Real estate professionals are often woefully unprepared for retirement, which can doom even the most successful agents. Many real estate agents disregard retirement completely. Instead, they plan to continue working until the day they die. Unfortunately, life sometimes has other plans that can prevent us from working into old age. Without saving for retirement, real estate agents can guarantee they’ll never have the opportunity to hang up their hats, or worse, leave the financial burden to their loved ones.
As a real estate agent, saving for retirement is entirely for your own benefit. Even without an employer match, you can still open one of several tax-advantaged savings plans for retirement.
Check out these tips to help set you up for a successful, graceful transition into your eventual retirement from real estate.
Open a tax-advantaged retirement account
Opening a retirement account is one of the first steps to planning for retirement as a real estate agent. A solo 401(k), Individual Retirement Account (IRA), or Simplified Employee Pension (SEP) are all tax-advantaged retirement savings accounts real estate agents can use to fund their retirement savings plans.
These plans empower you to invest in your retirement and, in many cases, enjoy tax-deferred or tax-free gains. For more information on the different types of retirement accounts, check out this article on Retirement Account Options for Real Estate Agents.
Start saving early
Like real estate, the assets in your retirement portfolio take time to appreciate in value. There’s a common saying that time in the market beats timing the market. Investing early and giving your money time to grow can put you ahead of the pack. In many cases, a smaller investment made earlier will yield better results than delaying your retirement savings and contributing more later on.
The main reason investing early is so crucial to retirement success is because of compounding interest. To understand the power of compounding interest, let’s compare two scenarios.
In the first scenario, Agent A chooses to start saving for retirement right away, even though she can only afford to contribute $100 per month. After 40 years, Agent A will have contributed a total of $48,000. By the end of each year, the investment earns an 8% average annual return, which, for the sake of being conservative, is slightly below the stock market’s average annual rate of return. When the time comes for Agent A to retire, she will have $310,000 saved up.
In the second scenario, Agent B, who postponed saving for retirement, tries to make up for lost time by contributing $400 per month for 20 years. Agent B contributes a total of $96,000 in total toward retirement over the 20-year period. She earns the same 8% annual return as Agent A but only ends up with $220,000 in their retirement savings account.
Agent B contributed twice as much as Agent A, but because the money didn’t have those extra 20 years to grow through compounding interest, Agent B ended up with far less for retirement.
Determine your goals
Retirement savings are personal. The amount you need to save depends on when you plan on retiring and how much money you spend each month. For example, if you plan on retiring earlier, you’ll need to save more money.
One of the challenges of saving for retirement is that we don’t know how long you’ll need to live off your retirement savings. With no guarantee of social security benefits in the future, more retirees are at risk of outliving their retirement savings. Therefore, it’s important to be conservative but realistic in your retirement savings goals.
Enlist the help of a professional
You’re a real estate agent, which means you’re an expert at helping your clients buy, sell, and lease properties. Financial advisors are experts in helping you manage your finances and save for the future.
Consulting a financial advisor can not only help you determine your retirement savings goals, but also the strategies to help you get there. The cost of hiring a financial advisor varies and can either be a flat fee or a percentage of the assets the advisor manages (0.8% – 1% annually is common).
Automate your savings
Saving for retirement can get complicated. To simplify your savings and eliminate the guesswork, automate your savings. Once you set an automatic contribution, you’ll quickly forget about that money; meanwhile, your account will continue to grow. Even if you only automate saving a small portion of your income, you can always make additional contributions when you want to accelerate your savings. Since you’re dealing with an unpredictable income, try automatically investing 1% of your previous year’s net commissions each month for retirement. So, if you earned $100,000 last year, set up an automated monthly investment that deposits $1,000 into your retirement savings account. If you feel like you can save more, or if you feel like that’s spreading you too thin, you can always adjust as needed.
Put away more during successful years
Most real estate agents work on commission. Unless you’re a salaried real estate agent, your earnings can vary drastically each month. In the months and years where your income is higher, increase your retirement savings contribution. This way, you can offset the down markets and more challenging years when your income – and consequently your retirement contributions – might be lower.
Invest directly in real estate
Some real estate agents forego retirement savings, choosing instead to invest directly in real estate. What they might not know is that a self-directed IRA (SDIRA) – aka a real estate IRA – lets you take advantage of an IRA’s preferential tax treatment while purchasing investment property to fund your retirement. A real estate IRA allows you to diversify your retirement portfolio without excluding more conventional securities like stocks, bonds, and exchange-traded funds (ETFs).
Saving for retirement is a marathon, not a sprint. Start by determining your goals and contributing to your real estate retirement as soon as possible. As a self-employed real estate agent, you can invest in an individual 401(k) or IRA while deferring income tax on your contributions or enjoying tax-free gains during retirement (the latter only applies to Roth accounts). To help you stay on track, consider hiring a financial advisor, automating your savings, and increasing your contributions during more profitable years.