to effectively plan for retirement. Plus, it doesn’t always cover essential life and leadership skills needed in the real world.
Planning for retirement can be complex and time-consuming, and it’s not something that schools focus on. Many people dream of retiring early, but it requires careful planning over many years.
Starting to save and invest early is crucial, but it’s also important to choose investment accounts you can access when needed. For example, 401(k)s and IRAs offer tax benefits now but come with penalties if accessed before age 59½. If you plan to retire at 50, you’ll need other sources of income to rely on.
Why Deferring Taxes Might Not Always Be Best
Traditional advice often suggests deferring taxes until retirement, but this isn’t ideal for everyone. This approach works well for those who plan to retire at a traditional age and live on less income than they did while working.
We’ve been advised for years to save money in 401(k)s, IRAs, and other tax-deferred accounts to lower our taxable income today, with the expectation of paying taxes when we retire. The idea is that you’ll be in a lower tax bracket during retirement, so you’ll pay less in taxes.
However, this strategy relies on two assumptions: 1) future tax rates and 2) retiring with lower income than during your working years.
Tax Rates Are Uncertain
Future tax rates are unpredictable and have been historically low for many years. Relying on a strategy that assumes low future tax rates could be risky as rates may rise, affecting your retirement plans.
How Real Estate Can Help
Investing in real estate can offer significant tax benefits. Real estate investments provide ways to defer taxes or get tax deductions. Tax deferral means postponing taxes to a later date, while tax deductions reduce the amount of tax you owe today.
Real estate not only diversifies your portfolio but also helps lower your tax burden through various deductions unique to this asset class.
Income and Taxes in Retirement
While some people are okay retiring with less income than they earned while working, others want to continue growing their wealth. If you aim to earn more in retirement, you might end up in a higher tax bracket. Real estate can help manage your tax burden with its various tax advantages.
The Benefit of Depreciation
One powerful feature of real estate investing is depreciation. Depreciation allows property owners to reduce their taxable income by accounting for the property’s loss in value over time. This means you can lower your tax liability by deducting depreciation from your rental income.
In Summary
Previously, the advice was to maximize contributions to 401(k)s and IRAs to reduce taxes now and withdraw from these accounts at retirement when taxes were expected to be lower. This approach works for those who retire with lower income. However, if you plan to earn more during retirement, this strategy might not be as effective.
Real estate offers a strong retirement investment strategy, balancing your portfolio and reducing risk. Take the time to understand how real estate can fit into your retirement planning.
Our team can guide you through passive real estate investing. Schedule a call today or fill out our investor form to get answers to your questions.
