After I got my first source of steady income at 22 I kept thinking "Why am I giving my money away to rent when I could have a house paid off by 50"? I pictured what I'd do in retirement, take my suped-up golf cart to the course and then head to the store for groceries. I had to make sure there were a couple of restaurants that were in walking distance too. I even wanted to be close to a hospital in case I got hurt. When I found my checklist home I bought it, not with my father not with a spouse all alone as a single woman at 23. I lived in it for a year before I was offered a job in San Francisco, then I ended up turning it into a rental down the line.
As millennials, my husband and I are looking to purchase another rental property and my mindset is still the same. If we can start purchasing rental properties now they should be paid off by the time we need retirement income. We don't have pensions and while we are paying into social security "full retirement age" will most likely be pushed back to age 70.
Why is passive income through rentals so attractive? Here are my top 4 reasons.
When evaluating properties not all are created equal and realistically you should have a property manager helping you along the way. But if you are able to start now you could have multiple properties paid outright to improve your income stream in retirement. Now start asking a professional if you might fit your retirement plan.
With Women’s History month coming to a close it’s be wonderful to celebrate the strides that women have made to get us to have equality but it never ceases to amaze me how finances can be so lopsided. There are still practices out there that will funnel questions through my husband about our finances (not knowing my background) and keep little eye contact with me. Why is that?
It wasn’t until recently that the finance industry was EXCLUSIVELY run - and dealt primarily with men. While most data is comparable between men and women about preparing a plan, what is their biggest concerns, and what’s important in retirement. The biggest difference between men and women is where they turn for advice. Over half of women surveyed cited they would go to workplace resources as their first choice, where most men cited online resources*. As I write this blog post I am aware that my primary intended audience will not find this information because of that stat.
Here are my tips on becoming financial fit:
As you look for someone to handle your finances you need to come up with an outline to guide you. Along with that you must feel confident in the relationship that you have with your advisor and have regular communication. I look forward to sitting down with you to go over your goals and plan to move forward to an early retirement.
*Empowered - Embrace responsibility northamericancompany.com
It seems like the answer should be fairly straight forward but in reality it depends on several factors the biggest one being taxes. If you are looking to take out a lump sum of money to pay off your mortgage before you go into retirement you may want to reconsider the taxable implications of how you have received this money. Let’s take 2 different examples of paying off a $50,000 mortgage and your taxable income is $38,500 as a single filer.
Example A: IRA Distribution
Withdrawing money from these accounts will be taxed at ordinary income. If you are going to need $50,000 you will need to pay taxes on that distribution. If you add the $38,500 wages to the $50,000 distribution you may jump from a 12% bracket to 24% 1. In that case you will need to pull out roughly $66,000 to cover your taxes
Example B: Investment Account
The basics on withdrawing from these accounts are conditional so I have made a map that will guide you in the amount of taxes that you may have to pay.
Another great option is what I like to call bridging. This is when you have decided that you have saved enough in your retirement account and instead of maxing out contributions you reduce it to the min for the match and save the rest in a high yield savings account. This is not for everyone and you will need to be aware of the tax implications that it will cause you. With that being said if you are looking to use the funds less than 12 months you will have protection of principal and growth at rate from 2% or more with full liquidity.
Reducing your debt in retirement is always a best practice because you never know what will happen. I highly recommend before you make a decision like this is to talk to your CPA and financial advisor to see how a longer term plan can reduce your taxable liability and coordinate timing of your retirement.
Sources: https://taxfoundation.org/2019-tax-brackets/ 1
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