Retirement Savings (401K, Roth IRA, Traditional IRA) vs. Being Liquid for Future Real Estate Investments

Hi everyone, 

As I am in the early stages of my career (21 y.o.), I am having difficult time understanding how much to put towards retirement if I hope to one day invest in real estate on the asset level (maybe even raise money... hopefully). I currently have stashed away $6k in my Roth IRA but as I start working this year, I think I should invest in my 401k up until employer match (vests on a 5-year schedule) and save the rest in high interest savings(0.5% currently), Series I Savings Bonds (7.12%), CDs, etc. Luckily, I am extremely blessed to not have a student debt burden and understand that I am very grateful to be in a privileged position.

I would love to hear any advice you have on this topic and gain some insight into personal finance. Thanks in advance!

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Comments (30)

  • Associate 1 in IB - Gen
Jan 3, 2022 - 7:49am

Think about how much you can save each year across all accounts. Then think about when and how much you will need for real estate. Figure out the pace of saving for real estate accordingly. I'd seriously prioritize maxing both 401k and IRA each year. Then after maxing, make a separate account in your brokerage for real estate. Put in enough each month to hit your goal and put any extra in a normal brokerage. 

  • Analyst 1 in RE - Comm
Jan 3, 2022 - 11:34am

Maybe a really dumb question, but instead of putting into 401k, why wouldn't I take that money and put into S&P every year. Although I don't get the employer match, my money is more liquid.

  • Associate 1 in IB - Gen
Jan 3, 2022 - 8:45pm

Tax benefits plus that's probably not a choice you have to make. While you're options are more limited in a 401k, I'd be very surprised if your plan didn't offer an S&P (or very similar) index fund. Even if it performs slightly worse than the S&P, there's no way the difference outweighs the tax benefits

  • Analyst 2 in RE - Comm
Jan 3, 2022 - 9:48am

Roth IRA $6.0K for 2022 (*More important now given you're income trajectory and income limits associated with contributions, along with possible removal of a backdoor IRA contribution)

Roth 401k $20.5K for 2022 (consider put your bonus directly into here)

If you're not making an insane amount, this is decent enough. Overage should go to a typical brokerage account. One thing I always like to consider is exposure, if I am work for a REPE firm, do I really want more exposure to real estate. Especially down the line where I can invest in the fund, do I want all my eggs in real estate. If I don't think I can scale reasonably, I'd rather invest in my fund or just REITs. Regarding REITs, I like long term trends I personally strongly believe in like healthcare and data centers. 

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Jan 3, 2022 - 10:21am
CRESF, what's your opinion? Comment below:

The way I handled it was I saved roughly 40% of my gross income in some form or fashion in my 20's and put about 7-8% of my gross pay into my 401K. With my company match that was getting me pretty close to 15% of my gross, which I felt was enough. As others have said, maxing out your 401K is smarter, it's just not what I did. I know real estate well, or at least much better than stocks, and figured that my money was better spent in real estate deals than in ETFs. I understand that from a diversification (my salary comes from real estate and most of my savings are in real estate) perspective that's not very smart, but I was/am(?) also still young and can take some concentration risks. I probably had $150-200K to play around with starting in 2020 and put the bulk of that into four deals - some GP and some LP. That has proven so far to have been the right decision, but I also have access to deals that some others on this forum will not. I am an oversaver and that allowed me to invest enough for retirement while also build up enough of a nest egg to invest in RE. If I had to choose one over the other, it's tough to say. You are not going to become extraordinarily rich diversifying away your investments, but maxing out your 401K into stocks that average 8-10% over 40 years is a foolproof way to retire comfortably. Up to you and your risk tolerance. 

  • Associate 1 in IB - Gen
Jan 3, 2022 - 8:48pm

To me, putting into a Roth 401k is as good as it gets. It might be a little less flexible (could maybe argue that being less active is better). But who knows what taxes will be in the future.. that's not something you need to ever think about in the Roth. Plus think about the yearly distributions and rebalancing. In a brokerage, you get hit each year. In the Roth, you're in the clear

Jan 3, 2022 - 9:34pm
CRESF, what's your opinion? Comment below:

Agreed with you…to be honest I didn't even think about it. Been a few years since a Roth was an option for me (I'm not gonna be the back door Roth guy). 

  • Analyst 1 in RE - Comm
Jan 3, 2022 - 11:37am

Reading this, it seems as if the prudent decision is to deploy into 401k until you maximize the employer Match and then invest into a brokerage account from there with whatever remains ?

Most Helpful
Jan 3, 2022 - 11:56am
MidMarketMcLovin, what's your opinion? Comment below:

I'm not familiar with US savings products so disregard any of the below which doesn't make sense for products available to you. The amount you'll save early in your career (first 3-4 years) will be relatively small vs. what you can start to save once you're a Senior Associate / VP, and it's highly unlikely you'll start doing your own deals before you're at VP / Director level. The amount you save over this period will buy little in the way of asset level RE, but can get you well set up in terms of retirement savings and emergency fund.

If I was in your position, I'd max my investments in tax efficient vehicles, with any surplus funds put into an emergency fund which should be sufficient to cover 6 months of expenses if you're income goes to 0 (add in a buffer for 2-3 months of travel during this period, nice to have in case shit goes wrong and you get canned). Once you've maxed your retirement savings and have an emergency fund, I'd then start investing what becomes your "discretionary investments", i.e. investments you can quickly liquidate and put into an RE deal if you want to start doing asset level deals. This discretionary investments portfolio should be medium risk focused on modest growth / capital preservation. If you go down route of 100% equities, your portfolio value can drop hugely in a sell off just as really  interesting deals start to pop up. Obviously you're giving up the long term upside of a 100% equity allocation, this is offset by you having maximized your tax efficient vehicles which presumably will be 100% allocated to equity.

Jan 3, 2022 - 1:40pm
Smoke Frog, what's your opinion? Comment below:

Put 6k in Roth and 20k in your 401k. It's only 26k a year and every first year analyst will make enough to do that.

Everything on top of that you can throw into your real estate fund if you want.

The 401k savings are real and tangible, where as your real estate dreams are far away and may never happen.

  • Intern in IB-M&A
Jan 3, 2022 - 2:52pm
  1. Open a Roth IRA, if you don't already have one.
  2. Open a Traditional IRA and deposit 6k into it (and don't invest it).
  3. Move those Traditional IRA funds over to a Roth IRA, after which you can invest them - the moving process can be done fairly easily on most brokerages (on Fidelity, it's as easy as going to the Roth IRA account and clicking convert another IRA to this IRA).
Jan 3, 2022 - 3:42pm
redever, what's your opinion? Comment below:

So, first you have a good liquid savings reserve (i.e. 3-6 months of expenses), then I would max the 401k (ideally as Roth if an option). If you leave the company to do "deals" or even just to take other job, you can roll that money into a self-directed IRA and invest directly in real estate (including in GP and LP positions and private funds). The tax benefits make this a no brainer. 

Jan 3, 2022 - 11:14pm
prolevel, what's your opinion? Comment below:

I'd seriously weigh the pros/cons between liquidity needs vs tax benefits for your own personal case. I'd max out tax accounts that have lower contribution limits such as the Roth IRA, and then the 401k until your company stops matching (it's free money), but having personally dealt with liquidity needs (i.e. down payments, family expenses, debt, etc.), the full 401k contribution was too high and limiting (I started in Big 4 finance consulting and now in strategy and finance) and I am only starting to max it out now (I am 28). Also, keep in mind that most 401k investment options are pretty crappy so one can argue that you lose out on better returns on other investment vehicles. At the end of the day, as long as you save/invest a good chunk of your income - I aim for >40-50% - and stay healthy, both physically and mentally, you will be set for retirement. 

Jan 4, 2022 - 8:56am
maplesyrup334, what's your opinion? Comment below:

Why do you think the isavings rate is 7%? Maybe there is something called inflation. There is no free lunch and inflation is most likely higher since the CPI basket changes all the time at discretion. With 7% inflation and it NOT being transitory like the idiots at the fed have been saying, 8-10% stock returns are not that spectacular. I think you would have to have another more risky part in your portfolio whatever that may be and I think you are likely young and smart enough to be able to take that risk. Good luck.   

Jan 4, 2022 - 10:14am
talkaboutit, what's your opinion? Comment below:

Given your age, you are likely in a lower tax bracket now than you will be for decades (or maybe ever again). For that reason, prioritizing Roth accounts makes sense. I would prioritize as follows, which pretty much sums up what others have said:

Cash safety net = ~6 mos of expenses

Roth IRA

Roth 401k (if your company offers this option, regular 401k if not). Personally would continue allocating to the 401k after maxing out the match but thats just me

Brokerage/direct RE investments

Jan 4, 2022 - 11:20am
DeanYoungBlood, what's your opinion? Comment below:

Wrestle with this a lot, but my approach is (need to practice what I preach a bit, feel a little behind)

In order, but the first three you can grow simultaneously:

- Good cash cushion - 3-6-9-12 months of cash - depending on risk tolerance and job function (i.e. brokerage or any volatile income stream, closer to 12 months - cash is king)

- Contribute enough to get your full employer 401k match, if available

- Then Roth IRA maxed

- Then back to the 401k to max out to the limit (20.5k in 2022)

After that waterfall is satisfied, start saving up to throw some units in deals.

As you get older in your career and comp, the above will be easier and easier to do. Also, once you get to around senior associate/VP levels, bonuses and overall comp will make it easier to save for RE specific investments - you will be doing it from a strong "basic personal finance position" with healthy balances in those accounts, and you will have both a stronger grasp on real estate, your market, your product type, etc. that you can then start investing in, along with better access to those deals.

All relatively subjective, but that is going to be my approach. Now I just need to make more!

Jan 4, 2022 - 4:05pm
DeanYoungBlood, what's your opinion? Comment below:

Agreed for sure. I ignored those and was thinking strictly about investment dollars, but those are very real costs/savings that become a personal decision. House, Ring/Wedding, Car - all big purchases/expenses that have to be considered as well. Where you place them in that waterfall is personal though. Life's expensive!

Jan 4, 2022 - 4:04pm
DeanYoungBlood, what's your opinion? Comment below:

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Jan 4, 2022 - 9:35pm
Elongated Muskrat, what's your opinion? Comment below:

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