Summary: Are the bulk of your savings in the stock market and in your 401(k)? Have you avoided real estate investing because you thought it is riskier than the stock market? Do you want to achieve financial freedom while you’re still young enough to enjoy it rather than when you’re 66? If you’ve answered any of these questions with a “yes” then this post is for you!
As physicians and high-income professionals, we’re told to save our money and invest in the stock market. We’re told to…
- Plan for retirement by saving in our 401(k)s
- Grow our wealth efficiently by deferring taxes using vehicles like 401(k)s
- Create backdoor Roths to maximize the amount we save
- Open up 457(b) accounts
- Create 529s for our kids
- Fund our HSAs.
And during times of crisis, like now, in this bear market, we’re told to hold the line, not sell our stocks, and not time the market. Everyone tells us to be patient. In time everything will come back to normal.
We’re told that over time the stock market is the safest, best place to put our savings and to grow our retirement.
So is this true? Are stocks truly “safer” than real estate? Does that mean real estate investing is riskier than the stock market?
Let’s find out.
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First of all, there’s nothing wrong with the conventional approach
The conventional approach of setting aside money in your 401(k) and invest in index funds is historically relatively safe. The only caveats are: there better not be a downturn right when you’re about to retire and you’d better stay healthy enough to be able to work until retirement age.
If you start early enough and put away money diligently, it also means you likely retire with a decent nest egg.
It’s also nice because it doesn’t require a whole lot of time and effort. You simply put away money in a retirement account and it grows passively. You let other people invest for you (by hiring a financial advisor) or you just plug and play with an age-based retirement calculator.
I still have a 401(k)
I followed this conventional train of thought for a long time.
In fact, I still have a retirement account at work, sitting there, losing money right now because of the current downturn. I’m not worried. I do believe that the market will recover. I still have almost thirty years until my “official retirement.”
I also don’t plan on needing my 401(k) anyway, since my real estate earnings should easily fund my retirement. So whether my 401(k) is big or small probably isn’t going to make a big difference in my life.
I admit I like the ease of leaving my money to grow in my 401(k) retirement account without doing much of anything. It also feels good to get my match at work, so I’m racking up some free money.
I feel good knowing I’m diversified beyond just having everything in real estate. While it’s tough for me to watch my returns be less than half of my real estate returns in any given year, I can justify having some of my money in the stock market for diversification alone.
Overall, It has its positives.
But, that being said, would I ever go back to putting a majority of my savings and my wealth into the stock market like conventional wisdom advises?
Nope, I’d never do that again
Why not?
Because the traditional mantra of putting all your savings in retirement accounts and in the stock market is based on several important assumptions no longer applies to me. In fact, I completely disagree with these assumptions.
So what are the assumptions behind the “put all your money in your 401(k) and stocks so you have a secure retirement” plan that don’t apply to me (and maybe to you)?
Putting all your savings into retirement accounts assumes that:
- You don’t want to have freedom before you hit retirement age
- You’re incapable of handling your own money
- You’re going to remain an employee, aka dancing bear, for your whole life
- You’re going to retire with less income (i.e. poorer) than you are now
- You aren’t going to need your money until you’re old (aka you are OK with putting your money into money jail)
- Putting money in the stock market is enough to be diversified
Not sure you agree either? Let’s dig in.
Are you waiting for retirement to be free?
When you put all your money into retirement accounts, you’re saying that you value future freedom over freedom now.
Now, don’t get me wrong. I’m not saying that you shouldn’t save anything for the future.
Many of us have taken care of elderly patients in the hospital who have depleted their funds and go back to less than stellar home situations or are stuck waiting to be accepted into adult family homes for months. Others have parents who didn’t plan for their retirement and have become financial burdens.
So there is no doubt that there is value in making sure you’re financially secure when you reach retirement age.
But what about retiring 5 or 10 years from now?
Why not secure your future earlier than retirement age AND survive and even thrive at retirement age too?
At this point, I’m sure some of you are saying, “Yeah, that’s a nice thought, but it isn’t possible for me.”
And that’s where I disagree with you.
With focus, action, and persistence I believe that anyone can build a source of income on top of their day job.
Kenji and I chose to do that by investing in real estate. And now, we’ve also created our blog. (Though that is a lot less passive than real estate income!)
No matter how you decide to do it, the point is that if you open your mind to the possibility of finding a way to build enough wealth that you achieve financial freedom in your thirties or forties or even fifties, you’re going to take a very different approach than just maximizing your savings in your 401(k) and calling it a day.
What will you do differently?
You’ll look for ways to build multiple sources of income instead of just passively socking away money for the future. You’ll siphon some of the money you save towards building businesses, but you’ll continue to learn and to grow. You’ll spend energy outside of your day job to build your future. And you’ll spend time with people who are leading lives outside the norm.
When you believe there are options, you will see the world differently and you will act differently.
And that’s what’s needed to achieve financial freedom before retirement age.
Are you not capable of building your own wealth?
The financial machine encourages us to put away savings in retirement, under the care of financial planners and retirement institutions because it assumes that we can’t make reasonable choices ourselves.
The underlying message is this: invest in the stock market because it’s safer and more reliable than anything you can do yourself to build your wealth.
Is that really true?
I’m not so sure.
Again, I agree that overall the stock market is a “safe” bet. That’s part of why I’m not freaking out about my retirement account right now with the current downturn.
But what I’m questioning is that the people on Wall Street are better than I am at handling my money. I believe no one cares for my money the way that I do.
I also don’t buy into the argument that I’m incapable of learning how to handle my own finances, so I need to hand them off to others. I can figure out the basics of investing in index funds. I’ve educated myself about how to invest in real estate. I can build businesses.
You can educate yourself and take control
Many of us don’t start out with any sort of financial education.
We don’t know how to build businesses. We don’t know how to invest. We don’t know how to create passive income streams outside of our day job. But, just because we aren’t taught this in school doesn’t mean we’re incapable of learning to manage and grow our money.
Sure, we might make mistakes along the way. And we might lose some money while we’re learning. But playing it “safe” and doing what everyone around you is doing has consequences too.
And those consequences are that you wait until retirement to be financially free.
Don’t you want more?
Do you want to be a dancing bear forever?
When you’re an employee, you trade your time for money.
It’s like being the dancing bear at the circus. When you stop dancing, the money stops coming in.
Most of us are employees at least at some point in our lives. As physicians and high-income earners, we’re often employees of big companies such as hospital systems and Fortune 500 companies.
Some of us are employees to ourselves. If you own your small business and you work for it, like a dental practice, for example, you’re often trading your time for money. Plus, you work for the absolute worst, slave-driving boss: yourself!
If you own a big enough business that you’re able to leverage the work of employees to remove yourself from trading time for money or at the very least increase the ratio of monetary earnings to the time spent, you become a business owner.
But what does socking away money in your retirement accounts assume?
The model assumes you are forever the dancing bear. That you never build up a significant, reliable source of income beyond your day to day work.
Because if you had a significant source of income that extended beyond what you do day-to-day, you wouldn’t need to have lots of money saved up in your retirement accounts. You’d just continue to live on the cashflow coming in from your investments each month and not touch your 401(k).
Are you going to retire poorer than you are now?
When people do their retirement calculations, they usually assume that they’ll be making less money in retirement.
This goes along with assuming that your main source of income is from your day job. So, when you leave your day job, your income decreases.
The assumption is that when your income declines, so does your tax rate. You’ll be in a lower tax bracket when you retire, the thought process goes. So you want to minimize your tax bill now since you’re paying more in taxes now than you will in the future.
How is that acceptable?
Wouldn’t you rather have multiple sources of income that are independent of your work? Wouldn’t you rather those sources of income continue to grow over time, so you become wealthier each year? Don’t you want to stay in the same tax bracket or even climb into a higher tax bracket 25 years from now when you retire?
If the answer is yes, then putting away all your money in your 401(k), hoping for a secure future, where you’re poorer, may not be for you.
Do you like putting your money into “money jail?”
Kenji and I have jokingly taken to calling our retirement accounts money jail. I say jokingly because we do it in fun, but there is some serious truth to it.
You may not see your retirement account as money jail, but if you ever try to pull your money out before retirement age, you’ll quickly see why we refer to it as “jail.”
I, for example, explored trying to get money out of my work 401(k) last year and immediately started running into barriers.
The first barrier, the fact I still worked at the hospital, meant that I couldn’t liquidate my account. While that might not bother most people, I had actually decided that I was willing to pay the 10% penalty to be able to access my money, since I know I can make that up in a year with a property I buy. (We always aim for a minimum 10% cash-on-cash return.)
Additionally, I had figured out a way to shelter any taxes I was going to pay using bonus depreciation. So, more than anything, I just wanted to empty my 401(k). I found out that’s not possible.
Through the process, I discovered the one option I did have was that I could get a loan of $50,000 from my account (which is now $100,000 with the CARES Act!). This would be a decent down payment on a duplex, so if I need the money, I’ll definitely consider it. But that was my only option.
As far as our leftover 401(k)s from previous jobs, Kenji and I knew we couldn’t get any money out of older 401(k) accounts without paying the 10% penalty except for a few exceptions (like purchasing a primary residence). Buying more investment real estate doesn’t count as an “immediate and heavy financial need” it seems.
So what did we do?
In the end, we paid the 10% penalty and liquidated one of our older 401(k)s. We sheltered our taxes by buying enough property to offset the gains.
We have one other 401(k) that we moved into a money market account in preparation for liquidating it as well, once we had identified another suitable investment property to purchase. That luckily saved that money from losing value during the COVID-19 downturn.
Since that 401(k) liquidation experience, one other decent option we’ve identified for managing your own retirement money is moving it into an eQRP. But that’s a story for another day.
The point here is this: when you put money into your retirement accounts you lose control. And I’d rather have control of most of my money.
That’s why I invest in real estate and plan on keeping most of my future savings out of my retirement accounts. I’d rather have access to my money whenever I need it, instead of having to wait to access it nearly 30 years from now.
Do you like having all your money in one place?
An interesting thing happens when you talk to people doling out conventional financial advice. Often they talk a lot about diversification. But the diversification they talk about is within the stock market.
Is that enough diversification?
When the stock market goes down, all your savings go down. Yes, you may be invested in one particular company that does well while everything else plummets. But if you’re doing that, you’re not investing according to conventional wisdom either.
And yes, you can be diversified in bonds and other lower-risk investments. But the yield on those are so pathetic, can they really be called investments? In reality, they are only keeping up with inflation so I don’t look at it as an investment or diversified.
So what’s the alternative?
It’s collecting uncorrelated assets, which means having a significant amount of your savings outside of the stock market.
Some people see their primary residence as that source of investment outside of the market. However, your house doesn’t make you money every month. So, it’s really just a place you’re storing your cash. Sure it might appreciate but that’s not a sure bet either.
Ideally, you purchase investments that bring in money each and every month. This is called cashflow.
As I mentioned, Kenji and I have our real estate holdings. These bring in so much money that our physician jobs are our side gigs.
We’ve also started our blog. While the blog is more of the business operator type model right now (yep, we’re dancing bears!), in the future, we aim to become business owners.
We’ve also started investing in other uncorrelated assets that have asymmetric risk-reward. These are riskier assets, such as small companies or funds, but the benefit is if they take off, the upside could be huge.
Finally, we’ve even diversified within our physician jobs by holding positions both as hospitalists in one location and telehospitalists at another.
In addition to these sources of income, we’ll develop more down the line.
Are you willing to spend some time and energy to get to financial freedom EARLY?
The conventional retirement plan is great for people who don’t want to learn about money and who don’t want to do anything beyond passively stocking away money into retirement accounts each month.
But is that you?
How much effort would you be willing to make if you knew you could earn your financial freedom in 5 or 10 years? Would you be willing to take on additional responsibilities and even risks?
If the answer is “Yes” then traditional retirement planning is probably not the right fit for you and you should start exploring alternatives. And there’s on better time than today to get started.
What would I rather do?
Having pointed out the weaknesses of the conventional “put all your money towards retirement in 401(k)s approach,” the obvious question becomes what would I rather do?
I’d rather:
- Invest money in things that will make me money today, not just when I’m retired, so I can be financially free now
- Build up multiple streams of income so that if one stream runs out, I still have many more
- Trust myself to manage and grow my own money
- Keep most of my money outside of a retirement plan (money jail)
- Diversify my money across multiple uncorrelated investments
- Retire richer, not poorer
Is investing in real estate or other sources of monthly income riskier than socking away all your money in the stock market for the FUTURE?
I’d say it’s riskier to put money away in retirement accounts under someone else’s watch and remain financially illiterate and assume that everything is going to work out just as you expect until then.
If anything, hasn’t the COVID-19 downturn shown us all that nothing should be taken for granted? Whether it is job stability or retirement accounts or your own health, nothing is for sure over the long run.
There’s risk to all types of investing
It’s true there’s a risk to investing, no matter if you’re following the conventional approach with 401(k) index funds or investing in cashflowing real estate.
But, the greatest risk of all is to leave yourself completely at the whim of your day job, relying on your salary to be there forever and hoping things work out.
So no matter what you do, get yourself some financial education. And start investing, building streams of wealth separate from your day job.
Interested in learning more about building a reliable stream of income through real estate? Join the waitlist for our popular course, Zero to Freedom Through Cashflowing Rentals by clicking here. Our next course opens in June 2020!
