Stop Planning a Lump Sum Retirement

by Derek Sall on May 30, 2013

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Lump Sum Retirement
Are you planning for your retirement? Do you feel confident that you’ll be able to retire and live as if you were still working? After all, that is the plan isn’t it?

Many of us look at recent retirees and just assume that they’re living the dream. Their lives are full of exploration, travel, and big spending. After all, they probably have millions in the bank. This is the assumption, but is it really true?

If you are like the average person, you have definitely thought about a retirement fund, but you might not have necessarily set one up yet (this is where being average will make you broke).

If you are a step above average, then you most likely opened up a 401(k) account through your work and contribute a portion of your check to this fund each week. This is great and all, but do you have any idea if what you’re contributing will allow you to retire in the fashion that you’ve imagined?

The Lump Sum Retirement

For those that are actually being proactive about saving for their retirement, many of them are following the “Lump Sum” plan, which means that they are basically contributing toward a 401(k) or 403(b) and have no other investment plans. Since there is basically no such thing as a pension anymore (for 99.9% of the companies out there) and Social Security is scheduled to go backrupt soon, the one lump sum fund is all there is.

First of all, many of you might be saying, “But I’m very diversified within my 401(k)! Not only am I investing in Mutual Funds, but I also have money in Bond funds.” While a typical financial advisor would agree that you have diversified your investments, I am not fully convinced. Here’s why.

Did you have money invested when the stock market crashed in 2009? How did your funds compare between 2007 and mid 2009?

No matter how “diversified” you were in the market, you still saw your investment plummet by 30, 40, or even 50% in just 2 years. This is why I am not a big fan of the lump sum retirement. If the market tanks, your entire investment is affected.

True Diversification

If you want to truly diversify your investments, you need to get more involved. Sure, it’s nice to just click a few buttons on your computer and add to your retirement funds, but if you want your hard-earned money to be safe, you’ll want to do more. So what is there besides the stock market or bond market?

Well, my personal favorite is real estate. Granted, it’s not for everyone, but it has been a tried and true method for hundreds of years. Not only could the value of the property increase, but you’ll be earning a monthly income as well!

If you’re able to aquire five rental units that each rent out for $500 a month, you’ll have a consistent cash flow of $2,500 all throughout your retirement! Then, if you get sick of being a landlord in your old age, you could sell the properties and live off your million bucks! It’s a great way to diversify outside of your 401(k).

There are other ways to diversify of course. You could start a business that creates nearly passive income. Something like a carwash or a storage facility. These businesses keep bringing in the cash, but you don’t necessarily have to be there to earn it. Hungry for more ways to diversify?

Invest in precious metals (not through an online trade…actually buy the metal). Or, perhaps you could invest in collectibles. Or, if you already have a lump sum of money, perhaps you’d like to be a lender and earn money off the interest. There are endless possibilities.

As long as you focus on investing your money in many different areas, you’ll be much better off than if you depended solely on your 401(k) investment.

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  • I definitely want us to have more diversified investments. Right now they are not very diversified.

    • Starting out, it’s pretty easy to throw your money into one pot, the 401(k), but as you grow that fund over $10,000, you should really start to think about diversifying. At least now you’re aware and it’s on your mind! :)

  • J

    Couldn’t agree more. It will be interesting watching the impact on the stock market of the baby boomers retiring and cashing out their stock market investments to fund their retirement. Hopefully, by spreading across multiple years, the impact will be softened.

    In your real estate example, you should consider the impact of your expenses on your cash flow: mortgage payments, insurance, maintenance, property management, etc. take a big bite out of your monthly rent cashflow. Finding a real estate investment that is cash flow positive, let alone cash flow positive plus some margin to account for downturns, can be tricky in many markets.

    • Great point about the real estate. My example is extremely simplified and you’re right – to find a cash flow positive investment is not easy, but they’re definitely out there. You just have to be willing to look at about 100 properties to find the perfect one for you.

  • To generate a cash flow of $2,500 on five $500-a-month apartments, you would need to have the building paid off by the time that cash flow had to supplement your retirement income. It could take decades to accomplish that. And by then, the apartments will be run down, the neighborhood around them will have run down, and the place will no longer be worth an inflation-adjusted $500 a month.

    In addition, apartments are like houses: the mortgage is far from your only cost. Repair and maintenance expenses will accelerate as the property ages. To keep it attractive to renters, you’ll have to renovate at least once and possibly two or three times between the time you buy the property and the time you retire — and that is a very big expense, indeed.

    Then there’s the human cost of dealing with renters. Not all renters are good little middle-class doobies, and few would-be landowners are cut out to deal with serious or recurring renter problems.

    If I were going to invest in real estate, I’d try fixing and flipping during times when market value is rising. It’s risky, but at least you’re in and out fairly quickly. Or else I’d buy raw land in an area that’s likely to be developed some time in the foreseeable future. ;-)

    Seriously, though: just buying the roof over your head and paying it off is one of the best retirement investments you can make. A paid-off home represents a “return” in the amount that you would have to pay in rent or mortgage premiums, month in and month out. And that’s money you don’t have to draw down from retirement savings, once you’re out of work.

    • Hi FAM! Thanks for the comment. You know, it wouldn’t take decades to achieve 5 rentals that were completely paid for, especially if 4 of those were part of a quad-plex. The great part is that you can not only use your access money, but you can use the money that the renter is paying you as well. According to my math (as I have researched this for my own investment), it would take me about 10 years to pay everything off completely. Then the cash is all mine! :)

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