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Real Estate Investors - Include These 5 Factors In Your Retirement Projection

Real Estate Coaching Financial Planning



What you'll get from this article: 

🏠 WHy running a retirement projection is so powerful

🏠 questions to ask yourself about your vision for retirement

🏠 how to set assumptions for savings rates, taxes, inflation, and investment returns

🏠 predict lifestyle, real estate management, and spending changes

🏠 tips for choosing a retirement calculator

Do you want to retire comfortably? Start by using a real estate-friendly retirement calculator to run a retirement projection.

Running a retirement projection is the financial version of your annual medical check-up. The retirement calculator is a diagnostic test that tells you whether you are on track --or not on track -- to retire at a target date with a comfortable income for the rest of your life. Just like the results of a cholesterol test or thyroid panel, an annual retirement projection lets you know if you are headed in the right direction for your financial health.

Why running a retirement calculator is so powerful

Research from the Financial Finesse Financial Wellness Think Tank[i] found the simple act of running a retirement projection annually may be the single most important step to take to reach your financial goals. People who discovered they were not on track for retirement could still make changes in how much they save, how they invest, and how they prepare. Using a retirement calculator acted as a nudge to improve financial behaviors.

Couple who realizes they are financially prepared for retirement The research analyzed 67,089 U.S. employee financial wellness assessments, and found that about 60% of those who ran a retirement calculator found out that they were on track to retire comfortably, while about 40% discovered that they were underfunded and needed to make changes. The twist – the same research found that slightly more than half (51%) of the participants surveyed had not run ever a retirement projection.

What real estate investors should include in a retirement projection

Are you one of those people who have not run a retirement projection, or have not used a retirement calculator in the past year? No judgement here. As a financial wellness evangelist, I just want you to use a retirement calculator – every single year.

A good retirement projection includes:

#1 – A vision of your ideal retirement

A retirement projection begins with envisioning your target scenario. When do you want to have the financial independence for work be optional -- to live completely off your investments and investment income?

  • When do you want work to be optional? Is this realistic?
  • Where would you like to live?
  • What do you plan to do when you are no longer working in your current career?
  • What do you want to accomplish during the next chapter of your life? What do you want to learn?
  • Who/what do you want to live close to in retirement, e.g., family, friends, arts and culture, recreation, overseas, etc.
  • What will you do with your current home – pay off mortgage, downsize, upsize, relocate, etc.?

#2 – Your mix of assets, liabilities and income

Before you use a retirement calculator, set some assumptions:

  • What sources of income will you have in retirement?
  • How much from each source?
  • When does the income begin and end?
  • What is the projected rate of return/growth for each income source?  
  • How is income from each source taxed?

Running a retirement projection is the financial version of your annual medical check-up

Make sure to include all the income sources which apply to you:

  • Rents
  • Business income
  • Social Security
  • Pension
  • Retirement accounts – 401k and employer-sponsored plans, Roth IRA/IRA, ESOP, etc.
  • Annuities
  • Brokerage accounts
  • Deferred compensation, employee stock and stock options
  • Bank savings
  • Payments from mortgages and loans you have made to others
  • Other income

#3 Predict changes in lifestyle and spending

How will your spending change in retirement?

Early and mid-career – use an income replacement rate

If you are early or mid-career, you can estimate using an easy replacement rate for your current gross income:

  • 80 percent replacement if you expect similar spending needs (that is because you will no longer make retirement plan contributions or pay into Social Security in retirement)
  • 100 % or greater replacement income if you expect your spending to increase
  • 70 percent or less replacement income if you expect to spend less (for example you have downsized and/or paid off your mortgage).

Young couple reviewing retirement calculatorWithin 7 years of retirement – calculate actual expenses

If you are within 7 years of retirement it will be helpful to prepare an itemized retirement budget and use that total in your calculations.

Expected changes in your real estate portfolio

Make some assumptions about other changes that could affect your retirement lifestyle:

  • Real estate exit strategy if you plan to divest from some or all your properties
  • Cost of property management if you plan to stop self-managing your units
  • Additional cost of contracting for renovations, repairs, and maintenance, if you are doing the work yourself now but plan to outsource it at some point

Remember healthcare expenses tend to increase faster than inflation

  • Cost of healthcare, dental, vision – for yourself and any dependents
  • Cost of long term care

#4 How much you save for future fixed and flexible income

How much should you save for retirement? When you run your first (or your next) retirement projection, start with how much you are saving right now. Does that get you to your goal?

If not, you will need to make adjustments. Can you save more? Working with a CERTIFIED FINANCIAL PLANNER™ can help you balance competing priorities.

51% of employees surveyed have not run a retirement projection

Ranges in savings habits I see in clients who own rental properties are:

  • Early career (10-25%) Most people in the early career stage are not thinking about retirement – but saving early will put the miracle of compound returns to work for you. Most folks in their 20s and early 30s are thinking about the competing financial priorities of early adulthood: getting their own place, enjoying life, paying off student loans and eventually home ownership, marriage, and parenthood. A house hack can help someone get started in homeownership and landlording at the same time.
  • Mid-Career (15-40%) People in the mid-career stage are typically juggling work and family and the tsunami of bills that comes along with owning a home and raising children. However, this also a time of increasing income. If you avoid lifestyle creep and accumulating debt as your income increases, you can put those savings to work investing in something that grows. This is the life stage where you typically see real estate investors build their real estate portfolios.
  • Late career (15-30%) People in later career are typically concerned with getting their financial houses in tight shape before retirement by paying off debt and building up cash reserves. People in the later career stage may pay down or pay off their mortgage before retirement, as well as contribute the maximum to their tax-advantaged retirement accounts.

See Retirement Planning From Start To Finish for a review of best practices for retirement planning at different career stages.

#5 Tax and inflation rates now and in the future

Inflation is the change in the price of goods over time where a dollar buys less goods and services in the future than it does in the present. That is why a Snicker’s candy bar cost a nickel when I was a kid and now costs more than a dollar. Most retirement calculators use a general rate of expected inflation for all spending, but more sophisticated financial planning projections for real estate investors may include unique inflation rates for:

  • Consumer goods
  • Housing
  • Health care
  • Medical expenses
  • Rents

GenX couple who just ran their retirement projectionU.S. income tax rates have changed many times over history (see graph), as have capital gains tax rates. Expect them to change again. While we cannot know for sure what tax rates will be, DIY retirement calculators typically assume future rates resemble current rates.

If you are working with a financial planner to run your retirement analysis, you may have the ability to specify the tax structure you expect in the future for income, dividends, and capital gains.

Where to find retirement projection tools and calculators that work for real estate investors

As a financial planner who works with rental property investors, I use a variety of tools to model retirement projections including financial planning software and spreadsheet models. These tools incorporate multiple cash flow streams and have flexibility to model and test changes in assumptions.

Pay attention to the question you are trying to answer in your projection:

  • Am I saving enough?
  • Am I ready to retire?
  • What happens to my progress if we have prolonged recession or a bear market?
  • What happens if investment returns, tax, or inflation rates change?

Find an easy retirement planning tool that does not have a hidden agenda, like trying to sell you insurance or investments. For a basic snapshot, DIY investors can start with the tools provided by their brokerage firm or try this Retirement Planner from the AICPA or this Retirement Estimator.  See this guide on DIY retirement planning tools. If you are working with a financial advisor, make sure their retirement projection tool can accurately incorporate your real estate holdings.

Want to learn more about financial planning for real estate investors? Book a discovery call here.

[i] Cynthia Meyer was a member of the Financial Finesse Financial Wellness Think Tank from 2015-2019 and co-authored research reports, including the report cited here.

Follow the Real Life Planning Blog for the entire real estate financial planning series

Start with this post, which introduces the framework for personal financial planning for real estate investors and offers a big picture overview. Over the next few months, I will dive deeper into each topic on the blog and in videos. I invite you will follow along and send me your ideas and feedback about this framework at info@reallifeplanning.com.

This blog is for general financial education purposes. Information contained in this blog should not be construed as financial, tax, real estate, legal or investment advice. For educational purposes, blog posts may contain links to other websites which are not under the control or and are not maintained by Real Life Planning. Real Life Planning has provided those links for your convenience but does not necessarily endorse all the material on those sites. Please consult your financial, real estate, legal, or tax advisor for advice specific to your situation.