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When it comes to retirement, real estate professionals have it easy in some regards and harder in others. On the one hand, agents and brokers have the luxury of scaling back their business a little bit at a time. That’s what Tom Fannin did. Fannin started his Arizona real estate career in 1958 “before air conditioning,” and retired in 2010 from Coldwell Banker. Fannin said he “saved enough money, used a financial advisor and bought real estate” as he readied for retirement. On the other hand, real estate agents also are largely in charge of looking out for themselves when it comes to retirement planning. AAR spoke with two financial advisors to offer some sound advice for any real estate professional planning for retirement.

“As you evaluate your retirement readiness,” said Patrick A. Funke, CLU, ChFC, AIF of Patrick Funke and Associates, “consider utilizing any one of the many retirement calculators available on the Internet to estimate your financial needs at retirement based on your desired retirement lifestyle.” Funke goes on to say, “research has shown that you are more likely to meet your retirement goals if you set, and periodically monitor, those goals.” In addition to utilizing a retirement calculator to estimate your financial goals, Funke suggests conducting an insurance review to determine what risks could stop you from meeting those goals and evaluate any ways to mitigate those risks.

Kenneth T. Holman, president of Overland Group, RE/MAX Overland, and the National Association of Real Estate Investment Advisors suggests opening an  Individual 401(k) account with a third-party administrator/custodian who permits self-direction. Holman said, “a self-directed Individual 401(k) is similar to any large company 401(k) account, except it is tailored to businesses that only employ the owner and his/her spouse.” This account is well-suited for licensed real estate professionals who are 1099 independent contractors with no full-time employees.

Advantages of a Self-Directed Account

According to Kenneth Holman, the advantages of having a Self-Directed Individual 401(k) plan are significant:

  1. The contribution limits are significantly higher for an Individual 401(k) than for an IRA account. Compared to $5,500, the limit for 2014 is $17,500 for the employee and another $34,500 for the employer if you’re under 50 years of age. You can add $5,500 in a catch-up contribution if you are 50 or older. Your spouse can also have an account and contribute the same amount.
  2. A Self-Directed account allows you to not only invest in the mutual fund accounts of your choice, but also to invest directly in real estate, mortgages, tax liens and deeds, and other related real estate products.
  3. The Individual 401(k) account allows you to borrow up to $50,000 or 50 percent of the account balance, whichever is less. It’s a great savings account that lets you borrow the money for an emergency. You can’t do that with an IRA. The only restriction is that you have to pay the money back to your account over five years at the rate of 4.25 percent.
  4. If set up properly, the Individual 401(k) permits you to have a Roth component on the employe eportion of the contribution. A Roth account allows you to invest after-tax dollars that earn interest tax-free. When you retire, you are required to take minimum distributions at age 70 ½, but you pay no taxes on the distributions.

With your Individual 401(k) you can invest directly in leveraged real estate with no detrimental tax consequences. If you invest IRA money in a real estate deal that has debt, the IRA account is subject to Unrelated Debt Financed Income taxes on the leveraged portion of the investment. These taxes can be as high as 35 percent. However, 401(k) accounts are not subject to UDFI taxes

Conduct an Investment Review

Once you have set your retirement goals, Patrick Funke recommends an investment review. According to Funke, “Investment downturns are inevitable; having a plan of how you react during a market downturn is a key factor toward your ability to maximize your return over your investment horizon.”

In addition to evaluating the appropriateness of the investments you hold with respect to time horizon or how long until you need the money, minimizing debt, accumulation of a cash reserve and the accumulation of a retirement nest egg, are all significant factors to retirement readiness.  Funke states, ”studies have shown that a sustainable withdrawal rate, the amount of money you take out of your retirement assets on an annual basis, is approximately 4-5 percent annually. If you take out more than 4-5 percent of your assets annually, you run a substantial risk of depleting your assets at an earlier age in retirement.”

By planning ahead and allocating a little time each year to review and update your plan for retirement readiness, you can substantially increase the odds of your success.

About the contributors:

Kenneth T. Holman is president of Overland Group, RE/MAX Overland, and the National Association of Real Estate Investment Advisors. Mr. Holman has more than 30 years of experience in the real estate industry. Mr. Holman offers training for real estate agents on investing for retirement.  Sign up for his classes at www.NAREIAGroup.org. He can be reached at KHolman@NAREIAGroup.org or 801.931.5571.

Patrick A. Funke is the founder of Patrick Funke & Associates, Inc. He is a financial consultant and retirement plan specialist with more than 25 years of professional wealth management experience. For more information, visit: http://www.pf-associates.com/index.cfm