Will I Have Enough Money To Retire Comfortably?
 |
Go Through This Quick Exercise Here's how to calculate your score using this example: |
Current age: 55
Current 401(k): $500,000
Years to retirement: 10
Monthly income needed in retirement: $10,000
Number of years needed: 20.
Annual rate of return on investment: 8%.
Rate of inflation: 3%.
$500,000, at 5% effective rate of return for 10 years is $823,504.
Number of years, you can have $10,000 per month: 10 years
In example we are short half the money needed for retirement.
How does a $50,000 investment in the stock market, compared to a $50,000 investment in real estate?
Stock market -- investing $50,000 in a traditional fund.
Assuming 8% annual return = $246,340
Assuming 10% annual return = $366,403
Real estate -- investing $50,000 as a 10% deposit on a $500,000 property.
10% down equals $50,000
6% interest rate on a $450,000 loan amount
Balance after 20 years, $216,014.
Assuming break even on cash flow.
Not considering any tax benefits.
6% average appreciation.
Value after 20 years, $1,655,102.
Equity = $1,439,088 (almost 4 times the return of the 10% investment in the stock market)
Is Now A Good Time To Invest In Real Estate?
Are we in a real estate boom? Or real estate bust? In the year 2001 and 2002 economists suggested real estate was the only sector propping up our economy and keeping it from a full blown freefall.
During the years 2000 to 2004 homeowners and investors enjoyed a $4.6 trillion increase in the value of their properties. That means, on average each homeowner experienced an average of $42,700 gain on their home in just a four year period. During those same years, 2000 to 2004, the stock market experienced a 10% return, as measured by the S&P 500 index.
As we know real estate has a tendency to run in approximately 7 year cycle. So it makes sense that we are now in a period of absorption. Based on what we experienced, then. Mortgage interest rates are still hovering at generational low levels and real estate listings are centralized on the Internet.
Minority home ownership has become a government priority influenced strongly by the baby boomers. Now that is a buyers market, the deals are there for the picking. There is far more inventory than there are people buying it. Many many people selling and very few people buying means that the buyers can be very selective and the market is highly price-sensitive.
Where can I get the funds they need to invest?
There are many ways a person can collect the funds they need to invest. Most people do not automatically have this money sitting in savings, however there are areas to tap without disrupting your retirement funds. Depending where you are in life will help dictate what funds you will tap.
If you are renting and currently do not own your own home, the first thing you must do is meet with the lender to find out if you qualify to make a purchase. If you do not at this time, the lender you met with should advise you on what to do to qualify.
If you are currently renting and do not own your own home, but have excellent credit history and qualify to make a purchase, there are two ways you may start. Since you most likely will have access to first time buyer programs, you will have the ability to buy $30000-$35000 more of a home for the same monthly payment. The prudent thing to do is to buy your own home first and begin building equity.
If it is imperative to you to begin investing as soon as possible, consider buying a duplex or triplex, living in a portion of it, and renting out the other unit(s).
If you currently own your own home, but have relatively recently purchased it or have credit issues that need to be fixed. You may need to do a little work before you can pull equity out.
If you currently own your own home, if there is some equity in the home, you may choose to either take a loan against that equity or pull some out. This is probably the most common for people to choose, but there are other ways...
.
If you have money and other locations, such as an IRA, 401(k), or other short-term investments, talk to your lender, you can often take loans against that amount depending on your circumstances. If you own more property than just your own home, and are considering selling to use in the equity of that cabin, Lake home or other investment or second-home, you may also consider at 1031 tax exchange to defer paying taxes.
If you had the money to pay off your mortgage today, would you?
An enormous amount of people would answer yes to this question. But we live in an ever-changing world. We will not hold the same job for 30 or 40 years. Like their parents and grandparents did. And, unlike her grandparents, we will not stay in the same home for 30 or more years.
Statistics now show that the average length of time, someone will live in their home is in seven years. Also unlike her grandparents, we will not keep the same mortgage for 30 years. According to Fannie May, the average length of an American mortgage is 4 years.
Unfortunately, most of what we have learned about buying a home and having a mortgage is from our grandparents and parents. They probably still tell you make a big down payment, get a fixed mortgage rate, make extra principal payments, and pay off your loans early. For them mortgages are a necessary evil... at best.
And, unfortunately, as we pay down our mortgage, every dollar we give to the bank is a dollar we did not invest. While paying off our mortgage saves interest, it also denies us the opportunity to earn interest, with that money. With mortgage rates as low as they are, it's relatively easy to earn more from an investment than the loan is costing us.
Two Different Paths - Let's Compare...
Two people, each earned $70,000 per year, have $40,000 in savings, and are buying $200,000 homes. Let's call them John and Jane.
John has been taught by his parents that the best way to get a mortgage is to get the shortest one possible and put is much deposit down as he possibly can.
Jane, who is a little bit of a rebel, is going to leverage her money differently. She never listened to grandma when she was growing up.
John puts his whole $40,000, down as a down payment on his new property. He selects a 15 year mortgage with an interest rate of 6.38% APR. Unfortunately, this leaves him no money left to invest. His monthly payment is $1383 (56% is tax-deductible the first year, 33% on average), $1227 after-tax net monthly average cost. John even sends $100 extra every month, towards his principle to pay off his loan sooner.
Jane, on the other hand, only puts down $10,000 on her new home. She chooses a 30 year mortgage, with an interest rate of 7.42% APR. She has $30,000 remaining if she chooses to invest it, her monthly payment is $1175 (100% is tax-deductible for the first 15 years, 64% on average) $799 monthly net after-tax cost. Jane puts $100 a month extra into her investments, plus $28 saved from lower mortgage payments, where account earns 8% rate of return.
After just five short years, John has earned $14,216 in tax savings. He has no other savings or investments.
After the same five years, Jane has $22,557 of tax savings alone, plus she has $83,513 in savings and investments.
What would happen if both John and Jane lost their jobs right now? Even though John has $74,320 in equity, he cannot get a loan if he has no job. He must sell his home or face foreclosure because he can't make his payments. At this point is a fire sale, he must sell at a discount and pay realtor fees of 6% or 7%. Jane has $83,513 in savings and other investments, she can easily make her payments even if she is unemployed for several years -- no reason to panic.
Okay, John and Jane didn't really lose their jobs, and now it's 15 years later. How did John and Jane compare now? John has now earned $25,080 dollars in tax savings, he has $30,421 in savings and investments. He now owns his home out right. Jane, on the other hand, has received $67,670 in tax savings. She has $282,019 in savings and investments. The remaining balance on her mortgage is $190,000. She has enough money in savings to pay this off out right and still have over $92,019 left over free and clear.
And, finally after 30 years, John has received $25,080 in tax savings, he has $613, 858 in savings and investments, and owns his home outright.
Jane, after 30 years, has received $107,826 in tax savings, has $1,115,425 in savings and investments, and owns her home outright...
