When planning for the future, especially for an early retirement, it’s important to understand the best places to put your money. In one of her recent podcast episodes, financial expert Suze Orman shared her thoughts on whether it’s better to invest in retirement accounts or real estate. Here’s what she said and how you can apply her advice.
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Why Put Money Into Retirement Accounts?
Orman believes retirement accounts should be a key part of anyone’s savings plan. In response to a question from a listener named Sabrina, she explained that putting more money into employer-sponsored retirement plans and Roth IRAs is a smart move. These accounts have high contribution limits — the 401(k) limit is $23,000 in 2024 — allowing people to save a lot of money in a tax-friendly way.
One of the biggest perks of Roth IRAs, according to Orman, is that the money you earn from investments in these accounts isn’t taxed when you take it out during retirement. This is a huge benefit for those who think they might be in a higher tax bracket later on. It means more money in your pocket when you retire, without the worry of paying extra taxes.
Orman’s advice is especially useful for people like Sabrina, who want to retire by 55. She stressed the importance of saving aggressively and choosing where to invest carefully.
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401(k) matching
A 401(k) match is when your employer adds money to your retirement plan based on how much you put in. For example, if it offers a match of all contributions up to 6% of your salary and you make $50,000 a year, then for every year you contribute $3,000, it will also contribute $3,000. Sometimes there are rules about how long you need to work there before you can keep this extra money if you leave the job.
How Roth IRAs Work
A Roth IRA is a type of retirement savings account with a unique tax advantage. Unlike traditional IRAs, where you get a tax deduction for the contributions you make, with a Roth IRA, you pay taxes on the money when you put it in. The big benefit comes later — when you withdraw the money during retirement, you don’t have to pay any taxes on it, not even on the earnings or interest it has accumulated over the years.
What About Investing In Real Estate?
Orman is more cautious about real estate. She admitted that while you can make a lot of money, it comes with challenges and costs that aren’t there with retirement accounts. Real estate needs continuous investment not just to buy it but also to maintain it. Expenses like insurance, property taxes and upkeep can add up, eating into your profits. Also, selling property can take time and might not always be easy depending on the market conditions.
During her podcast, Orman suggested to Sabrina to think about other ways to make passive income, such as investing in the stock market or putting money in high-yield savings accounts. These options are simpler and don’t require ongoing expenses like real estate does.
Investment Accounts vs. Real Estate: Pros and Cons
Putting your money into retirement accounts offers many benefits, including tax breaks and the potential for your employer to match some of your contributions, which is like getting free money. However, these accounts usually have rules about when you can take your money out without penalties, which might not work for someone who wants to retire early.
On the other hand, real estate can give you a steady stream of income through renting out properties. This can be an attractive option for covering living costs in retirement without needing to sell off investments. However, being a landlord comes with its own set of responsibilities and risks.
Final Take
Orman stressed the importance of understanding your investments. Knowing how different investments work helps you choose the right ones for your financial goals. She encouraged everyone to educate themselves on the ins and outs of stocks, bonds, real estate and retirement accounts to build a diverse portfolio. This can help protect your money from ups and downs in the market.
It’s always a good idea to talk to a financial advisor who can help you apply these strategies to your financial situation. They can provide you with personalized advice to ensure that your investment choices align well with your financial goals and personal risk tolerance.
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This article originally appeared on GOBankingRates.com: Suze Orman on Investing In Retirement Plans vs. Real Estate