Today, we will be putting the 401k under the microscope and see how it stacks up compared to investing in real estate.

The 401k in America came to popularity when employers realized they could shift the investing risk off of themselves through their pension funds and onto the employees within their 401k plans. Not the greatest origin story for the 401k.

Understanding the 401K

The first topic we need to touch on to understand the 401k is how its success is measured.

Both real estate and 401k are just investment vehicles, meaning, you don’t realize any benefits from either of them until you put them to work. In 401ks, that would be investing in the stock market. In real estate, that would mean placing a tenant in your rental property. The problem with the 401k is that most people don’t understand how the 401k or the stock market work. This is completely normal, as many people don’t have much of a reason to sink hours into understanding the complexities of these entities. Most of the time people end up letting someone else put the 401k to work for them. However, when that person relinquishes control of their investment, they are also relinquishing their ability to truly see how it’s success is measured.

The person who is now in control of that 401k is very happy to have it. They take fees just for having your money sitting in their hands. Hopefully they are taking fees based on how well your money performs while in their control, but that is not always the case. Both of these are sticky situations because nobody wants to pay for poor or non-existent performance and when fees are performance based, financial advisors can still manipulate how that performance is measured.

“Average Return” Lie

The biggest way financial advisors take advantage of their clients is the “Average Return” lie.

Money managers and financial advisors love to tout their high “average returns” that they have produced for their clients, and to be frank, most clients don’t bat an eye at this crap. It’s all because they may not understand the math.

Here’s how it works:

Let’s say a money manager is in charge of investing $100 within your 401k. In your very first year working with them, they really crush it and are able to get you a 100% return on your money. You would have just doubled your money to $200. Say what? Your money manager is a financial genius! Not so fast. This is a retirement account after all and you’re in it for the long haul. Next year, your money manager aimrs for the same great performance but he comes up short. Way short. He reports to you a -50% return. At the end of year 2, he reports to you that your “average return” was 50%. 

This is where the dishonesty starts to come in.

If we do the math, you had $100 to start, had a 100% return to $200, then had a -50% return and went, you guessed it, back to $100 because 50% of $200 is $100.

$100 (100% return)

$200 (-50% return) 

$100 (0% actual return)

Your money manager has effectively done very little for you. They have not acquired you a 50% return; they’ve gotten you a 50% “average return”.

Don’t Believe the Lie

Now lets move into how real estate stacks up to the 401k!

Real Estate Investing
– Average 10 – 20% real return
– No penalties for selling and accessing your money
– No limits on how much you can invest
– Takes work and attention
– No match, but someone else is paying into your pot just like an employer would in a match
– No tax
– Sizable monthly incomeSome control
– Can choose what to do with the property
– Redeploy equity through 1. HELOC 2. Cash out refinance
– 1031 exchange
– Average 5-8% growth
2.5% – 3% in retirement
– 10% penalty for accessing your money before retirement
– Limit of $19,500/yr in 2020
– Very passive
– Employer match
– Pre-tax contributions
– No income
– No control
– The market does what the market wants
– Can also borrow against the value of your 401k
– Much more risky than borrowing against equity in real estate as stock market fluctuates more than real estate market

Now that we’ve seen the strengths and weaknesses of the 401k, how much money would it take to earn $100k annually from a 401(k)? 

FOUR MILLION DOLLARS! (2.5% of 4 million) 

Now that you have seen the 401k and real estate stripped down to their elements and exposed for what they really are, you’ll clearly see an edge for real estate in this battle.

Using real estate as your preferred retirement investment vehicle can be much more effective than a 401K. With the costs of living and medical care expenses going up each day in America, it could be very difficult for anyone to be able to save their way to retirement. The most pertinent way to live a fruitful and abundant retirement is to invest in rental real estate.