JF2536: Should You Rethink Saving for Retirement? | Actively Passive Investing Show
In today’s episode of the Actively Passive Investing Show, Travis Watts analyzes Daniel Ameduri’s book, Don’t Save For Retirement. Travis pulls out and discusses some key points from the book, like why traditional methods of retirement aren’t actually designed to benefit us, redistributing retirement funds, and how to do as the millionaires do.
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Travis Watts: Hello, Best Ever listeners. This is Travis Watts with The Actively Passive Show. Thank you guys so much for tuning in. Today I have a very exciting episode for you called Should You Rethink Saving for Retirement?
You might take that one of two ways. You may say, “Of course I should save for retirement” or you may say, “What do you mean by save for retirement?” So whether you’re looking to achieve financial independence, whether you are looking to retire one day, I think we can all agree that the conventional methods that we’ve all been taught may not exactly get us where we want to be. And that’s what we’re talking about today on the show.
This show came from an interview with Daniel Ameduri. And he was actually on the Best Ever Show with Joe. But he’s also written a great book, it’s called Don’t Save For Retirement. I wanted to extract some of his best secrets that he shared on the show, I wanted to add a few additional items that I think are relevant to our show here. As always, we will talk about the active and the passive pros and cons and components to all of this.
So without further ado, Don’t Save For Retirement. What I mean by this is for most of us who graduate from college or don’t graduate from college, any of us who enter the workforce as a W-2 employee, have probably partaken in a workplace savings plan for retirement, something like a 401(k) or a 403(b), invested in mutual funds, ETFs stocks, etc. For the most part, the way the marketing goes in our society, we’re told that these types of plans are what’s going to get us to retirement safely and comfortably.
What Daniel points out in his interview and in his book is that these plans aren’t exactly designed for you and I to benefit from, they’re actually designed mostly for those running the industry, the so-called Wall Street. It can be extremely difficult to become wealthy using these types of savings plans like a 401(k) for example. Since pensions are basically a thing of the past, there’s no guarantee that you or I are going to actually have enough money in one of these plans by the time we decide to retire. If that happens to be before the age of 59.5, you can basically forget about that, because of all the taxes and fees that we’ll have to pay. So really it’s dependent on how much you and I save and put into a plan like this, and of course, how the stock market performs between now and then.
So instead, Daniel suggests that you and I take our money and that we invest in something that creates yield or passive income. And as we’ve talked about many times on the show, there’s really two ways that you and I can invest that would be for income or dividends, cash flow, etc, royalties or equity, which is your classic buy low and sell high. These plans are mostly built around the equity concept that you and I will put in 100k over the next several years, and we’ll wait decades, and then at the end of it, we’ll have a million dollars or something like that, hopefully more, in these types of accounts. That’s a buy low sell high kind of strategy. In the interim, there is no cash flow, generally speaking, in 401(k) plans.
The way Daniel puts it if you invest for passive income is, “You’re paying yourself along the way, you’re growing your wealth simultaneously, and not having to wait to see how your funds perform decades later.” That’s obviously a big gamble of what’s the stock market going to be in 40 years or 30 years or 20 years. Nobody has that answer. So you really are taking a little more of a gamble by using a strategy like that.
You may or may not be familiar with what’s called The Lost Decade. I think a lot of countries have some similar title to some circumstance that’s played out in their financial markets. But here in America, this happened between 1999 and 2009. And the whole concept was if you or I had put in a lot of money or any amount of money rather in than the stock market in 1999, we would have a negative 2% total return over that entire 10 year period; we had the dot-com bubble and bust, and then we had the great recession happen after that. So you really didn’t have earnings between that period if you were doing kind of a broad index approach like the S&P 500, for example.
And by the way, what’s even crazier about a negative 2% overall return is that that includes reinvesting dividends. So it’s actually worse than that, had you pulled out dividends or been living under dividend income in a portfolio such as that.
So instead, what Daniel suggests is invest for cash flow or passive income. So if we paint that example, let’s say that we instead had put our money into real estate, and let’s say that real estate—in whatever form by the way, single-family multifamily what have you—if we were getting, let’s call it a conservative 8% a year in cash on cash return, well, that would have been 80% of whatever we had invested; that’s 8% a year times a 10 year period. So that’s an 80% total return; or you might look at that as maybe a return of capital perhaps, but then you would still have the value of whatever the real estate was at the end of that 10-year timeframe.
So let’s say that the actual purchase price was still drastically down, just to give kind of an extreme example – your real estate you bought in 1999 was now worth only 50% of what you originally paid for it. Well, you still would have had the 80% from the cash flow, the 50% from the value it still holds today, and if you combine those numbers, that’s 130%. So you take out your initial capital contribution – it would have basically been, in simple terms, a 30% total return over the course of the decade.
So not too bad, certainly not negative 2%, and that’s the whole point that he’s trying to paint, is invest for passive income, because at least at the end of the day you would have had something along the way and at the end of that cycle.
Daniel goes on to explain why the conventional programs are an issue. For example, he says, “Most people use a three-part system”, which is actually how the system was designed. A 401(k) was never intended to be your only retirement option. It was supplemental to other things such as a pension, which as we already discussed, is pretty much non-existent these days. Your own savings, which we’ll get into here in a minute why that may not pan out for so many, and then the Social Security system.
Travis Watts: In theory, you have all these different income streams by the time you retire to overall give you a comfortable living; but let’s dive into that a little bit deeper. So let’s pull out some statistics here.
So the average amount that an American has in a 401(k) plan is $58,000; maybe enough to live a couple years at best, in kind of a minimal survival situation. And the average Social Security payment as of 2021 is somewhere in the ballpark of $1,500.
I don’t know about you, I don’t know about what market you are tuning in from, but I know in my market if I go look for an apartment, let’s say, a two-bedroom, two-bath or a three-bedroom, two-bath, I know those numbers are north of $2,000 per month. So $1,500 isn’t going to get me very far. In fact, it probably won’t even pay rent, much less utilities, much less every other expense I have in my life.
And as we all know, savings accounts are paying next to zero these days and we have inflation on the rise on top of that. And statistically speaking, the Federal Reserve did a survey in 2019 called The Survey of Consumer Finances. And what they’ve found is that the typical American household has $5,300 in a savings account at a bank or credit union. So if you’re looking to retire on some of your savings, good luck.
The bottom line of what Daniel is trying to portray here is that the traditional and conventional programs and systems aren’t exactly setting you and I up for a lifestyle of comfort or luxury, or even having any options for that matter.
One thing I love that Daniel points out is he says, “Look at what the wealthy are doing with their money, or look at the type of person that you want to become, the type of lifestyle you want to have, and figure out what these people are doing to achieve that.” So in other words, if you look to what the middle class do with their money and you emulate those things, you end up middle class.
One of the discoveries that Daniel found in doing this was as he looked to the wealthy, he found out that the majority of wealthy individuals owned real estate; and statistically speaking, I just pulled up a survey right before the show – oit depends on what survey you tune into, because there’s different data points, but everything I found on every survey I searched suggests that between 70% up to 90% of millionaires own or invest in real estate.
Another thing Daniel points out is just simply to look around at what other people are doing, to take real estate as the example. You don’t have to have a special skill set or special connections. There’s people nationwide, millionaires and non-millionaires doing single-family investing, buying up duplexes, doing vacation rentals, renting out their basements, investing in publicly-traded REITs, investing in real estate syndications… There’s a lot of different approaches, a lot of different ways, as we’ve talked about on the show many times over.
And the point is, if statistically a lot of people are having success with this particular asset class, that means not only is it possible, it means you too can do the same thing or similar.
My advice here would be to find a mentor, find somebody doing or who has done what it is you specifically want to do, make sure they have done it successfully… And either do a paid mentorship or an unpaid mentorship, or at least tried to snag a 15-minute phone call or something with these individuals to get some snippets, some takeaways, maybe a little bit of inspiration or motivation from it.
I know I get my time back to other people looking to take a passive approach to real estate investing, always happy to do that, and lots of people are. You’d be amazed at how many people I’ve been able to connect with, whether it be what you might refer to as a celebrity, or an author of a book, etc. If you genuinely reach out with sincerity and you don’t try to write them a whole book on why you want to connect, you just say, “Look, 15-minute phone call. These are some questions I have, if you wouldn’t mind just helping to answer those.” A lot of people are willing to give you that type of time to genuinely help someone who’s genuinely interested in getting results for themselves.
Daniel has a slightly different approach on passive income. He doesn’t suggest that people quit their jobs and start living off passive income, for example. Instead he says, “Take what money you would be otherwise putting into these retirement vehicles, and instead, just park it in real estate.” In a general sense, again. However you interpret that – single-family house hacking, real estate, private placements, REITs, stocks, which hold real estate, no matter how you spin it, the point is to focus on passive income, not to focus on equity appreciation or capital gains.
According to Daniel, the goal should be to start with a small bit of passive income, whatever it is you can afford at the time, and then to keep money rolling back and rolling over until you have enough to become financially independent or financially free. From there, he says, “It’s up to you. What do you want to do with your time?” I’ve talked a ton about this over the episodes of this concept of time freedom, when you have more passive income rolling in every month than you have lifestyle expenses – your rent or mortgage and food costs and insurance etc, you have a new-found kind of freedom; you get to choose. Not everyone wants to retire or have the absence of work. Some people just want to say, “Hey, look, I’ve been working 100 hours a week and I’d love to work 40 hours a week, that would be pretty sweet,” or from 40 to 20, part-time. Shift careers, spend more time with friends, family, travel; everybody’s different, open a non-profit. So that’s the beauty of building up enough passive income over time to exceed your lifestyle expenses.
And one more thing – I know, I’ve used this example multiple times, but my nephews at age 16, 17, 18, right in that range, have opened their own brokerage accounts and they have REITs that they’ve spent as little as $10 per share on. So I think it’s something that — I agree with Daniel, anyone can get started with this, anyone who has at least the ability to open a brokerage account, which in most cases is free… And then $10 because these days, there’s very low if $0 trading commissions.
One thing Daniel does a disclaimer on, which I appreciate, is that not all passive income is passive. And to the tune of our show, if you’re going to go out and buy single-family homes or your own multifamily properties, even if you hire out the property management, there’s still a lot of time, effort and energy involved in a strategy like that, where you’re spending time searching for properties, you’re spending time doing underwriting and submitting bids, building teams of brokers and realtors, either doing the value-adds yourself or coordinating them out, dealing with contractors, making a lot of decisions there, interviewing property managers, overseeing the property management once you get into that type of play, decisions on repairs, replays, when to refinance, when to sell… There’s still a lot of time and energy even in turnkey properties so to speak, so just be aware of how passive or how active you really want to be if you’re going to dive into the world of real estate.
Active real estate is something I did for about six years. I learned a lot from it. I’m very grateful for those experiences. But ultimately, I burned myself out in the process. It was just too much for me personally to do and to take on. It wasn’t really my skill set or my interest to be in the business of real estate. But the beauty is we’re all different, we all have different strengths and weaknesses. There’s people out there crushing it literally who were active in real estate, and I was the guy just treading water and trying to keep up.
So my suggestion to that – do your highest and best skill set, only focus your time and energy on the things that truly interest you, that you really want to develop and grow from, or that you feel you have a competitive edge in compared to other people.
Travis Watts: In fairness, Daniel does point out the other perspective to this and he does argue that sometimes being an active investor can yield a higher return compared to that of REITs or stocks or real estate syndications. More passive investments typically mean lower yield, generally speaking. I made a video on this a few years ago, it’s on my YouTube channel, and I forget the exact title, but it’s to the point of 15% return versus 10% return – which is better? So it again kind of makes you think, “Well, of course, 15% is better.” But what it points out is the 15% return comes from you actively investing in a single-family home and generating that kind of yield, doing everything yourself. The 10% return comes from a completely passive approach, a hands-off approach, where you’re not having to do anything. Which is better in that case?
Well, I’ll just kind of give you the bottom line here, it depends on how you value your time. For example, if to get that 15% yield you doing it all yourself, it takes you a 100 hours per year, and that equates to a $3,000 increase in your yield… In other words, that 5% on top equates to 3,000 in dollar terms, well, then you’re basically working for $30 per hour. So for some people, like for me, way back when in my early 20s, I would have said, “Sure, I’ll work for 30 bucks an hour. That sounds good.” But today, I would say, “Absolutely not, that’s not worth my time.” So everyone’s going to be different. And just keep in mind, again, to Daniel’s point, not all passive income is a passive strategy. I also like that Daniel talks about frugality, which is one of my little passion points on a side note. He says, “You have to brutally cut your spending.” I would say maybe aggressively, but same concept. So Daniel and his family didn’t have a lot of money when they got started in real estate, nor did I for that matter. So they basically decided that passive income was important enough that they were really going to dedicate to it. And in his opinion, he said cutting their expenses as much as possible made a huge impact overall years later.
Daniel said in his interview with Joe, that, “You may have to forego luxuries like buying a new car, for example, or buying expensive groceries for a period of time, until you’ve grown and expanded your income.” I agree with Daniel on the car example. On the food, this is what I would say – you shouldn’t nor do you have to sacrifice your health for your wealth. In fact, just this week – just thinking out loud, I just had a salad for lunch; I bought one of those large, clear plastic containers of organic baby spinach, and it was marked down at the grocery store for $1.79 from, I don’t know, $5.99 or something like that. And it hadn’t gone bad yet, it was just approaching its expiration date. It wasn’t soggy or gross or anything. So what I’m going to do is put sunflower seeds over it, maybe chop up some tomatoes or some mushrooms or chickpeas, and I’m just going to make about three days worth of salad. And if you break down that total cost, it’s probably going to cost me about $2 per meal. So there’s lunch for three days; organic salads, two bucks per salad.
In terms of buying a new car, I agree. As I said, it’s pretty much a losing battle. The minute you drive that car off the showroom floor, you’ve lost thousands of dollars on top of the dealer fees, and the taxes, and the tags and transition cost and everything else.
In my experience, I’ve owned luxury vehicles, I’ve owned multiple Porsches, Lexus, Range Rovers, and I have never paid more than $13,000 for a vehicle. And I’m talking about all in cash buying. I’m not talking about financing or leasing or anything else. I’ve actually bought these cars for 13 grand or less in good shape. But here’s the thing, it took more time, it took more energy. I bought private party, I bought used, and I had to negotiate oftentimes. So I know those can be some barriers for a lot of people. But if you have expensive tastes in some things, like I do with vehicles, it’s more in how you buy it, not what you buy.
Switching gears – I love this, what Daniel points out. He says, “Stick with what you know.” During his interview, he said, “While many people will try to diversify and keep moving into new fields, I suggest sticking with what you know. If you’ve found something that’s making you money, keep going with it.” This reminds me so much of what one of my mentors told me years ago, which is “Double down on what’s working.” I don’t know how you feel about that message or how that resonates with you, but let me share a quick story with you.
Between high school, college and post-college for me, several years in that span, I launched 20 small businesses in total. And by 2009/2010, 19 of those businesses had either failed or were in the process currently of failing. But you know what the one thing that wasn’t failing? My real estate. So I took that advice and I doubled down on what was working, and that has truly made all the difference. Daniel’s advice is to become an expert and scale from there.
If you’ve ever read the book by Malcolm Gladwell, it’s called Outliers, he talks about the 10,000 hour rule; that it takes 10,000 dedicated hours to build mastery in a particular skill or a subject. Now, the key here is focused and dedicated hours. In other words, you and I, we’ve gone to bed and we’ve slept for 10,000 hours in our lives. That doesn’t mean that we’re masters of sleep and that we know everything about it, and how the brain works, and how dreams work. You have to focus, you have to self-educate, you have to tune in. And if you do that with just about any subject, according to Malcolm Gladwell anyway, you will build mastery in approximately 10,000 hours of doing so. So great book if you haven’t checked it out, and couldn’t agree more with what Daniel had to say.
Final thoughts and a quick recap for you – obviously, saving/investing for retirement is very important. But it’s also important to be wise about the decisions on how you save and how you invest. The conventional programs, as Daniel pointed out, are not really in your best interest, and often are going to fall short of what you may have for your expectations. If you’re aiming for comfort or true financial independence, financial freedom when you retire, you should invest in real estate or something that produces passive income.
My final thoughts on the subject are that passive income, as I’ve said many times before, can help you design the lifestyle that you want to have. We’re all different. There’s lots of approaches. This is the time freedom concept, spending more time with family, friends, travel, being more charitable, building a nonprofit, switching to part-time work – whatever it means to you, I believe the passive income approach to investing is the way to go, myself. It’s obviously what I do full time, as far as investing is concerned.
One thing that’s difficult to argue with is the fact that if you had $10,000 a month rolling in extra, it’d be hard to justify that that’s going to hurt your situation in any way. So I would suggest that if you haven’t gotten started already in your investing journey, do so no matter how you decide to invest, obviously—
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