Real estate investing is a powerful tool that can help you retire early and with confidence. Regardless of the size of your investment portfolio, real estate can build wealth, generate income, and lead to financial independence. In this article, we will explore three case studies that demonstrate how hard-working individuals can retire within 10 to 25 years, depending on their savings rates, income, and investment discipline.
The 2 Financial Goals When You Retire
Before we explore the case studies, let's take a moment to understand the end destination of retirement. What exactly do you need financially when you retire? Here are two simple goals to consider:
- Investment income that covers all your financial needs and wants.
- Ensuring your money never runs out.
There are many different options and choices when it comes to retirement planning, which can be overwhelming. In times like these, it's best to listen to experts who have a proven track record of success. Personally, I find Warren Buffet's philosophy of investing in simple and understandable assets to be invaluable.
For many of us, residential real estate investments offer a core focus. We live in real estate markets and can intuitively learn where to invest. The fundamentals of running the numbers can be done on the back of an envelope. Additionally, diversifying our investments across assets like stocks, bonds, CDs, and cash can help ensure long-term stability.
Real estate investments can produce consistent income at a rate of 6% to 10% or more without any debt. Moreover, the value and rental income of quality real estate tend to grow along with inflation. Essentially, you can create your own inflation-adjusted pension using real estate income properties. These properties provide above-average, consistent income that forms the foundation of your retirement plan.
Traditional Retirement Phases: Build-Up & Withdrawal
The traditional path to retirement can be viewed as a journey with two phases: build-up and withdrawal.
In the build-up phase, you earn money, save as much as possible, and invest it for growth. When your net worth reaches your financial independence number (typically 25-30 times your annual income needs), you can enter the withdrawal phase. This phase involves living off your assets instead of working for money.
Withdrawing Without Running Out of Money
During the withdrawal phase, it's crucial to avoid taking out too much money. Many retirees follow the 4% rule, which suggests withdrawing 4% or less of your net worth each year to avoid depleting your savings. While this approach works for traditional investment portfolios, real estate investing offers a unique advantage.
Carefully chosen real estate investments can generate income at a rate of 6% to 10% or better without any debt. The value and rental income of these properties also tend to grow with inflation. This allows you to live off more than 4% without depleting your net worth while ensuring it continues to grow or remain stable during retirement. With real estate, you can retire earlier, even with a smaller net worth.
Now, let's look at three examples that demonstrate how real estate investing can help you retire on your own terms.
Example #1: 35-Year-Olds Retire in 25 Years (Age 60)
Meet Rachael and Justin, a 35-year-old couple from St. Louis, Missouri. Their goal is to retire within 25 years, by the time they turn 60. Here's how they plan to achieve it:
- Contribute $10,000 per year to their 401k and invest in low-cost index funds.
- Use $20,000 per year to build a rental property portfolio, paying off the mortgages using the rental debt snowball method.
- Pay the minimum on their mortgage until it's completely paid off in 25 years.
After 25 years, Rachael and Justin's total net worth is over $3,100,000. Their investments, including their 401k and real estate holdings, now support them financially. They can retire comfortably with an income of $150,000 per year. Real estate investments play a significant role in achieving this goal, allowing them to reach retirement earlier and with a higher income than traditional investments alone.
Example #2: Early Retirement in 10 Years
Kim and Steve, also 35 years old, share a similar goal with Rachael and Justin. However, they aspire to retire much earlier, at the age of 45. Their plan involves:
- Renting out a garage apartment through Airbnb, generating over $1,000 per month to cover their mortgage payment.
- Saving a significant portion of their income, approximately $82,000 per year.
- Building a portfolio of rental properties and aggressively paying off the mortgages using the rental debt snowball method.
After just 10 years, Kim and Steve achieve their goal. Their total net worth reaches $1,456,900, and they can retire with an income of $60,000 per year. By living off rental income and keeping their expenses in check, they can maintain and grow their net worth even after retirement.
Example #3: Late-in-Life Retirement in 10 Years
Jim, a 50-year-old man, finds inspiration in the stories of early retirees like Kim and Steve. Despite financial setbacks due to a divorce, Jim aims to retire by the age of 60. Here's his plan:
- Transfer his 401k balance to a self-directed 401k custodian and invest in private mortgages secured by quality real estate.
- Build a small portfolio of rental properties, paying off the mortgages quickly.
- Convert the basement of his home into a rentable apartment, using a home equity line of credit.
After 10 years of hard work, Jim's total net worth is around $1,655,500. He can retire with an income of over $100,000 per year. By diversifying his investments and focusing on real estate, Jim successfully catches up on his retirement savings and achieves financial security.
The Fundamentals To Retire Early and Confidently
Throughout these case studies, several fundamental principles emerge:
- Develop strong savings habits and consistently save and invest.
- Set clear goals and create a plan to guide your decisions.
- Leverage real estate investing as a core driver of your retirement plan.
Retiring early and confidently requires dedication and careful planning. While these case studies provide a glimpse into the possibilities, everyone's journey is unique. It's important to adapt these examples to your own circumstances and goals.
Real estate investing offers control, leverage, and strong income production, making it an ideal vehicle to retire early and confidently. Consider how real estate can fit into your retirement plan, whether during the build-up, hold fast, or withdrawal phases. Share your thoughts and timeline for retirement in the comments below.
