When planning for the future, especially for early retirement, it’s important to understand the best places to put your money. In one of her latest 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.
Learn: 401(k) Growth Potential: Ways to Double Your Savings in 10 Years
Read more: 6 genius things all rich people do with their money
Sponsored by: Is credit card debt keeping you up at night? Find out if you can reduce your debt with these 3 steps
Why put money into retirement accounts?
Orman believes that retirement accounts should be a key part of everyone’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 tax-wise.
One of the biggest advantages of a Roth IRA, according to Orman, is that the money you earn from investments in these accounts is not taxed when you withdraw it in retirement. This is a huge advantage for those who think they may be in a higher tax bracket later. That means more money in your pocket when you retire, without the worry of paying extra taxes.
Orman’s advice is especially helpful for people like Sabrina who want to retire by 55. She stressed the importance of saving aggressively and choosing where to invest carefully.
See: 4 genius things people do with their retirement accounts after retirement (and 4 things to avoid)
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 on 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 have to work there before you can keep that extra money if you quit.
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 invest it. 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.
How about investing in real estate?
Orman is more cautious about real estate. She acknowledged 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 only to buy it, but also to maintain it. Expenses like insurance, property taxes, and maintenance can pile up, eating into your profits. Also, selling a property can take time and may not always be easy depending on market conditions.
During her podcast, Orman suggested that Sabrina consider other avenues for passive income, such as investing in the stock market or putting money into high-yield savings accounts. These options are simpler and don’t require ongoing costs 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 withdraw your money without penalty, which may not work for someone looking to retire early.
On the other hand, real estate can provide you with a steady stream of income by renting out properties. This can be an attractive option to cover living expenses in retirement without having 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 about the ins and outs of stocks, bonds, real estate and retirement accounts to build a diversified portfolio. This can help protect your money from market ups and downs.
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 are aligned with your financial goals and personal risk tolerance.
More from GOBankingRates
This article originally appeared on GOBankingRates.com: Suze Orman on Investing In Retirement Plans vs. Real Estate
