Apparently many people spend more time planning their next vacation or cell phone purchase than they do on their own eventual retirement. It’s easier and probably more fun to focus on the vacation but here’s a simplified look at alternative ways to invest some money.
Let’s take a hypothetical situation where you have $35,000 to invest for your retirement in 15 years. Have you compared where you might have the best opportunity?
The safest place to put your money might be a certificate of deposit because it’s insured. But unfortunately, rates likely would be less than 2%. The value at the end of your 15 years would grow to about $47,233 in that time.
Mutual funds present some risks depending on the economy but they likely have a greater opportunity to earn a higher rate of return. An estimated 7% return on your $35,000 would results in an accumulated value of $99,713 over the 15 years.
Of course as a realtor I need to mention real estate investment. If you use your $35,000 for a 20% down payment and closing costs on a $150,000 rental home, you might see much higher returns. Using a familiar investment analysis spreadsheet, the $35,000 could grow to a future wealth position of $153,302. A common analysis considers leverage, an estimated 3% appreciation, re-investing any cash flow income, the 7% sales expenses and payment of applicable taxes.
The rate of return each of these three cases are 2% for the CD or 7% for the mutual fund or approximately 14% return on the rental. If your plan produces increased return on your investments, you might be able to consider additional risk or diversification as well.
Most people are much more familiar with homes than they are with mutual funds, bonds and other similar investments. The same REALTOR® who helped you with your home can help you invest in a rental home.