By Dr. James M. Dahle, WCI Founder
It is widely recommended in the financial world that you prioritize your retirement savings over college savings for your children. I agree with this advice. Yet, I run into people all the time who are not following it. Perhaps it is because college often arrives a decade or more earlier than retirement so it seems natural to save for college first and then turn your attention toward retirement. To make matters worse, I find some people prioritizing saving for their children's college over paying off their own education! Now, if you're milking along some 1.1% student loan while investing aggressively in a 529, fine, but for the most part, prioritize paying for your own education first, then your retirement, then your children's education. In this post, I'll give seven reasons why.
#1 You Can't Borrow for Retirement
One of the best reasons to save for retirement first is that you (and thus your child) can borrow for an education, but you can't borrow for retirement. That's not entirely true; you can borrow against your portfolio, your life insurance cash value, and your home, but you can't borrow without collateral (at least not very much, I suppose lots of retirees die with credit card debt) like you can with student loans.
#2 There Are Four Pillars of Paying for College
Regular readers have heard me talk about the four pillars of paying for college. Despite reason #1 above, none of those pillars involve debt (although I suppose some debt is okay for professional/graduate school so long as it brings a degree with high earning potential.) The pillars are:
- School selection – Pick a school you and your child can afford to pay for without debt.
- Student Contribution – This includes merit scholarships, the child's savings, summer work, and part-time work during school. The children of most high-income professionals won't qualify for need-based aid.
- Parental Savings – ESAs, 529s etc.
- Parental Cash Flow – A high-income professional can likely contribute something from current earnings toward college
Since there are three other pillars to rely on, even if pillar three is minimal, college can still happen. That's less and less the case with retirement, as Social Security's full retirement age is slowly climbing and pensions are going the way of the dodo bird.
#3 You Help Others from a Position of Strength
As a general rule, you can only pull people up to where you are. It is difficult (not to mention unwise) to provide significant financial help to someone else when you are financially insecure yourself. Like in the airplane when the oxygen masks drop — put yours on first, then help your children.
#4 You Can Use Retirement Money to Pay for College
Here's another novel thought- money is fungible. If heaven forbid, you save too much for retirement and don't have enough to cover what you want to pay for college, you can take retirement money and use it for college. Some of it is probably in a taxable account, so no penalty to withdraw it (plus you may even get some tax deduction or credit for paying directly.) Roth IRA contributions can be taken out for any purpose at any time penalty-free and tax-free. IRA earnings can be taken out penalty-free to pay for education. You could borrow against a 401(k) if you wanted, although I don't recommend it. You could even withdraw retirement account money and pay any taxes and penalties due.
#5 Retirement Tax Benefits Way Better
There are some tax benefits associated with saving for college, they're pretty minor though. In many states, you don't get a deduction/credit at all, just the tax-free growth and withdrawals. Retirement accounts, on the other hand, are often the best tax break available to doctors. If you need another reason to prioritize retirement over college savings, the tax breaks are a big one.
#6 Retirement Accounts Can Be Stretched and Get Better Asset Protection
While 529 account beneficiaries can be changed, allowing the money to continue to grow in a tax-protected way for another decade or two, that pales in comparison to the benefits of a stretch IRA, or even better, a stretch Roth IRA. 529 accounts also have limited asset protection in the rare event you are sued for more than policy limits. It really varies quite a bit between states. Retirement accounts, on the other hand, receive excellent protection in nearly every state.
#7 Much Greater Variability of Price for College Than Retirement
Definitely not planning on any of these cousins supporting me in retirement.
The price of a college education is amazingly variable. It can range from a mid-four figure amount per year to a mid-five-figure amount per year, a 10 fold difference for a similar product! Retirement costs do have some variability (notice how many retirees downsize or move South to a lower tax state), but not nearly as much. Unlike college, spending dramatically less on retirement often results in a “less attractive product” (i.e. lifestyle).
There you go. Seven reasons why you should prioritize retirement savings over college savings. As always, moderation in all things, but don't make the mistake of pouring all your resources into your children and then expecting them to support you in your old change. They may not be able to, may resent it, or simply may not do it at all!
What do you think? How do you balance retirement vs college saving? Comment below!
I couldn’t agree more about how an individual first has to provide for his or herself before even contemplating helping out for college.
In the long run you are doing your kids a favor by setting yourself up for retirement so that you don’t end up being a larger financial burden for them in your older years.
Ideally contributions to both can happen without sacrificing much for retirement, but if you had to choose, the retirement accounts have to take precedence (love the oxygen mask on plane analogy)
Agreed. As a general principle, most physicians should max out all available retirement accounts before contributing to a 529. I would begin to contribute to a 529 before starting to add money to taxable, though.
-WSP
It really depends. If you have very limited tax-protected space, such as 5% of your income, I would argue that you should be funding the taxable account for retirement before doing a 529. If you have tons of tax protected space such as 30% of your income, I think it would be fine to NOT fund it all should you so desire and go to a 529 after you’ve got 20% going to retirement. I separate the two goals in my mind, decide how much is going toward each, THEN use the best accounts for each goal.
A reasonable argument could be made to overfund retirement rather than 529s even if you’ve already hit 20% for retirement since the tax benefits of retirement accounts are so much better than those of 529s, of course.
Our IPS: 401k contributions made with each paycheck over the entire year (otherwise we lose out on some matching), extra cash goes first to backdoor roths, then 529s up to the state tax deduction, then split between taxable and mortgage payoff. Between our 401ks and backdoor roths is about 15% of base income, less when productivity bonus included but we don’t know in advance how much that will be. This year we are on track to save 25% of gross to retirement. I totally agree with collage pillar #1- we live in a state with excellent public universities so I see no need to pay anything more than that.
Great idea to write the plan down. It’s a lot easier decision when you’re choosing between taxable and 529 up to the state tax deduction.
Agree with WSP above. We have maxed out our 403B, wife’s 401K, and a Roth IRA. We are also putting a large chunk towards student loans so that it’ll be paid off in less than two years. Given that we are able to accomplish all of that, we also contribute to a 529.
Recently, my wife went back to work and because of massive childcare costs in the setting of a low teacher salary (makes me cringe thinking about it), we had to take some cash flow from somewhere to put towards the full-time childcare. The first thing we did was to contribute less to our three kids’ 529s exactly because of what you’ve outlined above. As they graduate from childcare into kindergarten, that money will go back where it was before.
Saving and investing is all about prioritizing and filling the right bucket first, then second, etc. I think this post helps point out that your pre-tax and post-tax advantaged spaces should be filled up prior to a 529, though I contribute to a 529 prior to putting money into my work place’s non-governmental 457 and a taxable account.
TPP
Good luck with expenses actually going down after the kids go to school. Many docs have found they never really drop, especially in the setting of private school.
We are definitely not going private, but don’t want to start that debate!
It’s hard for me to imagine $1800 a month in costs once these two youngest are in elementary school. As middle school picks up and the activities start to cost more, I can see it… but we have a little while, I think.
That would be a good guest post (or post of your own) showing how/why costs don’t go down after school starts.
P.S. The major source of expenses going down is our monthly $5500 student loan payment, which is guaranteed to be gone in 10 months. Probably less.
TPP
Don’t worry, another piece of that debate is coming up.
I’m not sure I’m the one to write that post as really never had child care expenses aside from some inexpensive pre-school, but our child-related expenses have definitely climbed every year despite not buying diapers anymore!
Congrats on the student loans by the way.
A question regarding allocation of savings to loans versus 529s — we are a two physician couple and already save 20% of gross in our combined retirement accounts (403B, 457, backdoor Roth, generous state retirement accounts). We also contribute to a taxable account monthly, so we save slightly more than 20% if you count this account. We also still have approx 100K of student loans, the highest rate being 3.75% (not 1.1%!) We have three kids under 6 and want to fully fund their college, so we are saving in their 529s at a level to meet this goal. Our current loan payments will have our loans paid off in 5 years. Would you recommend decreasing 529 savings to pay off loans more quickly? The rate is relatively low, so the loans have not been our priority. Or, would you increase taxable savings instead of 529s? Or, leave it as is? Thank you!
While he was in private practice there was never enough to invest for college. Now that my husband belongs to a large group with a pension and a better salary that we ever saw in private practice we are just paying for college out of pocket. All while maxing out the 401k and taxable accounts to catch up from the “lean years”. No fancy vacations for the next four years, but otherwise no big change in lifestyle. 10 yesrs til retirement with a full pension and the 401k money should be gravy. That’s the benefit of being a high income professional…you can make up for screw-ups even later in life.
For sure, just cash flowing it is an option for most docs as long as they didn’t have those kids in their mid 40s.
Would add a 5th pillar to #2. Don’t go to college at all and instead learn a trade or a skill set that you can leverage into a career. Blasphemy, I know. But hear me out. The Choose FI duo had on the guy from Treehouse (Online computer programming course). They argued that programming is a skill set that you don’t need a college degree for. You need to lean how to write code and prove your worth by creating things.
We have an infant I’ve been wondering a lot about what we want for him as he grows older. Should we encourage a long career that requires an incredible investment (doctoring) or maybe encourage the early Financial Independence path where his working career need only be 10 years or so. He could be done with W2 work by the time we finished residency. Get in and out as quickly as possible and enjoy the greatest of life’s luxuries, time. This obviously requires a discussion of what “enough” is and where to derive happiness and self worth. Big stuff.
I discussed something very similar with my wife and her husband. Husband does software engineering of some sort ( I have no clue about tech obviously), and sister stays at home although alleges she’s a real estate agent. During New Years’ lunch, one of the kids was asking why she had to learn certain things and why college will take so long. I personally thought those were rather insightful questions for a 12 year old rather than take things for face value. I chimed in that she could just take the courses she needed or learn a skill such as those you listed. Oh man, did I ever get the evil eye. I got the speech that “our kids will be college educated” yet they refuse to contribute a dime towards it. I was happy to point out the overpriced pool they built while on a beach vacation would have funded public college for all 4 kids 🙂
I think a reasonably priced university education paid for without debt can be justified just for the life value of the education, even if you then do something that doesn’t actually require that education like coding or owning a business.
Very true. There are intangible benefits to going to university that are hard to recreate outside of that environment. The passion, intense debate, friendships, late nights and love of learning that comes with a quality university environment can’t be found in an online course. Everyone has there own path and I just wanted to highlight that the no college path is not as crazy as it initially sounds! 🙂
I too listen to that podcast and found that particular episode intriguing. The only problem with that is that coding is not for everyone. In fact coding is enjoyable for very few. If you happen to have a kid that has a penchant for this type of work, great. But the likelihood that he/she will is pretty low. And besides, you want your kids to do what makes them happy, we all just hope it’s also financially rewarding as well.
I’ve got 3 kids under 7 so my biggest conundrum is how much to put in a 529. I’ve heard so many strategies:
1. only fund 1 and let the leftovers trickle down to the youngest, and dip into other cash flow to finish it off
2. Put in 100K when they’re born and let it accrue
3. I’ve heard one person said they were going to borrow against a whole life policy they opened specifically for this purpose (!)
The elephant in the room here is will costs eventually get contained once colleges realize they are losing students? And when will this finally happen? After some reading about the reason for tuition inflation I learned that professor salaries have been level- it’s the benefit costs (I.e. healthcare) and the “perks” for students (high tech sports facilities, fancy dorms, etc.) that they think will attract them that are adding to costs. And to make matters worse there is a lot of talk in my professional society about donating to scholarship funds to help students pay these bloated tuitions…. I think that kind of giving makes the problem worse. If schools know the students will find a way to pay, they will never have any incentive to control costs. Where is the public outcry about this? The public was quick to blame doctors for healthcare costs out of control…
1. Not a big fan, but it’s not crazy. How big of a pain is it to open 2 or 3? I mean, I’ve got 35 of them. No big deal. Also, my state tax break is per account, so if I only had one, I’d have a much lower state tax credit.
2. Most of us don’t have $100K to put in there when a kid was born. In fact, the only kid I had where I could put ANYTHING in at the time of birth was the last one. I didn’t start 529s for some of the others for over 5 years. Didn’t have the money.
3. I think that’s a bad idea. https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-2/
I doubt the cost of college will go down significantly in between now and when my 14 year old, 9 year old, or even 3 year old start. Maybe it’ll be fixed for their kids, but I kind of doubt it. I think the best we can hope for is that the rate of increase slows.
I don’t care if that kind of giving makes the problem worse, so I’ll continue to do the WCI scholarship. That’s like not feeding the starving man in front of you because there should be a soup kitchen around and if we just feed them all no one will ever start a soup kitchen.
The starving man analogy is not quite accurate, because if a starving man doesn’t eat he dies. He has no alternatives. College is optional. And, one would think, subject to the supply and demand forces of Capitalism. Anyhow I did not mean my post to be a total condemnation of scholarships because they are based on good will. I just wish there was a way to help these young people without inadvertently feeding the fire. I think your content has done immeasurable good in helping folks, white coat wearers and not, realize potential financial mistakes before they make them – Including paying too much for education.
Sounds like a good way to justify not doing anything personally to help because “it feeds a broken system.” I can’t personally fix the system. But I can start a scholarship program, so I will.
On the other hand, I donate to the soup kitchen, the homeless clinic and the shelter, but I don’t give handouts to panhandlers. In that case, I feel like I can do something for the system.
Do you feel like there’s something you can personally do for the system? Because I don’t.
To answer your question, the only thing I can personally do for the system is teach financial literacy to 6th, 7th, and 8th graders. Maybe in a few years the high school kids, when my own kids get there. This education is sorely lacking in our curriculum and I think this is the reason a lot of people as adults make poor financial decisions. I know I had zero financial literacy teaching as a kid or young adult and am now playing catch-up. Hopefully this will translate into an ability to assess value in an academic institution or degree. My generation was told we need a college degree to have any sort of success, but I think the tides are changing because ROI is just not there anymore. Student loan debt is now catching up with the top 1%- an article in this week’s New York Times chronicles yet another doctor who can’t afford his student loans-even while scrimping and saving and riding his bike to work so he could make $700 monthly student loan payments while still in school and residency. This is crisis territory. In my opinion the Private student loan business is just as predatory as the mortgage lending crisis of the early 2000s, and has contributed to the explosive rise in tuition since the 1970s, when our government allowed this practice and extended the additional perk of borrowers not being able to discharge this debt in bankruptcy. At least the mortgage crisis ended when people defaulted on their loans. They lost their homes. Students on the other hand have this debt for life, often with no way out. They can’t start over. Anyhow I digress- I’ve gotten off topic but this is the basis for my ire about tuition inflation. We all do what we can, I am hopeful that this situation will get better with the next generation. I am certain it will take some government intervention though.
In my view, the goal of education is not just to get a higher-paying job, but to pursue a career that you derive great value from outside of money, perhaps even one that you would be still be doing if money were no object. Sure, you can learn to “code” without higher education, but university training in computer science may lead you to working on more interesting and intellectually fulfilling software projects.
As with any purchase, there is a cost benefit choice. You mention “coding” compared to a computer science degree.
The problem is making original study choices. The path of prerequisites for upper level courses is narrow. Basically, a change to engineering or health related science means “starting over”, two more years. Most switch to the goal of “a degree” to stop the debt train and hope.
It can be done but it’s similar to choices in a medical education, but without the flexibility. STANDARD four years, then residency. If PG1’s had to map their path, well let’s just say a lot of physicians wouldn’t complete residency and fellowships. Without having the foundation, a college freshman is making expensive career and life choices.
Coding in universities courses isn’t as divorced from reality as 15 years ago, but there’s still a *big* gap between lecture halls and working on a fulfilling and useful project. That’s particularly true for undergraduates. I completely agree about the difference between “learning to code” and actually doing it, but would suggest participating in open-source, non-profit, local government, competitions and group hackathon type projects is infinitely more valuable since you’re working with more experienced devs. It’s a rare undergrad course where that kind of mentor/student interaction takes place.
I completely agree. We have enough tax-advantaged space (not counting 529s) to save over 50% of our gross income, so we’ll max that out in lieu of saving for college. If our only child decides to attend college, we’ll just pay for it out of cash flow, reducing our retirement account contributions if needed. Further, I view a 529 for us as risky; we only have one realistic shot (i.e. our only child, no family members in need of the money, and we certainly aren’t spending more on education for ourselves) at spending that money without a penalty.
Wow. That’s a particularly high percentage. Care to list it out?
401(a): $19,500 (mandatory contributions, includes employer match)
401(k): $18,500
457: $18,500
HSA: $6,900
His and hers Roth IRAs: $11,000
Total: $74,400
Your income as a doc, together with your partner, is only $149K? Are one or both of you working part time or something? I’m guessing you’re not a doctor of medicine. The reason your % is so high is because your income is comparatively lower for most people who have access to that much tax advantaged space. Most consider me to have a lot of space available to me and I don’t think I’ve ever had that % be higher than 33%.
I’m an academic doctor (Ph.D.), and we’re a single income household, which I should have specified earlier. But even if my spouse worked, we would likely get even more tax-advantaged space (e.g. another 401k).
It all makes sense now.
#8: No plans on saving for college education.
Times have changed and neither my wife or I feel a college education is an automatic ticket to guaranteed employment any more. That’s coming from a professional software developer and an attorney. We’re not against the kids going to college, but they have a wide number of options available including paying their own way. Despite the hyperbolic US World News College Rankings, no one needs to pay $50K annual tuition + room + board for six years to obtain a degree (nope, it’s not four years nowadays). And regrettably, only about half of those students will ever graduate despite the tuition expense and student loan debt.
Study abroad, IB program, community college, public university, vocational school, entrepreneurship and working are excellent alternatives. Given a six year head start without student loan debt, I’m a little skeptical that a college degree still increases lifetime earnings.
Especially if you give them the equivalent of a $50K a year education in cash at 18 and they invest it wisely.
That would almost certainly close the income gap (real or imagined). It’s too time consuming for me, but boy would some aspiring financial blogger get a world of press coverage putting together that scenario and writing about it. It would make an excellent guest post.
I think you’re going to like Friday’s post.
It’s a balance…we are targeting providing 4 yrs of a decent in state tuition (what we both got). Having the ability to share my GI bill with them helps, though with 4 kids they each only get 9 months (1 academic year).
For us it works out to about half as much towards college as towards retirement.
Even 33% seems like a pretty high percentage. I’ve never been anywhere near that high. I bet I’ve never put 10% of what I’m putting into retirement into college. But the math will be different for everyone.
We made the mistake of maximizing 529 savings over maximizing retirement in medical school and residency before we were financially literate. In the end it didn’t cost us too much other than some valuable Roth space, as we eventually corrected course and switched to maxing retirement.l and discontinued 529 savings. “sequence of savings” mistake overall low on my list of early mistakes.
If I had life to do again, I might try to skip 529s entirely, put everything into retirement, go for early pre-college FIRE, try to qualify for financial aid by zeroing out FAFSA eligible assets, and pay for college from retirement accounts.
I couldn’t agree more with your post. Like you said, you can borrow for college but not for retirement (at least not much). I am always amazed at parents who are worried about saving for college for their kids but have no single worry about their lack of retirement savings. That’s like getting it backwards.
We’re in our mid 50s, and have been funding 529s for our 3 children since they were babies. The oldest recently graduated with an undergraduate engineering degree and about 5K left in his 529s. Now he’s decided he’s going to get a master’s degree. We’ll help with the tuition, but maybe not right away.
You mention that a 529 can only be stretched for a decade or two….
Can the beneficiary not be renamed to a grand child, niece or nephew essentially stretching the growth for 30-50 years? My understanding was that it can. Am I wrong?
Also, do you know how 529’s are addressed at the time of death? Can the beneficiary be changed after death of the principle holder/contributor and how does it get passed down?
Good post but reminded me of some of my original thought on 529’s and familial wealth building.
Thanks,
Yes, you can name someone in a new generation as a beneficiary and stretch it more and more and more. The gift tax does apply when you change beneficiary to a new generation (but not when changed to a sibling or cousin, i.e. same generation).
I believe the beneficiary can be changed after death. Not sure how long you have to do it. If the account owner doesn’t change the beneficiary, the assets can be included in the beneficiary’s estate and be used for anything without paying the 10% penalty. Not sure if taxes are due on the gains, but I don’t think so. So not a bad way to get to funds there, except for, you know, the death.
Yes, the beneficiary can be changed to another family member. I don’t recall ever hearing about an expiration date for 529s.
https://www.schwab.com/resource-center/insights/content/529-account-what-happens
The penalties only apply to non-qualified withdrawals. I don’t think many people realize there’s several exceptions AND the original contributions can be withdrawn without penalty at any time. The money that grows over time is subject to penalties though.
529 Withdrawal Exceptions (no withdrawal penalty)
– The student beneficiary receives a scholarship
– The student beneficiary dies
– The student beneficiary enrolls in a U.S. service academy
I’ve always thought 529s are pretty mediocre. The investment choices are very limited, the portfolio mix can only be changed annually and (obviously) qualified expenses are limited to higher education. Putting away $4,000 annually for 10 years with 7% returns generates $56,700. And those are all pretty optimistic numbers for the typical 529 plan participant.
The 10% penalty only applies to earnings, so cashing out the entire thing would cost an additional $1,670. Paying penalties is never great, but that amount wouldn’t keep me from liquidating the account if there weren’t any family members to use it for qualified expenses.
Having been through this, I would simply like to point out a parent primary goal is to raise a child equipped to be a good person and earn a decent living. Making smart personal and career decisions will be up to the child at 18. Most at 18 don’t really have a firm career path let alone a comprehension of student debt.
Undergraduate- split 50/50.
Grad/Med/Fellowships- On your own.
Back to reality, as a parent. Life expenses are real. A safe apartment in Columbus vs. Boston or New York are completely different. Investing in your child is different than just paying for it. Providing an “assist”
can help lead to good decisions (like credit card debt for moving) and some assist in residency and fellowship. I am perfectly comfortable investing 50% in an undergraduate degree. I am perfectly happy investing in a sound career glide path.
Payback is the question. Will I need the funds in retirement? Will the income flow of the child support it?
“don’t make the mistake of pouring all your resources into your children and then expecting them to support you in your old change. They may not be able to, may resent it, or simply may not do it at all!” Regardless, if possible, return the favor.
If you raised you child right, their needs and your needs will be fulfilled. In the best of all outcomes, you never need it back and can use the vacation houses as long as you wish.
This is another reason why I love to invest in rentals. They have great tax advanatges without having to worry about what account or retirement plan to use.
I find the only real tax advantage of real estate ends up being the ability to exchange. The rest aren’t really advantages. For example, business expenses like new carpet. Yup, it’s a deduction. Because it’s a very real expense. Same with depreciation. The IRS let’s you depreciate the building because it really is depreciating. The roof and walls and driveway will all need to actually be replaced eventually. The actual rental income isn’t tax advantaged at all compared to qualified dividends or long term capital gains.
There is also interest deduction if you get a loan which is a huge advantage. The depreciation is huge too because you deduct the entire structure value over 27.5 years. In reality houses last much longer especially if maintained.
That interest deduction is just a business expense. Any business that has to spend money to get money gets a deduction. That’s not unique to real estate.
If you add in the cost of that maintenance (even after taking the deduction for that expense) and the decreased value of the structure after 27.5 years, I would submit that tax break isn’t as big as most real estate investors think.
Don’t get me wrong. I take all those deductions with my real estate investments too, but I think they’re oversold a bit.
The primary advantage of real estate is the timing of the depreciation which “defers” the income tax.
As long as you roll it over to a like kind exchange, you have postponed paying taxes.
If you look at compounding over 20 years, that can add up .
The secondary advantage is when and if you realize the gain when sold at capital gains tax rates.
The cost of the property depreciation is at the table rate. On a $100K property 35% deduction and 15% capital gains. That is 20% tax saving or 20K. Ten houses is $200K.
You won’t get rich on the deferral. The real trick is positive cash flow and buying smart. Taxes are icing on the cake over time. The old saying is never invest for tax reasons.
Yea, there’s a little icing there, I agree. And certainly the way to do it best is to depreciate, depreciate, depreciate, exchange, depreciate, depreciate, depreciate, exchange, depreciate, depreciate, depreciate, die. But I think the “tax benefits” of real estate investing are kind of oversold. I mean, compare it to an HSA- tax deduction for full investment now and never taxed again on any gains/dividends/anything. Not exactly comparable. One is awesome the other is better than a kick in the teeth.
You are completely right except one point, diversification. If one is looking at a large portfolio, there is something to be said for stashing a piece in something besides the market.
Real estate, except for the last 2007/2008 slowed in sales but, not a foreclosure crisis. The income stream should be reliable as well. It is NOT the growth investment it is touted. If capital preservation is desired, it would certainly be better than bonds if purchased at a good price.
The problem is, pro’s do it as well.
Read this before you jump.
http://awealthofcommonsense.com/2018/08/some-thoughts-on-investing-in-real-estate/
I fully agree. That’s why I have 20% of my portfolio in real estate.
Aside from cashflow, real estate also offers tax free distributions. Not a small benefit. One of the approaches is borrowing out the equity (loans aren’t taxable income). After you run out of equity, either wait awhile or exchange into into a larger property. You won’t see things like that with the one SFH rental.
Real estate is the original index fund. It’s built the vast majority of long-term wealth for the rich folks, so I don’t mind going along without picking at the current details too much. No one’s going to generate $10M – $100M in net worth by putting earned income into index funds, but those numbers aren’t even notable for real estate.
Leverage can hurt, or leverage can help. More loan simply reduces the net equity.
You can borrow against anything tax-free, that’s not unique to real estate. You can also borrow against your car, your cash value life insurance, your stock portfolio etc.
Your logic makes sense. Do you have a calculation on how much cash to keep around for emergencies for those over 50? I always thought you should keep 3-6 months of cash or at least as much as you need for the 4 mo exclusion period for disability should that happen. But this article says if you are over 50 you should have 2-3 years worth of cash. https://www.yahoo.com/finance/news/much-money-experts-savings-account-110019200.html Seems like too much cash not earning much (though some savings are 4.5% for the moment). My thoughts are maximize retirement, while keeping 3-6 mo in cash/easily convertible non-retirement funds. If you have Roth funds, you could always use that principal as an emergency fund as well. Thoughts?
The funny thing about emergency funds is the more you need one the harder it is to get one. Retirees don’t need an emergency fund but many keep 2-3 years worth of portfolio withdrawals in cash. The opportunity cost of cash for someone with a sub $100K net worth is huge, but that’s also the person most likely to benefit from cash on hand.
The article you linked to is aimed at the general population, of which according to the article 32-45% of people have $100 or less. Not sure you should apply anything in that article to the life of a financially literate high income professional. 4 months seems plenty to me for an emergency fund. I don’t really keep one at all, but I’ve also got two years worth of living expenses sitting around in cash right now just to make my next quarterly estimated tax payment and another two years worth that I need to pay to a hotel for a recent conference we held there. For many of us, our cash flow needs dwarf a classic emergency fund.