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Summary:
- Real estate is vulnerable to local risks, such as natural disasters and economic changes, that don't affect 401(k) plans in the same way.
- Income from real estate depends on maintaining occupancy, which can be uncertain.
- Selling property at a profit is not guaranteed, making real estate investments less predictable compared to a 401(k).
According to the Pension Rights Center, more than half of U.S. workers have some form of retirement savings plan, with many choosing company-sponsored 401(k) plans. However, many Americans also invest in real estate to generate retirement income. As of 2022, approximately 10% of U.S. households with individuals aged 65 or older earned income from real estate, compared to 7% of households with individuals under 65, according to the Wall Street Journal, citing data from the Federal Reserve and the Boston College Center for Retirement Research.
It's understandable that retirees may turn to real estate to enhance their retirement savings. The Wealth Enhancement Group highlighted in a recent blog that historically, real estate has offered average annual returns comparable to equities, with stocks being inherently more volatile. Given that stocks are a significant component of 401(k) plans, these findings may lead some to question the balance of their investment portfolios. However, before deciding to invest in real estate, it's essential to consider the potential risks. Here are three reasons why real estate might not be as reliable as a 401(k).
- Exposure to Localized Risks: While economic downturns can impact both real estate and retirement investments, real estate is also susceptible to local factors. Natural disasters or the loss of a major local employer can dramatically reduce the value of your property, an issue that does not affect 401(k) investments in the same way.
- Dependency on Occupancy: Real estate investments often require a steady stream of tenants to generate income. Finding reliable tenants can be challenging, and any period of vacancy means covering property expenses without receiving rental income.
- Market Uncertainty: The ability to sell property at a profit is not guaranteed. Unlike a 401(k), real estate investments are highly dependent on market conditions and the availability of buyers, making them less predictable.
