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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 (401(k)s 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 401(k)s give us tax benefits, but saving a few thousand dollars a year in taxes by funneling some income into 401(k)s doesn't seem that significant in our current situation.

Our employers do an 8 percent match on the 401(k)s 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 401(k) you could each be contributing over $56,000 a year into it under various characterizations. As you mentioned, you are only making $40,000 and will never max it out, but you already indicated a desire to expand. It may be obvious to some, but there is still $40,000 that you can defer taxes on. Right now if you are maxing the 401(k) contribution out, you are deferring $19,000, each.

The 401(k) 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 401(k) 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 401(k), 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.

Whoa. The real estate is a business, not a retirement. Totally different.

The 401(k) is a trust account that is absolutely protected. It cannot be sued out from under you. You cannot lose it in bankruptcy; it cannot be garnished or attached (until you are near retirement and you reach a point where withdrawals are compulsory). The only way you can lose it is if you are willfully stupid in a moment of weakness, and collectors are pretty good at tricking you there.

Investmentwise, a university endowment is a sure thing over 30+ years. A 401(k) invested the same way over the same period is the same sure thing. The only risk is misinvesting, or being duped by brokers into wasting capital on sales loads and high expense ratios. (My institution has about 1.5% total expenses on their endowment; my donor fund has about 0.65% and my IRAs/401(k) have about 0.2% because I'm a sharper investor than a committee).

The problem with your 401(k) and IRAs is they are not nearly sufficient for a decent retirement. A sustainable withdrawal rate is 5-8% a year out of that; can you really retire on $6000-10,000/year?

Real estate is a wild ride. I imagine your investments are leveraged? That means the potential swings in asset value could greatly outrange the capital you sank. This works in your favor more often than not. But another real estate dip - and I do expect one - could put you deep in the hole. You can find yourself with upside-down properties and banks calling notes. Depending on your private capitalization and how events turn, you could actually go bankrupt. That can happen.

In that case, don't you dare think about cashing out any 401(k)s or IRAs (if IRAs are protected in your jurisdiction).

The other thing is that endowment-strategy investing is a surer thing that houses - which might explain why university endowments are in 60-70% in the stock market and typically 0-10% in real estate (and only that for diversification).

I would be moving as much profit from the real estate business to the 401(k) as I possibly could. That protects/checkpoints that money. Even if the real estate business takes you into bankruptcy, the 401(k) is fully shielded and that money can't be yanked back out, (unless the creditor can prove you drew so much out of the business that you undercapitalized it; leaving it unable to fund its foreseeable needs).]

Since you are not so concerned about the tax benefits; I would use Roth 401Ks, Roth IRAs and/or "back door Roth". This is even better; you pay taxes on the money today; then pay no taxes whatsoever on final withdrawal. That really matters when the investment may be worth 5-10 times more. What's more, you are able to pull the corpus (initial contribution amount) back out without any penalties or taxes at all - so that portion is able to function as an emergency fund.

Even more, Roths let you contribute more total money. Imagine a single deposit, your combined Fed and State bracket is 25% and your investment increases 10x over the years.

• In an IRA you earn $6000, contribute $6000 of tax-unpaid money, withdraw $60,000 of tax-unpaid money, pay $15,000 in taxes on it, giving $45,000 of tax-paid money.


• In a Roth you earn $8000 of tax-unpaid money, pay $2000 taxes, contribute $6000 tax-paid money, withdraw $60,000, keeping $60,000 of tax-paid money.

So instead of $6000 you get to contribute $8000 of tax-unpaid money (33% more). And in the end, instead of $45k tax-paid, you get $60k tax paid (33% more). Why not just contribute $8000 to the Trad IRA? You can't because of contribution limits. The Roth lets you snake in e.g. 33% more capital into the account. Roths are really quite amazing.

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.

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.