Some are saying that the imminent retirement wave of Baby Boomers is going to be a crisis of epic proportions. New research by the Federal Reserve shows that an astounding one in four Americans (including the 27% who consider themselves retired) have absolutely nothing saved. This is consistent with a survey where 56% of Americans report not being financially prepared for retirement.
The retirement crisis has everything to do with the traditions and norms about how we should plan for retirement. These are reinforced by family, society, corporations, and other institutions that tell us how we should live our lives. Everyone tells us that to plan for retirement, we must go to school, get a job, and tuck away money in a 401(k) for retirement. Then, when we retire, we’ll live off our 401(k)s and ride out into the sunset in comfort. However, with 56% saying they’re not prepared for retirement, few seniors will be spending retirement in comfort.
Those who are relying on the growth of their 401(k)s for their retirement may be in for a splash of cold water if their retirement is ill-timed, like in 2008, when many potential retirees saw their 401(k)s lose half their value almost overnight.
Retirement accounts like 401(k)s don’t cut it, and relying on them will jeopardize your plans to retire comfortably. The problem with 401(k)s is that they’re inherently limiting.
For example, the IRS imposes contribution caps and regulations, limiting the growth of retirement savings. Ceilings on total contributions hinder adequate retirement funds, especially considering rising costs. These IRS limitations also create mental limitations, where a worker who believes they are contributing the maximum should be adequately prepared for retirement.
The other problems with 401(k)s are inflation and taxes. Inflation erodes the value of 401(k) savings over time, while withdrawals are taxed as income during retirement. So the allure of being able to contribute pre-tax dollars during employment is nullified when retirement funds are withdrawn in retirement.
Hidden fees are another cost of 401(k)s that are not widely spoken about. Associated management fees diminish overall returns.
What if you want to retire early? Retirement accounts like 401(k)s are built to fail in this regard. Besides underperforming, early withdrawal fees diminish the value of any funds taken out.
If you want to retire early, consider taking a different path. Instead of relying on the appreciation of a retirement account that may or may not be adequate at retirement, consider a different approach. Consider a strategy that involves passive income along with appreciation.
An investment strategy that couples passive cash flow with growth will not be found in traditional markets. It’s why the ultra-wealthy allocate more than 50% of their portfolios away from traditional assets like stocks, bonds, and mutual funds, towards alternative assets like commercial real estate (CRE) and investments in private companies (i.e., private equity).
Why are cash-flowing alternatives based on tangible assets?
Conventional financial institutions offer income investments, but fixed-income products like CDs, savings accounts, money market accounts, bonds, and treasuries don’t even keep pace with inflation and fail to create the wealth necessary to retire early. Instead, smart investors prefer cash-flowing assets like CRE and private equity, where they can partner with and entrust capital to experts with the experience and strong track record in a chosen segment to grow their wealth passively.
Private alternatives have the additional benefit of being recession-resistant and inflation-insulated. Uncorrelated to the stock market, private alternatives give investors the peace of mind of being able to grow their wealth without worrying about market volatility.
Savvy investors gravitate towards private alternatives like CRE and private equity because not only do they offer higher returns, but they do so at less risk. It’s the passive income element of CRE and private equity that sets them apart from traditional investments like 401(k)s. Cash flow that can be reinvested is an essential element for compounding wealth insulated from market uncertainty.
Most Americans are fixated on growing their retirement through appreciation of their 401(k)s or stock portfolios. But what happens to these accounts in the midst of market uncertainty?
Sophisticated investors seek a different kind of growth. They seek to grow wealth through cash flow and appreciation. And they pursue these elements in the private markets, where assets like CRE and private equity offer passive income along with underlying appreciation to supercharge returns insulated from broader market volatility.
To avoid the impending retirement crisis, think about growing wealth in a different way. Ignore market appreciation and concentrate on compounding returns through cash flow.
