FI Fighter
โ‰ก Menu

401k Contributions: Why I’m Stopping Mine

Print Friendly, PDF & Email

I’ve decided to stop investing in my company’s 401k plan. Since I started working full time in 2009, I’ve been putting in the maximum every year. It was supposedly the “smart” thing to do. My portfolio is now up about 12%, and I’ve been getting free money every year. Sounds like a really good deal, right?

So Close to the End Game!

By no means am I trying to knock the 401k, I just now believe that I know how to better invest the money. That is, I’d rather invest these bi-weekly 401k deductions into another vehicle. And as you might have guessed it, that vehicle is real estate.

I’m about to close on my third property in the last year, but I’m not satisfied. ๐Ÿ˜‰ All along my goal has been to achieve early financial independence as EARLY as possible. After running the numbers for Rental Property #3, I can see just how close I really am to making this a reality. Truth is, if all goes to plan, I could probably retire next year with a minimum ofย $1500/month in passive income. The most optimistic outlook would project over $4000/month in passive income.

Why Real Estate Works

Granted, there’s a few unknowns and variables that may alter my returns (everything has to go to plan), but even with my conservative estimates, the numbers just simply work. Real estate works… and I can see that on a month to month basis. Let me tell you, there’s absolutely nothing I look forward to more than the 1st of the month. I used to dread it because it meant I had to pay rent. These days, I have two additional paychecks coming in, and soon to be three. I’m not going to lie, this has a huge psychological impact on your mind. Real estate has got to be the simplest thing in the world to grasp… and yet that’s where the returns are. Even in this appreciating market. As is often discussed, real estate combines 4 pillars which make investing in it a total no brainer:

  • Monthly cash flow (just like your W-2 paycheck without the 40+ hour/week requirement.)
  • Tax breaks + Depreciation (tax benefits help a lot come tax season.)
  • Principal paydown (someone else is paying off your mortgage!)
  • Appreciation (more speculative, but I’m seeing first hand how powerful this can be in a rising market.)

Not to mention being able to use other people’s money to make you rich. Leveraging is perhaps the greatest tool a real estate investor can use to build wealth. Especially in today’s low interest rate environment. This is another reason why I am so eager to max out my loans. I want to lock in these low rates!

My Reasons

Would I recommend someone else stop their 401k contributions? That’s difficult to answer, because it all depends on your own goals, timeframe, and comfort level with taking risks. For me, it makes sense because:

  • I would rather invest funds into something that can benefit me now. Why wait until traditional retirement to access funds? Real estate will pay me NOW and TOMORROW!
  • I’m not afraid of leverage and will go $1 million in debt if I have to. If I can earn 10% on that, well guess what? I’ll have $100k/year and be able to live a very, very comfortable life. The more the banks will offer me, the more I’m taking.
  • I have $140k in my retirement accounts. To me, this is a sufficient base to allow compounding to work its magic over the next few decades.
  • I want to be aggressive. I want to buy another property in the next 6-8 months.
  • I would like to have additional funds to invest in Tesla Motors (TSLA). This is a speculative play, but one that could pay off huge returns over the long run. I’m sold and fully convinced Tesla is here to stay. Buy on the dips, and dollar cost average. I’m sufficiently allocated and “stable” in my other investments where I am comfortable taking this risk.

Related Posts :

{ 29 comments… add one }
  • The StoicNo Gravatar June 4, 2013, 8:35 pm

    I like your bullish stance on real estate FI. I’m hoping to use real estate to achieve my investment goals as well, although I’m taking a different approach. I’m hoping to gain appreciation from adding value to distressed homes. We shall see how it works out. Looking forward to seeing you build a real estate empire! ๐Ÿ™‚

    • FI FighterNo Gravatar June 5, 2013, 8:10 pm

      Stoic,

      That sounds like a profitable and exciting venture! I would love to get my hands on distressed homes, but unfortunately even those don’t come cheap here in the Bay Area. Out of state is too difficult for me to manage, so I really have no other choice than to use turnkeys.

      I look forward to hearing about your progress, updates on your real estate investment journey!

      Take care!

  • LeighNo Gravatar June 4, 2013, 8:42 pm

    I was wondering when you were going to do this! I can’t believe how profitable real estate is being for you!

    I’ve calculated that my 401(k) should have about $140k in it by the end of the year that I turn 28 and that should be enough, compounded, for me to live off of from age 59.5 on! I’m not sure if I will stop contributions after that, we’ll see!

    • FI FighterNo Gravatar June 5, 2013, 8:12 pm

      Leigh,

      Yeah, real estate has been good to me so far. I was fortunate to land some real good properties last year.

      That’s right about where I’m at now, $140k at 28 years old ๐Ÿ˜‰ I’m figuring just as much, and am hoping the 401k balance is sufficient to grow without further contributions. I look at the 401k as my backup plan, anyway, with social security as my backup backup plan. We’ll see!

      Cheers!

  • ExecutionerNo Gravatar June 5, 2013, 5:36 am

    Does this mean you are willing to forgo an employer match?

    • FI FighterNo Gravatar June 5, 2013, 8:14 pm

      Executioner,

      Yeah, I’ve contributed about $5k this year, so far. So, I’ve gotten matching up to that. My employer is nice in the sense that that match vests immediately. I could keep contributing up to the $17.5k limit to max out all the free money, but I’m getting to the point where I feel like my 401k is sufficiently funded.

      Cheers!

  • PaulineNo Gravatar June 5, 2013, 8:12 am

    I never made contribution to my company’s pension for the exact same reasons. 4 years later my rental income is covering more than my living expenses while I would still have to wait 30 years to see the stocks.

    • FI FighterNo Gravatar June 5, 2013, 8:15 pm

      Pauline,

      Wow, sounds like your rental properties have been working out great for you so far! Congrats!

      I hear you and feel the same way. I want to retire soon, so I need to focus on funds I can access now and not later!

      Take care!

  • Kurt @ Money CounselorNo Gravatar June 5, 2013, 8:47 am

    Given the often high fees and poor investment options attached to many 401k plans, it’s hard to argue with your plan.

    • FI FighterNo Gravatar June 5, 2013, 8:16 pm

      Kurt,

      I’m actually lucky in the sense that my employer has good options and the expense ratio is about as low as you’ll find in a mutual fund. I just feel like I’ve contributed enough, and want to focus more on investing in assets that I can access now rather than later.

      Cheers!

  • PKNo Gravatar June 5, 2013, 9:04 am

    Let me be devil’s advocate here – you’re likely giving up a match to invest in what could very well be an inflating bubble (I’ll have some math on this soon). Now, I understand that a bubble can blow quite a while, so bets could still turn out okay, but can you go halfway? (I agree that rents are generally more stable than home prices, even in the relatively stable overall housing market, but depending on your geographic concentration you can get burned there too).

    I’d say, don’t give up the match at a minimum. As an alternative, remember, if you leave your job:

    Rollover 401(k) to IRA.

    72(t) out OR self-directed IRA, collect rent directly into IRA.

    That latter option might save you quite a bit?

    • FI FighterNo Gravatar June 5, 2013, 8:21 pm

      PK,

      Good points you bring up there. True, another bubble could be forming, but I got in last year for my first two properties when cash flow still existed. Normally, I would fear a bubble if I was banking on appreciation and just barely meeting the mortgage payments each month, but that’s not the case. Couple that with the fact that these two properties are in excellent locations with lots of jobs and great schools, honestly, I’m just really not that worried.

      Investing always involves some degree of risk. That’s one reason why I want to diversify my real estate markets. Just like how most do with stocks. I’ve already put in about $5k in my 401k, so I have gotten some of the match. So, that’s sort of 1/2 way approach I’m taking.

      I’ll have to research more about the self-directed IRA. I see a lot of people doing that to invest in real estate, although that’s not my preferred approach. I look at the 401k as my backup plan, so would prefer not to touch it at all until traditional retirement age. I feel like I can accomplish all my investment/real estate/early FI goals without it.

      Take care!

  • Dividend Growth InvestorNo Gravatar June 5, 2013, 10:06 am

    That’s great, but I am just hoping you are not going over your head with RE investing. You have not done it for too long, and yet you are signing up so many mortgages, etc. I read the site of Joe at Retire@40, and he is spending a lot of money almost every other month on something.

    You know, leverage works on the way up great, but it also works against you on the way down. Do not get into a hole you won’t be able to dig yourself out of, if something got terribly wrong.

    That is to say, I am happy you are doing great, but please try to look at things in a realistic way.

    And last, do not forget that you can take loans out of your 401K.

    • FI FighterNo Gravatar June 5, 2013, 8:28 pm

      DGI,

      Thanks for the comment! I appreciate the alternative viewpoint as it’s always a good idea to hear things from the other side of the coin.

      I totally agree that taking on too many mortgages can be risky. It’s always a good idea to analyze how to protect your downside if things turn. With that said, even though the numbers may show that I “can” retire next year, I most likely won’t b/c I want to build that safety net. Before I exit for good, I need to have a large cash buffer + dividend stocks in the fold.

      The extra mortgages I’m speaking of would be acquired by doing a 1031 exchange on my current two properties which have appreciated. So, I would be using the profits, so to speak to fund these ventures. If I hold and don’t sell, the appreciation does me absolutely nothing. I’ll take the risk to access this capital b/c it will go a long, long ways towards buying me my freedom.

      Appreciate the thoughts.

      Cheers!

  • The First Million is the HardestNo Gravatar June 5, 2013, 6:35 pm

    It’s a risky move, but I can understand why someone who wants to retire young like yourself would do it. Personally I would still contribute just so I had that much more to fall back on if things change in the future but like you said $140k should be enough to compound over time to give you that saftey net anyway.

    • FI FighterNo Gravatar June 5, 2013, 8:31 pm

      First Million,

      Yeah, it’s a difficult decision, for sure. But at some point, I just feel like there needs to come a time when I say “enough is enough”. The 401k is a buffer, or safety net, in case the early retirement doesn’t work out. Other than that, it won’t do me much good since I won’t be able to access it for a long time.

      $140k may not be much to some, but I have to draw the line somewhere. I see too many better investments in real estate and stocks right now to continue funding this. Sure, I’m taking more risks, but I’m ok with that. To me, the worst thing that could happen is my early retirement plan gets delayed by another year or two. As long as I’m out the door by 32, I should be ok. The earlier the better.

      Take care!

  • Financial IndependenceNo Gravatar June 7, 2013, 3:27 am

    I thought 401K is a no brainer, at least to the level where your employer is matching. It is an immediate 100% return.

    One of the advantages of 401K is nobody can take them from you, even if go under water with your portfolio. It is protected.

    • FI FighterNo Gravatar June 9, 2013, 8:23 pm

      Financial Independence,

      Yeah, the 401k match can be a no-brainer for most people. My employer matches up to the full $17k, so it’s difficult for me to obtain this, since I don’t want to contribute that much money. So, I’m only putting in around $5k, and getting the free match up to that.

      In general, I think the 401k is a great idea. I am just trying to focus on early retirement, so for me, it’s starting to make sense to focus less on this.

      Cheers!

  • KK @ Student Debt SurvivorNo Gravatar June 8, 2013, 2:41 pm

    I have done some saving for retirement, but am focusing right now on saving for a down payment on a rental property. I know the real estate has ups and downs, but at long as I can cover the mortgage during bad times I’m fine with that. Once you have paid for real estate, any rent you bring in is quick and “easy” profit. Sure there’s maintenance and whatnot, but at some point I’d love to be able to quit my job, follow my passion, and live on my rental income. I’ll be following your journey and seeing how I can implement pieces of it in my own life.

    • FI FighterNo Gravatar June 9, 2013, 8:26 pm

      KK,

      Good luck on the rental property! As you know, I’m a huge fan of real estate and believe now is a great time to invest in a rental property.

      Exactly, if you can find a good deal where you cash flow from Day 1, it’s almost a no brainer! Of course, you need to do your due diligence and invest in a quality location… Over the long-run, the property will pay for itself and then you’ll really be glad you got in when you did!

      Cheers!

  • Compounding IncomeNo Gravatar June 11, 2013, 12:17 am

    Looks like you found something that works… real estate. Now that you have a couple properties under your belt you what to do. Perhaps you can roll the equity you are building into even more properties. I bet you could snowball it pretty fast. Maybe a few years from now you can just do real estate full time if it’s something you enjoy.

    I’m thinking about ditching my 401k too. I believe the matching recently ended. My only options are plain vanilla index funds… no thanks.

    Really though, 401ks and IRAs are not designed for early retirement! If you want to retire early and are committed, ditching retirement accounts is clearly the right move. Hard to make an argument against it. Safety net schmafety net. Those retirement accounts tie up your money for decades.

    • FI FighterNo Gravatar June 11, 2013, 10:23 pm

      CI,

      Hey, that’s an awesome idea! I’ve been researching into that lately as I’ve been wavering back and forth on whether to do a 1031 exchange or not. If I elect to keep the properties, I can always try to get a home equity loan or home equity line of credit (HELOC) and tap into the equity. This will allow me to leverage to a whole ‘nother level! Definitely more risk, but the reward could be well worth it. Lots of real estate investors do this, but you definitely have to be careful and have tons of cash reserves, just in case.

      Exactly… my thoughts have been shifting on retirement funds, the more I think about it. Once a sufficient base is in place (in my case, $140k), then it might make sense to start thinking about how to invest elsewhere to further help the early FI cause. I’m thinking rentals that cash flow from Day 1 are great… money today + money tomorrow (especially when paid off free and clear). That’s the path I’m heading towards, anyway.

      Best wishes!

  • Roger S BalserNo Gravatar June 18, 2013, 5:43 pm

    FI, Best of luck to you. If you are not looking at appreciation this may work for you.
    Our indicators are showing real estate could be in for a move to the downside. Probably not like 2008, but one never knows.
    All in all good luck with your plan.

    • FI FighterNo Gravatar June 19, 2013, 9:53 pm

      Roger,

      Yeah, I’m definitely focusing more on cash flow than appreciation at this point. I know a lot of people got burned badly the last time real estate corrected (especially those who got caught up in the appreciation speculation game).

      I figure if I focus on cash flow, then even if prices decline, I will still be able to weather the storm. This is mostly due to the fact that rents tend to hold more steadily, even in a down market.

      Of course, it’s always a good idea to build up some cash reserves, just in case.

      Best wishes!

  • MartinNo Gravatar June 18, 2013, 6:27 pm

    Fighter, this is somewhat admirable. I like your approach although I wouldn’t do it that way. As I mentioned many times I do not want to deal with tenants and their never ending complaints. But I bet you not only get the rent plus later as the market gets better (and today I read an article about builders holding back on new constructions to artificially raise prices) you will be able to sell if needed for a lot better price than what you paid for, so from the long term perspective it may be a nice winning game for you.

    However, I am typically a careful person (paradox since I gambled with my money in the past trading stocks) and I would probably keep the 401k as a back up. Although my 401k sucks and I believe I can make better elsewhere (and my TD account and Lending Club account do perform better) I still keep it as a back up in case of what if. You know the old adage of not having all eggs in one basket. That is valid even for investing vehicles, not only allocation within one investing vehicle.
    That’s just my opinion.

    • FI FighterNo Gravatar June 19, 2013, 9:56 pm

      Martin,

      That’s perfectly understandable, not everyone wants to deal with tenants. Of course, you can always hire a property manager, but even then, real estate is never fully passive. That’s why I also like dividend investing, and will get back into that at some point.

      I agree that the 401k is nice to have as a backup plan. That’s the main reason I’ve kept funding mine, even this year after my strategy started to shift. I don’t plan on tapping into it early, or using it to buy more real estate. Hopefully I can just sit back and watch it grow. If all goes well, I won’t even need it. Hopefully that’s the case!

      Happy hunting!

  • MartinNo Gravatar June 18, 2013, 6:39 pm

    To add to my previous note, I am not saying continue contributing everything as before, you may just lower it to some 300 dollars monthly only or 80 dollars or whatever you feel OK, but I would still do it to have all investment vehicles diversified. For example my Lending Club is making me almost 15% annually and at some point I was also thinking to ditch the 401k or TD or my ROTH and use Lending Club only, but then decided to stay diversified.

    • FI FighterNo Gravatar June 19, 2013, 9:59 pm

      Martin,

      Yeah, somewhere in between the max and zero is probably the right compromise. For no rhyme or reason, my compromise was $5000. To me, that’s sufficient for this year, and enough for me to stop. I want to focus on real estate now.

      I like your idea of using Lending Club as well. Another means to diversify your investments!

      Cheers!

  • DougNo Gravatar September 18, 2013, 8:52 am

    Thanks for the post! This was useful info for me, I just changed my 401(k) contribution from max to the employer match (5%) because I didn’t want to give up the free money there but felt like I had enough in the account for later.

    I might be missing something here but since you are lucky enough to have a 100% match from your employer, why wouldn’t you fully fund your 401(k) to get that free money from the match, then take money out of your 401(k) and pay the 10% early withdrawl penalty? Seems like you would come out way ahead this way but there may be other factors I’m not considering.

Leave a Comment