When it comes to planning for their retirement, real estate agents tend to procrastinate because they think their next year is going to make them more money than their current year.
Real Estate Agents are busy people who are not necessarily tax-minded, which means they probably pay more income tax than they need to. They frequently do not take full advantage of every opportunity to provide for their retirement. A lot of REALTORS® make high incomes and have the capacity to save a lot, but they also tend to spend a lot. They should make sure they have the right kind of retirement plan.
- 22 percent of U.S. workers are confident they will have enough saved for retirement
- 45 percent of American have no retirement savings whatsoever, including 40 percent of baby boomers.
A good first step is to set up your real estate operations like an actual business. Check with your accountant or CPA to see which business type is best for your operation. You should have budgets set up for personal and business expenses and pay yourself a salary. Suggestions would be to set a ROTH IRA, SEP Account and buy rental properties. One of the best reasons for setting up a SEP or ROTH IRA is to help reduce your tax liability. Most real estate agents are 1099 employees (independent contractors) Many retirement options, including company sponsored 401(k) accounts, put a limit on the amount of funds that an individual can contribute for retirement each year. With a SEP IRA or a 401(k), the limit for independent contractors is much higher. Individuals can contribute up to 25 percent of their gross income annually up to $53,000. This is the sort of retirement investment that is recommended to any REALTOR® who is ready to start planning for their retirement.
Since nobody is watching out for our retirement with a 401(k), profit sharing or anything like that, and we sometimes have real estate fall into our laps, we would be crazy not to take advantage of it. Many real estate agents look to income-producing properties to play a large role in their retirement plans. You can pay extra on the principal of these properties to pay the loan off quicker so you will have more income to add to your retirement accounts. While still selling real estate, you should set up an exit strategy that involves enough retirement funds to support the lifestyle to which you have grown accustomed. It just makes good sense for real estate brokers to buy income-producing real estate.
According to the Center for Retirement Research, more than 50 percent of all working households are at risk of being unable to keep up their standard of living in retirement.
My advice to younger agents is to start saving as early as possible. Save a minimum of 10 percent of your gross income every year and put it into a sheltered retirement plan so you don’t pay taxes on the money now.
The amount to save is variable. Historically, people were told to save 10 percent in part because social security was expected to be a significant factor in their retirement. My accountant says 15 percent is better as a rule of thumb, because if my income is higher, then social security will replace less of it.
Another approach that comes up among real estate agents in setting up an exit strategy, is selling off their book of business, which if you have been highly successful, can result in some fairly robust payments. Not a lot of REALTORS® realize they can even do this. There are companies out there that will walk you through the process and give you a formula to find out what your book of business is worth. Even when REALTORS® work for a real estate brokerage, they still have rights to their own accounts. Listings, pending contracts and leases are the property of the broker and can’t be sold by the REALTOR®. On the other hand, the contact information and personal knowledge that a REALTOR® has on prospective buyers, sellers, tenants and other contacts belong to the REALTOR® and probably have substantial value.
Example: George was a successful REALTOR® in the Austin market for 48 years and toward the end of his career sold as many as 80 properties a year. He had more than 300 contacts in his file with names, addresses and phone numbers, along with numerous notes. Close to 10 percent of that total was providing him with regular referrals. He handpicked his successor and sent out letters to all his contacts letting them know they should use this REALTOR® for any of their real estate needs. He decided to move to Florida. The new broker paid George a referral fee on all the business she got from those clients for the first 12 months that he lived in Florida. He got a pretty nice income for doing nothing.
Be thankful for the business you have and make the most of it by adding to or starting a retirement plan today!