Your investment advisor probably won’t tell you this (because it doesn’t pay a commission), but buying real estate with an IRA account – specifically a Self-Directed IRA – can easily beat the return on investment of a typical 401(k) or traditional retirement account. If you’re like most investors, you probably contribute money religiously to your current 401(k) or IRA, but have a hard time really quantifying the return on investment over time, due to complicated fees, commissions, etc.
Unfortunately, the reality is much different from what most investment advisors promise:
- 401(k) balances are relatively low, compared to what they are supposed to be for most investors, regardless of your age.
- Most investors have a tough time explaining whether or not their 401(k) has been a smart investment vehicle for them, regardless of how long they’ve been feeding the machine.
Sadly, while the average 401(k) balance has been increasing, a study done on balances for the typical middle-class worker found that pre-retirees ages 55-65 had an average of just $100,000 saved. So what gives? Several things: Lack of diversification, failure to rebalance and fees.
“There are typically high fees involved with 401(k) plans”, wrote Bigger Pockets. “Fees range from plan administration to fund management”.
Here’s how it works: Although it might not seem like too much to expect a measly 5 percent return from a long-term investment in your 401(k), but in reality even this is likely out of reach for most investors. In fact, returns are expected to plummet over the next decade, according to an independent evaluation by Research Affiliates of 11 different retirement calculators, advisors and research by institutional investors.
“The next 10 years will be ugly for your 401(k)”, wrote Bloomberg. “A typical balanced fund with 60 percent stocks and 40 percent bonds has a zero chance of returning five percent or more over the next 10 years”.
Although the annualized long-term ROI for most investors right now is around 6.2 percent, when inflation is factored in that’s reduced to just 4.6 percent… Which is a big problem, considering most people are planning for retirement with hopes of getting returns of 6-7 percent or higher. Looking back, history paints a similar picture, with the Dow Jones Industrial Average delivering returns of just 4.3 percent after adjusting for inflation, spanning the 91-year period before 1987.
Fortunately, real estate investing using the funds in your IRA – especially when you buy income producing property – can provide a crucial hedge against inflation and also much-needed diversification for your retirement account. This leads to the ability to realize much greater return on investment while also experiencing less volatility than the stock market… Provided you invest wisely in a strong rental market, such as Mexico’s Riviera Maya, which is currently delivering (conservative) returns of 8-14 percent on vacation home rentals.
Are you happy with your IRA or 401(k) account performance? Let us know in the comments!
Would you like to know more about how to invest in real estate using an IRA account? Click the link below and discover why buying real estate with an IRA in an ideal location can diversify your portfolio and provide a hassle-free revenue stream to dramatically improve your ROI!