How do you envision spending your golden years of retirement?
It may seem like a distant dream, but there will come a day when you decide you’d rather listen to the waves break on the beach and the wind rustling through the palm fronds than a homeowner complain about a lowball offer.
Will you be financially able to retire?
Many agents won’t. They’ll keep selling real estate because they have no alternative.
Now, imagine having a million dollar retirement fund.
That could make the difference between continuing to sell real estate because you want to versus selling real estate because you have to.
If becoming a millionaire realtor sounds appealing to you, I suggest you get started immediately.
Why starting now is critical
According to financial planners, here’s how much you should have saved by several milestone birthdays;
Age 35: 2x your annual salary saved.
Age 40: 3x your annual salary saved.
Age 45: 4x your annual salary saved.
Age 50: 5x your annual salary saved.
Age 55: 6x your annual salary saved.
Age 60: 7x your annual salary saved.
Age 65: 8x your annual salary saved.
By age 67, they recommend you have ten times your annual salary saved for your retirement.
So, how do you measure up?
If you’re falling a little (or a lot) short, you’re not alone.
Money magazine reports that 1 in 3 American households have saved $0 for retirement – and that 56% of households have saved less than $10,000.
I met with a real estate agent several months ago who told me she earned over $300,000 in the previous year – and had nothing to show for it.
And while many agents are focused on building teams, one of the best “teams” you can have is money that is growing while you work, sleep and play.
It never calls in sick, never asks for a day off and never complains.
And the sooner you put this
team money to work, the harder it will work for you.
For example, if you contributed $10,000 per year to an investment account earning 7%, and you did this for 20 years, you’d have roughly $410,000 – even though you only deposited a total of $200,000.
We can thank our old friend compound interest for this miracle!
The longer your money stays in your investment account, the more good it does.
Don’t believe me?
If you waited 10 years to start making those $10,000 annual contributions, you’d have only $138,000.
Your money would have grown by only $38,000, so those extra ten years would bring an additional $172,000!
As a small business owner, which is really what you are as a Realtor, you have a unique opportunity to save for your retirement.
If you need to play “catch up” with regards to saving for your retirement, there’s good news.
As a small business owner, you can use a SEP-IRA to save up to $54,000 per year, or 25% of your income, whichever is less and defer paying taxes on that money until it is taken out beginning at age 59-1/2, when your tax bracket is likely to be lower.
A SEP-IRA, which stands for Simplified Employee Pension IRA, also enables you to invest your money in a wider range of investments than a typical 401k.
While many real estate agents are eager to invest in rental houses, I would encourage you to look at investing part of your money into a real estate mutual fund. These funds, and the real estate companies they invest in, are managed by people with a lot more knowledge and skill than the typical agent, and their diversification means you aren’t exposed to the risk associated with a single investment property.
Also, managing rental properties takes you away from your main focus – becoming the best real estate agent you can be.
A good friend of mine sums it up this way, “When you chase two rabbits, you lose both of them.”
So focus on what you do best and let others do what they do best,
Let’s look at how you can set up a SEP-IRA.
Setting up a SEP-IRA
The deadline for establishing a SEP-IRA is your business’s tax filing deadline, including extensions.
For most of us, that’s April 15th, but your situation may be different. If you aren’t sure when that is, ask your CPA.
As the owner of your business, you are not required to make an annual contribution. This is especially attractive for agents who’s business has not reached the point of providing a consistent, predictable income.
You can establish a SEP-IRA through a bank, insurance company or other qualified financial institutions, such as Fidelity, Merrill, Scottrade or Schwab.
You may also be eligible to receive a tax credit for an expenses incurred when establishing your SEP.
Once you have your SEP established, you’ll want to calculate the required contributions to reach your retirement goals.
Determining your contribution requirements
The best way to determine how much you need is to hire a good financial planner.
I recommend those who provide fee-based plans and are not tied to selling any particular investments or insurance plans.
A good rule of thumb, and one used by many financial planning experts, is that retirees will need approximately 70-80% of their pre-retirement income.
Let’s say you and your spouse will get $3,800 per month in social security benefits and you need $90,000 per year to cover your anticipated expenses. As a result, you’ll need $44,400 from your retirement savings to meet your budget. ($90,000 – $45,600)
Using the 4% rule, you’ll need to have $1,110,000 in retirement savings to generate the annual income necessary to cover your expenses. ($44,000/.04=$1,110,000)
If you have twenty years before you expect to retire, and you have not saved anything so far, you can still get there – but it will take some effort.
To accumulate a total of $1,110,000 in twenty years, you will need to contribute approximately $24,000 per year to your SEP plan. This assumes you are earning an average annual rate of return of 8%.
Obviously, a lower annual rate of return would require a higher annual contribution, or more time to grow, to reach your goal of saving $1,110,000.
As a real estate agent, you have another unique opportunity to save in that you can earn as much as you want.
You simply have to have a plan.
Calculating your production increase
Let’s suppose your average sale is $350,000 and you’re on a 70/30 split with your broker.
For every home you sell, you generate $7,350 in gross income.
But then there’s those pesky expenses that chew away at that number, so let’s round it down to an even $7,000.
If you can avoid the siren call of a new car and expensive toys that will ultimately lose their value and invest that into your SEP, you’ll need to sell four more homes per year to reach your goal of becoming a millionaire agent.
(The number is actually less than four, but socking away a little extra wouldn’t hurt)
There are other ways to increase your income.
I recently wrote an article on how real estate agents can double their income by making small improvements to their business.
We hear a lot about millionaire real estate agents.
I think a lot of that is talk.
But I can’t think of another business where you have the opportunity to decide how much you want to make and the ability to use the SEP-IRA plan to save substantial amounts of money for your retirement.
You can do it.
It takes discipline and willpower.
But the opportunity is there.
I hope to see you on the beach.