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SHOW NOTES FOR EPISODE 306: 9 WAYS REAL ESTATE INVESTING CAN REVERSE THE RETIREMENT CRISIS
Are you going to be able to retire? And if you do, will you be in a position to enjoy your life, pay medical bills and maintain the health and lifestyle you desire in your retirement? According to the National Council on Aging, one-third of senior households either goes into debt or has no money left over to meet their needs each month and one in six will live below the poverty line. In this podcast episode, Bill examines the retirement crisis and cites 9 ways real estate investing can help reverse the problem and bring back the “golden years” for retirees.
INTRODUCTION
All of us – in fact, everyone listening to the podcast – will have to, at some point in their lives, deal with the reality of aging and and retirement at. It’s just a fact of life. And, since our listeners are well-educated and generally make sound financial decisions, many of you are already doing something about it – you have a plan, a financial planner, a pension, 401K, IRA or other nest egg you’re growing for your retirement years.
But for those of you old dawgs who have been around a little while longer, you know there are some some harsh realities when it comes to retirement:
Gone are the days, such as were with our fathers, who stayed with a single job until age 60 or 65, got a gold watch, a nice pension, and a pat on the back as they walked out the door into the golden years of retirement.
Fast forward and that reality changed. As we approached age 40–50, many of us Boomers found out that the pensions we were promised when we were first hired, were being eliminated. Some Boomers older than me, who were nearing retirement may have got grandfathered in, but the more junior employees saw pensions go away. To buffer the blow, our employers came out with something called a 401k Plan. This was in the late 1980’s to early 1990’s. At first, the companies told us they would match our contributions 100% to the plans dollar for dollar. It wasn’t long, however, before they cut it to 50 cents on the dollar – then less. Of course, there was a cap on percentage of income one could contribute, as well as a dollar cap on how much money the company would contribute, as well.
At first, if you took another job with another company, you had to cash out your 401k contribution which was taxable, but the company’s contribution stayed with them. Rules quickly changed so that if you rolled your 401k over fast enough, you wouldn’t have to pay taxes on it.
Multiple recessions, the tech bubble bust, and a host of other economic factors all but destroyed this once treasured employee motivation called a pension. Those other than me, at the leading edge of the Baby Boom, got hit the hardest, as these changes came about when they thought their retirement plans were well established, and their kids were starting to think about college. The timing hit hard.
And then, in 2007-2008, there were those whose entire retirement nest eggs and futures were wrapped up in pension funds, investments and special retirement packages backed by hedge funds and subprime mortgages, which brought about the worst financial disaster since the Great Depression. And left in the wake were hard working, soon to retire employees, who had to figure out themselves what they were going to do.
So, many Boomers, who were previously planning their dream retirements, had to go back to work and have worked much longer than they believed they would have to or wanted to. Many had to take jobs in their 60s and beyond to supplement their Social Security checks.
Remember that next time you see old gray-haired guys and gals stocking groceries in the wee hours of the morning at your local supermarket or at a Wal-Mart, greeting you when you walk in.
So you can see why many of us have come to realize that, unless we do something about it, there will be no “dream retirement.”
Retirement, as so many of us thought, was supposed to be a time when you buy a property in southern Florida, and spend your days golfing and traveling the world. But for many Baby Boomers, the idea of retirement isn’t a relaxing one. In fact, for many it’s a fear that’s fast approaching – if it hasn’t already arrived.
Baby Boomers are reaching the magic “retirement” age in droves, with approximately 10,000 Boomers turning 65 each day.1 And, unfortunately, it’s becoming increasingly clear that many Boomers have not prepared appropriately. On average, according to a Marketwatch study in 2017, Boomers expect that they’ll need approximately $658,000 in their defined contribution plans by the time they retire (most financial planners will say that amount isn’t really enough). The reality is that most Boomers, on average, only have around $263,000, less than half of what many expect they’ll need. 2
The increasing cost of retirement
It’s no secret that Boomers are going to need other sources of consistent income in retirement to deal with particular challenges that this generation may face in the years ahead, making the demand for income even more important.
First, retirees are living longer. While that may seem like a reason to celebrate, it also means there’s an increasing risk that Boomers may outlive their savings. Life expectancy for people aged 65 and older has increased to 84.4 years.3 That means the average Boomer is spending 19 years in retirement. Take into account the average retirement savings for this group, and you’re looking at approximately $13,800 of usable money available for your retirement per year, or a little over $1,100 a month, just above the Federal Poverty Guidelines of $1,012 per month for a single person.4
Then there’s the risk of increased inflation. For a demographic that lived through a period of hyperinflation in the 1980s, they understand what it means to lose purchasing power. Couple inflation with increased longevity, and a small retirement account starts to feel even smaller.
So, as Boomers begin to transition from their accumulation years to what is called the distribution years, they’re going to need to find additional income. One potential solution is an allocation to income-focused assets – in other words, they will need to generate more cash flow to make up the difference.
It’s no longer 1997
When you think about potential income assets, traditional options like money market funds, CDs, Treasuries, municipal bonds, index funds and corporate bonds may come to mind. However, interest rates, although recently rising, are still very low after falling steadily for more than three decades, meaning these traditional assets are no longer producing the sustainable levels of income that investors were used to 20 years ago.
VIEW DISCLOSURE: ForecastChart. Historical CD Interest Rate; Bloomberg. U.S. Generic Government 10-year Yield (U.S. Treasuries), Bank of America Merrill Lynch. U.S. Municipal Securities Index (U.S. Municipal Bonds), Barclays U.S. Aggregate Total Return Value Index (U.S. Corporate Bonds). 1997 data as of 12/31/97, and 2017 data as of 12/31/2017.
Additional income risks
And as I mentioned, inflation is finally trending higher. So, what does this mean for Boomers seeking additional income? In order to avoid losing future purchasing power, they’ll need to look for assets that can adjust quickly to inflation. Since inflation typically puts pressure on interest rates, as rates move higher, assets with longer durations face challenges, but assets with shorter durations, on the other hand, have the ability to help mitigate this risk, capturing the increase in prices.
There’s also the “welcomed” return of market volatility. In order to potentially avoid market risk, Boomers will need to search for assets that behave differently than the broader equity markets.
A potential income solution – real estate
Increasingly, Baby Boomers looking for steady income in retirement are turning to real estate investing. Historically, real estate has delivered higher income than traditional fixed-income assets.
VIEW DISCLOSURE: Bloomberg. FNERTR Index (Real Estate), USGG10YR Index (Treasuries), LBUSTRUU Index (Corporate Bonds). 12/31/2013 to 12/31/2017.
Additionally, real estate generally has a low correlation to equities and bonds, helping Boomers diversify their portfolio, and potentially hedge against increased market volatility. Also, in today’s rising rate environment, real estate may provide some downside protection as the fixed-income markets continue to struggle with rising rates. And even though it’s true that real estate can suffer short-term interest rate shock, what really drives its performance long-term is a healthy, growing economy – similar to the current environment we’re experiencing.
Assessing the different real estate sectors
Therefore, it’s important to remember that real estate casts a larger net, and different sectors and investment structures may react differently.
Supply and demand fundamentals help drive the attractiveness of specific sectors. For example, there is currently a very high demand for affordable, updated apartments, (which is what our value-add investing efforts are all about). There is a very low supply of these apartments, making it a potentially attractive sector for investment.
Additionally, you should weigh a sector’s dependency on the economic cycle. Needs-based-real estate and real estate driven by employment and GDP figures, like industrial real estate, is thriving in today’s economic climate.
And finally, there’s duration. Real estate has the ability to potentially hedge against inflation, but it depends on the duration of the lease. For example, hotels, storage, and apartments all typically have shorter lease durations, meaning they have the ability to capture property income that keeps pace with inflation. Retail, on the other hand, typically has longer leases, meaning it would have a difficult time reacting quickly to an inflation spike.5
What’s ahead for Boomers?
So, what does this mean for those of us approaching or in retirement? This is a pivotal time for us to avoid a potential “retirement crisis,” we should consider additional sources of income as we transition from the accumulation stage of our lives to the distribution season of our lives.
The Lesson Here
While the current economy may be evolving and the foreshadowing of a recession creates challenges in today’s investment environment, a real estate investment has the potential to meet multiple vital needs and counter these opposing forces.
Here are 9 Reasons Real Estate Investing Can Reverse the Retirement Crisis:
1. Anyone Can do it
You can get started as a real estate investor relatively easy without much specialized training, without much cash, and even potentially with no money down
2. Fast Ramp-Up
You can leverage your investments to ramp up and grow your holdings fairly quickly
3. Generates Immediate Cash Flow
It can generate monthly income (cash flow) to address current needs and fill the gap created by the elimination of steady employment income, meager social security assistance, rising living costs, inflation and increasing expenses like medical care, assisted living costs and specialized care and assistance costs.
4. Builds Equity
Besides generating steady monthly cash flow income, your real estate holdings increase in value over time, thereby acting as a “savings account” of sorts, backed by a tangible asset (property and buildings), that you can always tap into in cases of emergency, be it unexpected medical costs, or other unplanned for expenses or other unplanned events
5. Tax Advantages
It has amazing tax benefits that most of your other assets can’t even compare
6. Recession-Proof
It is also a recession-proof investment that responds to inflation. As inflation increases costs, you can increase rents and meet or beat inflationary rates.
7. Increases Your Net Worth
As your property increases in value over time, not only are you building up your equity, but your net worth increases as well. This helps you acquire larger properties to further grow your portfolio.
8. Wealth Creation
Real estate investing really is the final frontier, where the average person has a legitimate shot at creating real wealth. And real estate is one of the very few options out there for people over 50 to build and create wealth later in life — giving a new definition to the term “your golden years.”
9. Creates a Legacy
And finally, real estate investing can create and grow a valuable legacy or inheritance that you can hand down to your children, nieces and nephews, etc. – the next generation – that can continue to grow long after you are gone!
So, as you’re looking ahead – approaching retirement or already in it – it doesn’t have to be an imposing challenge. There is a way to turn things around for those willing to make the effort. For some, you may only need to bring in a few thousand extra dollars a month in extra income to make a difference. For others, it may create great returns and help establish a security blanket that will insure your nest egg endure for the long run.
I’m not pretending that real estate investing will solve the world’s problems or make you rich overnight. It will take some hard work and perseverance. But it does have all the right stuff and potential to help turn you turn your retirement years around and to bring to fruition that “Dream Retirement” you always wanted.
Well, that’s it for today!
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