401k Contributions: Why I’m Stopping Mine

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. 😉 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 of $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.

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DougMartinRoger S BalserCompounding IncomeFI Fighter Recent comment authors
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The Stoic
Guest

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! 🙂

Leigh
Guest

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!

Executioner
Guest

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

Pauline
Guest

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.

Kurt @ Money Counselor
Guest

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

PK
Guest

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?

Dividend Growth Investor
Guest

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.

The First Million is the Hardest
Guest

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.

Financial Independence
Guest

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.

KK @ Student Debt Survivor
Guest

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.

Compounding Income
Guest

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.

Roger S Balser
Guest

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.

Martin
Guest

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.

Martin
Guest

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.

Doug
Guest
Doug

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.

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