The concept of retirement means different things to different people. It’s a concept that possesses the vast majority of working people in this country and in most other countries as well. It’s the moment you no longer have to work for a living or, for some, it’s the time where you are finally required to slow down and take a break. Retirement is a concept known the world over because it’s a biological fact. At some point between 50 and 70, the human body begins to wind down. It becomes increasingly more tempting to simply sit on the porch with a good book and a sunbeam for a few hours instead of worrying about the hustle and bustle of working life. When there’s a house, grandkids, and maybe a few pets aging with you, it’s pleasant to no longer have to work.
However, retirement isn’t exactly a magical time where cares disappear and money is no object. Quite the contrary. Most people plan for decades putting aside a little each month to make sure they have enough to live on when income through work is no longer an option. Retirement planning comes in many shapes and sizes and the majority of working people today are expecting to rely on a combination of social security and 401K plans put together with their employers. These savings plans are organized for your benefit to absorb your retirement savings and very slowly build interest. Unfortunately, the way the 401K and other similar plans are set up cause most of the retirement stress and worry you hear about today.
The 401K Zero-Sum Retirement
Retirement savings accounts like your 401K are a great place to start retirement planning, but they should by no means be the end of your retirement plan. The 401K serves as what most of us would call a ‘nest egg’ with a few special rules about when you can withdraw and when you must withdraw. It is essentially a savings account and after the age of 55 1/2, you can withdraw as much as you want whenever you want. It’s advised that you withdraw somewhere around 4% annually as a rough estimate of how to make it until end of life on a single savings account, but what if you have higher expenses? What if there’s a costly emergency? Seniors who rely on 401Ks and other static savings accounts are constantly worried about spending too much early on and running out of money when they really need it.
This is what as known as a zero-sum game. No matter where the money goes, no new money will re-enter the system because it’s assumed that you no longer have the capacity to bring in income. But wait. Working is not the only way to bring new money into your retired household, especially if you set up a passive income source as part of your retirement planning.
Passive Income in Retirement
When it comes to preparing for a truly relaxed retirement, the key is one simple phrase. “Passive Income”. What this means is essentially money that generates itself without your interference. One form of passive income would be an actor earning residuals like Jerry Seinfeld who is still being paid a steady income from his sitcom’s success. Running an online marketplace that takes a slice out of every transaction is another form of passive income. However, for people who don’t act or develop websites, the best way to secure yourself incredibly low-maintenance passive income is through residential or commercial real estate.
The reason passive income is the key to a happy retirement is because it brings new money into the equation instead of simply assuming that you will be bleeding money throughout your retirement. Having a fixed amount like you do in a 401K savings account means that you will constantly be wondering if you’re spending too much because there’s no way to refill that bucket once it’s empty. However, passive income means that you can always count on another payment coming in. Don’t worry about still drawing some from your 401K, they mandatory minimum withdrawals at the age of 70 1/2 either way. With passive income, you’ll be able to stretch your retirement savings much longer and will likely have a tidy sum to pass onto your heirs because so little was needed.
Passive Retirement Income Through Real Estate
We mentioned before that the most practical form of passive income for most retirees is real estate and now we’ll explain how that works. Real estate investment sounds like a big deal, but it’s really incredibly common and surprisingly affordable. Especially if you plan to use the property as a source of income instead of a second home.
All you need is a desirable rental property with the right balance of expenses to local average rent. The property can be residential or commercial as long as there’s a steady demand from renters. When the math shakes out correctly, the total rent should be able to cover mortgage payments, the annual cost of maintenance and repairs, and a property management service. You’ll know the right property when, after these calculations, there’s still a nice return percentage coming back to you every month. This means that not is the mortgage paying itself, you’re actually earning income while building equity on a second property. And, of course, when the mortgage is complete, the rent doesn’t suddenly drop. The entire portion of rent that used to go to the mortgage will then be available to supplement your retirement income.
When it comes to retirement planning, the 401K may be a great place to start (and get some matching from your employer), but it is not the most secure solution by a long shot. Passive income is the ideal retirement situation because you know more money will flow in to support you and your savings are not the end of the line. With even one property generating rental income, you can float more comfortably through retirement as a respected landlord. At Crescere Capital we believe that everyone should understand the power of recurring revenue.