In a recent Pulse column, Inman asked its readers for their take on their own personal retirement plan or exit strategy.
Although the answers to this very open-ended question varied dramatically in length, detail, and of course, strategy, it was intriguing to see the various thought processes of real estate agents and their unique attempts to solve the retirement equation.
After reading each response, I could not help but let my financial planning brain start running with each scenario.
To that end, I decided to put pen to paper and lay out a brief SWOT analysis (strengths, weaknesses, opportunities, threats) for a handful of the responses based on the admittedly limited information provided.
(Full disclosure: I am making huge assumptions in this process, and none of these responses should be considered financial advice to the individual responder.)
The full details of your financial situation are required before true financial planning can be completed.
Let’s dive in.
Scenario 1: ‘Pension and Social Security from previous employment’
The standout here is definitely guaranteed income.
Although most Americans, including self-employed small business owners, pay into and receive a benefit from Social Security, having an additional monthly income stream from a pension in retirement has become a rare advantage few can tout.
While the guaranteed income from prior employment is a great asset, this response is worded in a manner that leads me to believe they stopped saving for retirement when they left their past occupation.
An easy mistake to make when you do not have a built-in retirement plan for your new real estate business.
Depending on how long they worked at the prior job, it could be a fairly small income in retirement and leave their income level well below their current standard of living as Realtors.
As a small business owner, this real estate agent has the ability to save toward their retirement and build assets outside of their guaranteed income.
This would allow them to diversify their income and also add a component of flexibility by saving in an account that allows them to take withdrawals on demand instead of at a fixed rate.
A SEP IRA or Solo 401k plan could be a good fit depending on the specifics of their situation.
The greatest threat to guaranteed income is inflation.
Let’s look at an example and assume the guaranteed income does not have any Cost-of-Living Adjustment for inflation built-in.
If this individual were to have $5,000 a month of guaranteed income coming in at retirement, and we entered an extremely high rate of inflation of 7.2 percent per year, after 10 years the same $5,000 a month benefit would only have the economic value of $2,500 a month — half of what they started retirement with.
Scenario 2: ‘Buy an income property, one a year for 10 years. Cash flow breaks even at first but as the years go on, Wow! We have taken cash out, and positive cash flow has allowed me to stay active in listing and selling by choice’
The fact that your current cash flow allows you the ability to purchase an additional income property each year is a huge indicator of success in your real estate business.
Congrats on your success!
Additionally, you have a hidden benefit here beyond purchasing the income properties: living well within your means.
By committing to purchasing an additional investment property each year for 10 years, you have adjusted your lifestyle to a level well within your income in order to achieve this goal.
Overconcentration risk is rearing its ugly head in this scenario.
While I love the tenacity required to add an additional income property annually, this gameplan leaves you extremely exposed to real estate as an asset class.
For the same reasons it makes sense for corporate employees to diversify out of their company’s stock options, it makes sense for realtors to build a net worth outside of real estate.
Depending on where you are in your 10 income-producing properties in 10 years journey, you have the ability to diversify out of a portion of your real estate holdings and into other investment types.
Because taxes will need to be considered greatly in the decision, consider pairing the sale of an appreciated property with a large Solo 401k or other retirement account contribution in the same tax year as the sale.
This can help offset the tax liability of diversifying your net worth.
Be sure to loop in your financial planner and tax advisor if considering a move like this.
A downturn in the real estate market is the biggest threat to this scenario.
With both earned income and investment income dependent upon real estate, this responder becomes very vulnerable in a down market cycle for real estate.
Scenario 3: “Possibly retire at 75”
I sense some sarcasm in this response? Or maybe just downright discouragement?
Again, we are working with extremely limited information, but the biggest strength of each of these scenarios is the fact that you are a small business owner.
As a Realtor, you have massive upside for your income potential.
By default, you have the express ability to deploy that income in a manner that sets you up for future financial success.
Once again, I am connecting the dots here, but the weakness I am seeing expressed in this response is the agent has found themselves later in life with little to no retirement savings or net worth to show for it.
I won’t sugarcoat it; compound interest is a real thing and planning for your retirement is a much lighter lift the earlier you begin saving in life.
Real estate agents have the ability to leverage their niche expertise to both identify a deal in their own market and execute the transaction at a reduced cost as compared to the average investor.
While there is certainly risk to taking on a directly held real estate investment, the sweat equity available on the right deal could be very compelling if you find yourself behind in your retirement savings.
I find most all agents love their jobs, but there comes a time when we start to slow down.
Clients have told me “I will never retire! I love what I do.”, only to encounter a medical event out of their control that forces them to change plans.
The ability to ratchet down your workload along with sending referrals for a fee in return is certainly a huge benefit of the real estate business you have built.
Just don’t put yourself in a position to where you are stuck in a hard spot if for whatever reason life throws you a curveball to where working to age 75 doesn’t pan out.
Jordan Curnutt, CFP, is a Certified Financial Planner professional for top-producing real estate professionals who want to strategically manage their wealth, optimize variable income, build a balanced net worth, and mitigate what is likely their biggest personal expense, taxes. Reach out to Jordan on Facebook, Instagram and LinkedIn.