While we're on the topic of real estate, let's go ahead and take this next question from Steve
Hi Steve, I do think real estate, and especially rental properties, can be part of a financial plan. the issue many owners face is that it is too big of a piece of your financial plan - and therefore an illiquid investment that can't be changed very easily...did you buy these properties for appreciation in value over time or for supplemental retirement income? If it's for income and you are still receiving it, then the current price of the property is less relevant. If you bought it for appreciation, you may want to evaluate it the same way you do a stock - what is it's long term prospects? Do you need to sell at a loss and invest the proceeds in something with better prospects?
Steve, RE has always been considered another asset class and still should be, only as long as it doesn't dominate your portfolio. Their are numerous advantages (tax and cash flow) of holding RE, but you have to be careful that it does not hurt your overall financial health. I would consult with a financial professional about these properties and make sure that you are not burdening yourself with large amounts of debt.
That's great advice, thanks Lea Ann.
@Steve in Wash: In our portfolios Real Estate is an important sub sector of the asset class of Resource Stocks. Publicly traded REITs have done very well the past few years and we include these in our portfolio: Vanguard US REITs (VNQ) and Vanguard Global REITs (VNQI).
For clients who have their own real estate holding we count these as the same type of investment. For people who love to run real estate, the two dangers are:
(1) They leverage themselves too much and when RE corrects even millionaires go bankrupt this way. Don' leverage all the way. Keep the totel
less than 50% leveraged.
(2) They have only RE investments and won't diversify. Keep your RE to less than one third of your total net worth.
We've been increasing our exposure to Real Etate investments in our portfolios. We must assume that the govt-induced double digit returns in real estate are a thing of the past but selling your real estate now may not be a good idea. When it comes to owning rentals, I would start by asking, "Do you enjoy it?" If not, you'll be more productive if you find investments that allow you to chase after your "highest and best" or most productive area of expertise. Too many were pulled into real estate because of the bubble returns seemed to be a quick and easy path to your financial finish line.
Sounds like all of the advisors are in agreement -- real estate can be part of a financial plan, just so long as it doesn't dominate your portfolio.
And that's another very important point about finding your most productive area of expertise, Matt.
Alright, here is our next question from Smith.
HI Smith - 20% a year towards retirement is super. In fact, depending on your age, you may even be able to dial that back a bit and put some money towards the other items you mentioned - college savings, trips, etc. A fee-only financial advisor can run a retirement calculation for you to see if you can divert some money to those other goals. I have a lot of clients who use mint.com to track their spending and saving. And finally, the biggest expense for most couples is their mortgage - you didn't mention it - but if you haven't refinanced in the last couple of years, you may be able to reduce that expense by refinancing.
Smith. thats great that you are saving so much for retirement! As we all want to contribute to retirement and get there as soon as possible, we also need to think about funding things like college along the way. First I would look at your budget and see what sort of discretionary expenses you can cut back on. These are expenses outside of fixed costs like mortgage, insurance, and utilities. If you cannot find enough to save for college or that trip, you can look at whether you are contributing too much to retirement. Last resort would be to cut back on contributions, but you could always back down your retirement contributions to help fund college. However I would still contribute enough to get your full employer match.
Feeling "squeezed" is typical for most families. Trying to balance "wants" and "needs" is espcially challenging during the "season of giving."
I have found that having other couples to discourse about our budget is very helpful to both gauge our own spending and I always find some helpful tips on ways to have fun and be thrifty. Finding others who are willing to openly talk about their finances with you is challenging because family finances are so personal. My wife and I meet with a younger couple in our church and we talk about finances and a variety of other issues. I find that we learn as much from them as they do from us.
One of my favorite pieces of advice from one of our past Jump-Start chats was "you can take out a loan for college, but not for retirement."
Some great advice for Smith, thanks all!
Here's our next two questions from Courtney
@Courtney: The most important place to start is saving 15% of your pay. Saving and investing is the way to grow rich slowly. If you save $5.00 at 21 years old it is worth $500.000 in retirement. And saving and investing $5.00 each day results in a portfolio of $500,000.00 in retirement. Save and invest.
For where to invest, we recommend:
1. Get the full match of your 401(k) if your employer matches contributions. Put your contribution in a Roth 401(k) if that is an option.
2. Fully fund your Roth IRA for $5,000 for you (and $5,000 for your spouse).
3. Save any additional amount in a normal taxable investment account. You are young and don't need the tax deductions you will never be in such a low tax bracket again.
Courtney, congratulations on both! That is wonderful! It is never to early for contributing to a childs college or your own retirement. However you do not want to sacrifice your current financial health to contribute to these 2 events. Right now I would give yourself a few months and see if what you are making will be enough to support you and a child. If you find that you have money leftover at the end of each month, then you can look at starting a 529 plan for college and also participating in your company's retirement plan. You do not want to contribute money right now without knowing if you can afford to do so.
Hi Courtney. Congrats on the college graduation, the new job AND the baby boy. First I highly recommend starting contributions for retirement. If your employer has a plan, contribute as much as you can there. I know it's a long way off - but you will be so glad you did it when you are ready to retire. As soon as your baby is born, you can open a college savings 529 plan. It's never too early to start saving for college. Who knows what the landscape will be by the time he is college-age, but right now a private university is running $50,000 a year in tuition, room and board.
Thanks, Matt. It's always nice when advisors can share from personal experience.
Yes, we've got all "experience" we can handle right now! :-)
And good advice, Rich and Lea Ann. It's always a difficult balance, but most of the advisors seem to agree that in general, couples should prioritize saving for retirement over saving for college (please correct me if I'm wrong!)
And thanks for finding that exact quote, David!
I recognized the quote from its regular use within our firm!
While we're on the topic of saving for college, here's a question from Splank
Splank, I like 529 plans offered through your state as many of them give tax deductions. They also have high contribution limits and they can be transferred to anyone in the family. You want to make sure they are a rightly rated plan though and offer sound investment choices.
Alright, here's our next question from Dee.
@Dee: Oddly enough, I would probably *not* rush to pay off your student loans using your savings. Once you do that, you won't have any chance of undoing it and getting your money back out. Assuming that your income allows you to make payments on your student loans, I would invest your savings in a good balanced portfolio appropriate for your age. This will probably include equities, which should earn (on average) more than 3.6 to 7%. I have know people with a great deal of value in investments still making minimal payments on their student loans.
@Dee: You need money for a down payment on a house. You need money for an emergency fund. You need money compounding in the markets making money. Having that money now in investments rather than paying off your student loans may be worth paying the lenders back with cheaper dollars in the future. If the dollars are not deprecated because of inflation they are at least deprecated because you need to get started saving and investing.
If the alternative, however, were living rich with high spending I would say paying off your student loans is a great idea!
Student loans are certainly a tricky one.