Real Estate Vs. Stocks: Which Investment Is Better for Retirement Savings?

You need to achieve financial independence so you can retire comfortably. And to build that wealth, you’re putting your money to work for you by investing. Your parents, siblings, neighbors, and coworkers are all investing their money in Wall Street securities like stocks, bonds, and mutual funds.

This is how you’re investing too because, as we all know, this is how to build wealth.

But is investing in traditional securities to create financial independence becoming… outdated? For decades, even non-wealthy individuals have been able to save for retirement and create financial independence by investing their savings in stocks and bonds. Yet current economic trends are revealing that this tried-and-true method of building wealth may actually be falling behind.

Courtesy of the Coronavirus pandemic, the U.S. economy is experiencing historically low interest rates, mismatches between supply and demand, swollen equity valuations, and shaky inflation rates. These factors combined mean that Wall Street investors are experiencing – and may continue to experience for some time to come – lower returns on stocks and bonds.

Thus, many investors are searching for alternative ways to increase their returns and outpace inflation. What they’ve found is that real estate may not only be the next best thing – it might be the best thing to invest in to provide high returns (and also to increase cash flow and provide more diversification for their portfolios).

The Current State of Wall Street Investments

On Wall Street, all equities are currently overvalued and consequently overpriced. According to calculations by Advisor Perspectives, the market as of August 2021 is overvalued in the range of 124% to 203% depending on the indicator you’re looking at. Lower returns are certainly in store if companies’ real future earnings cannot keep pace with those increased valuations. 

Essentially, this means that you’re buying stocks and banking on the fact that someone else is going to pay more for those stocks when you’re ready to sell. The incredibly high overvaluation rates we’re seeing make it unlikely that investors will be willing to pay more for those stocks in the future when companies haven’t been able to proportionally increase their earnings. 

Indeed, I can see evidence of these overvaluation percentages in my own firm. In April 2021, one of my clients made a transfer from his traditional IRA at JPMorgan Chase to his self-directed IRA with us at Chicago Trust Administration Services. When he made the transfer, he sent over a statement showing his investment performance over the past year.

The 14 pages of his statement included a history of the portfolio’s value from before the onset of the COVID-19 pandemic in March up until April 2021. Before the pandemic, his traditional IRA was valued at $1.5 million dollars. In just a year, it had increased to $3.4 million due to the eye-popping market recovery we experienced after the initial drop in March of 2020. 

That’s great for today. But a 226% increase in his portfolio is not sustainable growth.

What About Wall Street Before COVID-19?

The truth is, Wall Street was showing signs of poor outcomes for retirees even before the COVID-19 pandemic shocked the global economy. Here’s an example of the reality for retirees who wish to have $100,000 a year in retirement and plan to live off their 401(k) savings. 

Assuming a 4% return rate (which experts have historically used as a benchmark for retirees to safely withdraw from their nest egg each year to fund a 30-year retirement), you would need a principal balance of $2,500,000. And that’s only for $100,000 a year! 

Never mind years the markets are down – you’ll have to live on a lot less in those years to prevent having to draw down your principal. (If this example sounds familiar, it’s because we used it in our last blog post, which you can find here: Banking on Social Security and 401(k) Savings to Fund Your Retirement? Think Again….)

Luckily, there are other investments you can make so you don’t have to rely solely on Wall Street to fund your golden years. What’s more, the type of investing we’re about to suggest can start generating income for you now and help you better predict the resources you’ll have available in retirement.

The Truth About Real Estate Investing

Before we get into the great benefits of real estate investing, keep in mind that real estate investing isn’t for everyone. It requires more effort on your part than investing in stocks and bonds, and the principal amount held in real estate isn’t as liquid as your principal amount held in traditional securities. 

(But if you plan not to touch the principal anyway, this isn’t that big of a problem.)

For those who are prepared to take on the extra work and are comfortable with an illiquid principal, real estate investing can provide much higher returns than stocks and bonds (and with a significantly lower principal amount, too). For real estate investments, we believe your income return benchmark should be around 10%. Although this benchmark may sound unattainable to conservative investors, it isn’t unrealistic.

David Swensen, the famous manager of the Yale endowment, was considered the “guru” of real estate investing. He realized that in exchange for less liquidity, you could purchase investments at a much lower price that also offer greater cash flow and returns. Indeed, his investment strategies resulted in 10.9% and 9.9% annualized net returns for 10 and 20 years respectively.

With this kind of return (which again, is historically not unrealistic), you would only need a principal of $750,000 invested in real estate to generate $100,000 a year in retirement.

The Real Estate Bonus: Monthly Cash Flow That Starts Now

There are many options when it comes to investing in real estate. Residential real estate or commercial? House flipping or building an empire of rental properties? No matter what you decide, the returns can be significant, and you have much more control over your real estate assets than you do over your Wall Street investments.

And if you make savvy real estate deals, you can start increasing your monthly cash flow from this investment now. For example, if you finance a rental property that has a $1,000 monthly mortgage payment, but you rent that property for $1,850 a month, you’re probably going to generate a positive monthly cash flow on that property, even after taxes, insurance, and maintenance costs.

Once that mortgage is paid off, those rent payments will continue to fund your lifestyle in retirement...for the rest of your life. Of course, any type of investment carries inherent risk, so you must keep this in mind as you choose your investments and evaluate your options.

How Chicago Trust Administration Services Can Help

One of the biggest perks to investing in Wall Street securities is that you can invest with funds in tax-advantaged accounts like a 401(k) or an IRA. Many real estate investors restrict themselves to using after-tax dollars for their real estate investments, missing out on the tax advantages offered through a 401(k) or traditional IRA.

But there is a solution. With a self-directed IRA (SD-IRA), you can use tax-advantaged retirements contributions to invest in real estate as well. This means that investors who have already saved high balances into their tax-advantaged retirement accounts may not have to save any extra money to get started in real estate investing. 

So, real estate vs. stocks. Which do you think comes out on top?

At Chicago Trust Administration Services, we walk you through the process of rolling some or all of your 401(k)/traditional IRA funds into an SD-IRA. We are experienced SD-IRA administrators and can help you complete your real estate deals in a timely manner that is IRS-compliant. To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.

_____________________________________________________________________________________________

The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Past performance is not indicative of future returns. The value of investments and the income derived from them can go down or up depending on a variety of factors. Future returns are not guaranteed and a loss of principal may occur.

CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.