Gfyuki

My wife and I are in our later 30s and make about $100,000 per year from salary. We also net about $40,000 from rental properties that we have purchased over the past several years. Our essential monthly expenses are about $2500.

We've been diligently contributing to our retirement accounts (401ks and Roth IRAs) for about a decade. We have about $120,000 total in retirement savings currently.

My question is: Should we keep putting money into the retirement accounts? The $40,000 that we get from rental properties would already be enough for us to retire on if we wanted (not that we plan to retire anytime soon), so my thinking is that it's silly to keep putting money into retirement accounts where we can't touch it (without steep penalties) for another ~20 years. On the other hand, the idea of stopping retirement contributions feels wrong because we've been trained (by ourselves and by financial advisors) to feel irresponsible if we were to stop making retirement accounts a priority.

Another part of my reasoning is that instead of continuing to put money into retirement accounts, we can redirect the money into buying more rental properties. Doing so will expand the passive rental income we can rely on for retirement, with the bonus that neither the principal (i.e., the money we spend buying properties) nor the interest (the rental property income) will be locked up in a retirement account.

I realize that the 401ks give us tax benefits, but saving a few thousand dollars a year in taxes by funneling some income into 401ks doesn't seem that significant in our current situation.

Our employers do an 8 percent match on the 401ks as long as we put in 1 percent, so we'd keep doing that, but I don't see a reason to put in more or to keep doing the Roths.

First, if you structured your rental properties correctly and had a Self-directed 401K you could each be contributing over $56,000 a year into it under various characterizations. Right now if you are maxing the 401k contribution out, you are deferring $19,000, each.

The 401k contribution limit is $19,000 from income, and the rest from employer contribution. The 8% match is the employer contribution and is often linked to the income max. So your employer is only giving a max of $1,520 (let me know if I get that right), meaning that $35280 can be put away ($56,000-$19,000-$1520 = $35280) by having a self directed 401k in the entity governing your real estate holdings and making employer contributions from that. As a reminder, all these limits are doubled for married couples so its $70,560 annually, which you two aren't even close to.

We have about $120,000 total in retirement savings currently.

Second, $120,000 is a privileged situation when compared to the rest of the planet, but are you in the business of comparing yourself to the rest of the planet or in the business of making money for comfortable retirement and generational wealth. If the latter, then $120,000 is nothing to brag about 🤷‍♂️The goal is millions.

Third, you presented a question of retirement OR reinvesting, when its AND reinvesting. Ideally you reach the actual max for retirement contributions and have other accounts you are funding. You want flexibility, liquidity, and keeping your productivity and efforts as your own and not giving an undue cut of that to other entities.

Fund the savings account. Get above the $ thresholds for banks to start treating you better. Many services become free. They'll even court your business with the latest consumer electronics, for free. So the conspicuous consumption you would actually save up for now no longer even cost you anything.

Fund the non-tax deferred brokerage account. Same situation as the banks. It gets better as you get richer.

You want to buy more houses? You can do that with the cash. You can also borrow against a 401k, as well as your existing properties, at the lowest interest rates imaginable. So now the government is cutting your capital in half, and you get to deduct the interest.

Try to enjoy yourself.

You should try creating a financial plan that specifies when you want to retire, and what income and expenses you will have throughout retirement. It appears that your main current assets are the rental properties. The issue with relying on this income is that it's an undiversified investment subject to swings in the local property market as well as building-specific issues. Do you really want your retirement livelihood to be dependent on finding good tenants for the rest of your life? It would be good to also calculate your current equity in the properties and how much income that could generate if placed in diversified investments.

Consider the expense side carefully; you say $2500/month, but are you accounting for expenses that may grow faster than inflation and/or lose a current employer contribution, such as health care? You don't mention children, but if there is any chance you want them then that would change everything.

Also note that contributions (as opposed to earnings) can be withdrawn from Roth IRAs at any time without taxes or penalties, making them a savings vehicle with very little downside.

Ultimately, it's just a matter of your retirement goals and preferences.

If your goal is to keep acquiring additional rental properties then contributing to 401k beyond employer match at this point doesn't make much sense. If you imagine getting out of the landlord business in retirement you might want to max out Roth IRA contributions each year now to help normalize tax burden on years with big capital gains when you sell property.

Personally, I view my traditional retirement accounts as a way to diversify. I just don't want to be tied too heavily to my local real estate market. If your rentals aren't spread across the nation, remember that local housing markets can take a nasty turn pretty quickly. However unlikely that is, it sticks in my mind as a reason to keep investing elsewhere. I also re-evaluate frequently, you don't have to do one or the other and stick with it. My local housing market is starting to cool after a very hot streak, so I intend to wait to buy any more rentals and therefore have been putting more in 401k and CD's recently.

Don't forget to budget the big-ticket items when evaluating your rental income. Roofs, HVAC systems, sewer mains, etc. They can throw off rental income pretty significantly year over year, so for retirement planning evaluate estimated average income including those infrequent but large rental expenses.