As you near retirement, it’s natural to think about how to maintain your income and preserve your wealth. Presumably if you are retiring, you’ve built up some investments in either 401ks, IRAs and/or real estate – Congrats!
Before we dig in, the most important question to ask yourself is what does your retirement look like? Are you looking to travel or spend the winters down South or are you just looking to simplify a little but stay local and keep it simple?
The answer is going to be deeply personal for each person. Obviously owning real estate means you have cash flow. It’s a good financial decision, you know that because that’s why you invested in the first place. However, you have tenant headaches, unexpected major expenses, tax complications etc. that you may decide are not worth the impact to your personal life now that you’re trying to simplify.
LET’S LOOK AT AN EXAMPLE
No one can answer how much money is worth the headaches, so we tried to provide an example of the various paths you can take now, to help think through what’s best for you.
We assumed the following:
- You own a property worth $500,00 today.
- It generates $7,000 in rent a month or $84,000 a year.
- It has $15,000 in expenses for things like insurance, property taxes, and basic repairs.
- You hire a property manager to be a little more hands off now that you’re retiring, they charge 10% of rent.
- Property values will increase at 4% a year which is the average for real estate appreciation in the US for the last 10 years
- Stocks will appreciate 11.7% which is the average for the S&P500 for the last 10 years.
- Rent and expenses will all appreciate at the same rate so we’re essentially ignoring that to keep it simple.
The punch line is:
- Option #1 - Keeping the real estate is the best financial performer, but it requires the most work and headaches.
- Option #2 – Selling real estate and investing in stocks for 10 years is also a good performer, it is much more passive but there’s no cash income until the end.
- Option #3 – A mix of the first two options is the worst performer but gets you a large chunk of cash to start your retirement with
- Option #4 – Selling the property to buy stock and slowly liquidate gives you a similar outcome to just holding the property. Your final payment in 10 years is $140k less but you have had 10 years without the real estate headaches.
Disclaimer: This blog post is for informational purposes only and does not constitute financial advice. Please consult with a qualified financial advisor for personalized advice
