New Graduate: Invest in Real Estate or Invest in 401k and RothIRA

[Paige A.]

Hello everyone, I am a recent graduate from college with a job that is paying decently well, approximately mid five figures. I have saved a lot from working throughout college and have approximately 20K in savings. As I begin to pave my way to financial freedom, I have been met with the question of investing in a real estate deal first or focus solely on 401k and a ROTH IRA. According to a financial planner, if I invest in both 401k and ROTH IRA at approximately $800 dollars a month I will be able to retire by 63. This sounds like a substantial money each month and the payoff would be around 40 years away. To be honest, I would like to achieve a level of financial freedom sooner than later. I would love to hear from others about their approach to this dilemma. Do you invest in both? Did you make your first real estate deal before opening an account? Or have you had success with only focusing on real estate? Any advice would be greatly appreciated!

[Greg Scott]

Paige:

Listen closely to what they tell you. The reason they say an IRA and 401K are great is because you defer those taxes until you are retired and your tax rate will go down. Why does your tax rate go down? Because they assume you will be living like a pauper in your old age. Withdrawals from a traditional IRA and 401K are considered ordinary income so the assumption must be you are living on MUCH less than you did while working.

With real estate investing, not only is it possible to defer taxes, I can defer them forever, even well after I retire.

What kind of returns do you get in your mutual funds and how volatile is it?  In 2008 my 401K got cut in half. Thank God I wasn't trying to live off of it.  Volatility would be a killer after you retire.  Most of the time they will say you can expect to get 8-12% return on average over the long run, on your funds.  For my rental property, I typically get that on my cash flow (which has almost no volatility) plus all the other 4 ways we make money on real estate.

You are about the same age as my kids.  We bought them all rent properties to fund their college education and it not only funded it, they had money left over when they were done.  Two of them are now investors themselves.