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Archive for February, 2016

Investing in Real Estate for Retirement

Over the last few years, the interest rates of various investments have fallen and despite all the attempts taken to make the economy stable, millions of people had to extend their work years just to maintain the minimum standard of living. Yes, everything lost has its value, but one asset has only risen in spite of this recession – real estate. Most people dream about spending their retirement period in a calm and quiet place. A place where the crime rate is low and the entire surrounding is filled with intelligent people who are just living the much-needed peaceful and retired life. However, all these dreams can only turn into reality if an individual makes intelligent decisions regarding his/her investments.

How to Invest in Real Estate for Retirement

There’s no doubt that investing in real estate is a smart move, but it is advised to check out all the loopholes before putting money in a piece of property. Buying real estate is more than just living on a piece of land. The practice of property selling and buying has become a popular practice over the last few years, and more and more people are joining this bandwagon. Yes, the real estate market has plenty of lucrative opportunities for investors, but sometimes dealing in real estate can be more complicated than dealing in stocks and bonds. In this piece of information, we understand different and safer ways of investing money for real estate.

Giving on Rent
An vacant, habitable house can rented to a tenant for a considerable period of time. The owner pays for its maintenance, mortgage and various additional taxes. The rent on the property is usually decided on the basis of its location. The land owner earns a fixed income every month which is known as rent. In due course of time many landowners charge more rent in order to gain more profit. However, the best thing to do is to charge rent which would be enough to cover the mortgage payment. Plus the value of the property is likely to have appreciated with time. As soon as the tenant moves out due to various reasons, it is advised to put up the property on the market to earn additional profits.

Real Estate Trading
This is perhaps the fastest form of making money in the market of real estates. In real estate trading, the traders buy properties from owners with the motive of holding them temporarily and selling them for a better profit later. This practice is also called ‘Flipping Properties’ and traders who follow this usually purchase properties which are highly undervalued or are very high-priced. In some cases, when traders purchase a low priced property, they try to increase its value by doing some renovations on the property. This customization can actually result into a huge profit for the trader.

REITs
One of the most easiest ways of investing in real estate is putting money in the Real Estate Investment Fund (REIT’s). A RIET is created when a trust or a corporation uses the investor’s money to buy and operate properties. RIET’s function just like stock trade. The trust or corporation has to pay out 90% of all its taxable profits in the form of dividends to its various investors. By paying the dividends, the REIT is exempted from paying corporate income tax. RIET is the perfect choice for people who want to earn regular income.

401 (k)
Most people believe that the money saved through the 401 (k) plan is simply for retirement. However, there are some smart investors who have figured out ways to invest in real estate without disturbing the money saved for retirement. 401 (k) account holders can take out a loan against their account. The money which comes from the loan can be used to buy real estate. However, there are some limitations which come with the loan. First and foremost, there’s a cap on the amount which can be borrowed. Normally the cap is of $50,000 but it can be less depending on the money in the 401 (k) account of an individual. Another thing to remember is that real estate purchased through this method is not eligible for any tax benefits.

Roth IRA
Almost everyone in the US knows about the Roth IRA (Individual Retirement Account), it is a great form of investment and is non taxable. People who open an IRA account deposit some money from their salary in the IRA for retirement. In some companies the employer deducts some part of the salary and deposits it in the IRA of the employee. The good news here is people can use the IRA money to invest in real estate. Let’s make it more simple; If you have $50,000 in your IRA account and you want to purchase a property which is priced at $100,000. You can put in $50,000 of your own money and put in more $50,000 from the IRA. This makes your IRA account nil but you can put back that $50,000 once you sell that property at a better rate.

For legal advice regarding these investments, it’s necessary to get in touch with your attorney.

Investing money in real estate for retirement is a good idea if the investor keeps himself/herself updated with the latest regulations and strategies of the market. Real estate is perhaps the best way of earning easy money in retirement but before the game of investment begins it is a good idea to know all the rules.

How to Calculate Retirement Needs

Before we start off, answer the following questions. These answers would tell you a lot about your own financial situation. At what age would you like to retire? Would you face the burden of liabilities such as mortgages, or home equity loans at the time of retirements? What would be the monthly income from annuities, mutual funds, pensions and savings? What is the intent of medical insurance coverage? The answers to all the above mentioned questions would provide you with an idea as to how to calculate your retirement needs.

Retirement Needs Planning

You would get a rough idea as to how you can calculate your retirement needs by studying the bank statements.

Basic Necessities
First off you will need to consider your basic necessities, which include, food, clothing and common medical expenditure, gymnasium and library fee, household expenses such as water, telephone and electricity bills. Based upon your current expenditure, you can calculate these expenses on an annual basis. You would also need to add the current inflation rate while calculating the basic necessities. These are inevitable expenses and have to be fulfilled.

Medical Expenditures
Old age means more health related problems. Therefore, you should also calculate the costs to medical checkups and procedures related to ailments that you suffer from. Consider the costs of tests, average doctors’ fees, and also the premium of a long-term health insurance policy that would extend for several years into your retirement. Now, all your medical expenditures can be fulfilled with the help of provisions specifically dedicated for the purpose. For instance, a medical insurance policy, an annuity dedicated for all medical expenditures. You can also have Medicare, TRICARE and even Social Security, to cater to your medical expenditures. However, these provisions have to be foolproof and you should be able to rely on them without hesitation.

Expenditure for Recreation
Taking a vacation twice a year, subscribing for recreational facilities in clubs, etc. can be considered. For this purpose, you can draw an estimate for one time vacations from tour packages. A retirement needs analysis that is carried out carefully allows you to plan properly for recreation purposes also.

Retirement Homes
Few of us might prefer availing the benefits of living in retirement homes. This is probably the best way to live life after retirement. The retirement homes are meant for housing medical professionals who in turn would be looking after you. In addition, you would also have other senior friends living with you. These senior homes specify a comprehensive annual figure of fees for the services they offer. You can consider the figure of expenditures specified by them while calculating the retirement fees.

Your Hobby and Passion
There are many of us who love music. You may think of pursuing your hobby after retirement. For this, you can make a proper provision by estimating the approximate needs or requirements to pursue the hobby. It is important to learn how to calculate retirement income if you want to make provisions for a hobby, recreation or other similar needs.

Taxes and Premiums
Even after retirement, you will have to pay taxes for the income you obtain through mutual funds, pensions, retirement funds, interest in savings, and insurance benefits altogether. All the money that one benefits from through these funds go into the bracket of taxable income. You will have to make a total of all these incomes and benefits and calculate the limit beyond which tax is levied on these income sources. If the answer is yes, include the total tax into your annual retirement needs. Apart from that, you will also need to consider property tax and inheritance tax or for that matter any other state level tax.

On the whole, financial experts often state that a person should enjoy benefits of at least 70% of the pre-retirement income from all the provisions he/she has made. Calculating your annual expenses should also give you an idea of your retirement needs. Exclude your credit card bill, mortgage, loan and premium payments. Add 25% more into it and that will be your retirement need. There are few important points which need to be considered so that your life post-retirement remains tension free: get rid of all debt, cancel the credit cards and do not borrow under any circumstance. Secondly, make concrete provisions for your medical expenditures. Thirdly, do not depend on just one source of income or money, make multiple provisions. Hope you have got all your answers on how to plan for your retirement.