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401K Condo??? January 15, 2008

Posted by shaferfinancial in Uncategorized.
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One of the best decisions we ever made was to purchase a condo in the white mountains of New Hampshire.  We made the decision quickly when an opportunity came up.  I think it was a critical decision made because our thinking on wealth building had changed due to much reading and personal evaluation.  At the time it was not clear that our wealth building had been transformed for the positive or that we would be traveling a very different personal road that what we had been traveling.  But it set the seed of our personal wealth creation transformation.

In his excellent book Missed Fortune 101, Doug Andrews calls the purchase of a second home a 401K condo.  He thinks that owning a second home and paying the expenses/mortgage is a better retirement plan than spending the same amount inside a 401K.  I think he is probably right on his math and strategy advice.  Further he states that his 401K condo is a place for creation of memories that a 401K can’t duplicate.  I can attest to the absolute correctness of this.

The memories that our condo has created for us makes us wealthy in ways that simply can’t be counted.  It is a part of what can be described as “true wealth.”  But it goes even further than simply memories and real estate investments.  In short the condo made us feel wealthy, even before it started to add to our net worth.  And that feeling I believe has led to even more wealth coming into our lives.

My wife comes from a large family and many in that family have come and stayed at the condo.  Some of our friends have done the same.  My sister-in-law lives around the corner and she has many of her relatives and friends stay there. We have become friends with other’s that own there.  The ripples continue to go beyond any direct benefits that can be counted.

So for any of you that are thinking about purchasing a second home and are trying to come to grips with the numbers, understand that the numbers are only a small part of the story.  Don’t let people, events, or things cause you to hesitate. 



1. joetaxpayerblog - January 15, 2008

One needs to run the math as with any investment. In the long run, owning a home is usually a good investment as one gets a monthly return in the form of saved rent, and the enjoyment of the home.
To forgo a 401(k) in favor of a vacation home does make sense to me. In fact, a vacation home that isn’t rented out much of the time isn’t an investment at all, it’s a toy for the rich, like an expensive car or watch. The average American cannot afford and should not be looking to buy a vacation home. Save up and go somewhere different when holiday time rolls around.

2. shaferfinancial - January 16, 2008

Thanks for your response. Somehow I don’t quite understand your comparision of a piece of real estate with a watch or a car. Watches and cars do not generally appreciate, while real estate does. Add in the ability to leverage real estate and its investment properties should be obvious. Of course you should get a better return with a rental property versus a 2nd home, but that is not the point. Yes, the “average American” (whatever that is?) can’t afford a second home, especially if they think like an “average American.” “Corporate America” with an assist from our goverment has hoisted the 401K savings plan petard onto folks in lieu of a real retirement plan. Just for fun, what do you think the average actual return for folks who own mutual funds (both inside and outside 401K/IRA’s) is? Hint: It runs about 10% less than the market returns! Then you get the fun of paying taxes on it when you get to retirement age and start using it. Next questions: How much money have people actually accumulated in their retirement plans? How does this compare to their home equity? Answer: People have on average 5 times as much in home equity as retirement plans. If 401K’s are such a superior retirement plan why do people have so much more $$$ in their homes?
Finally, you seemed to miss the whole point of the post. Memories…….
Sorry if I come off a little harsh…..but I take creating wealth seriously for myself and my clients. The real data paints a scary picture for Americans retirement dreams. Living here in Florida allows me to see first hand how the typical financial advice (save,invest in mutual funds,pay off that mortgage) has failed “the average Ameican.”

3. joetaxpayerblog - January 16, 2008

Your points are well taken (no need to apologize for the tone). In your initial post you quote the author “He thinks that owning a second home and paying the expenses/mortgage is a better retirement plan than spending the same amount inside a 401K.” I don’t believe that, except in the rare case of a well timed purchase combined with the right rental market. You are right about the underperformance of the average investor. A Post of mine from September http://www.blog.joetaxpayer.com/archives/36
quotes “For the 20 years ended Dec. 31, 2006, the average stock fund investor earned a paltry 4.3 average annual compounded return compared to 11.8 percent for the Standard & Poor’s 500 index.” Pretty close to your numbers. But that doesn’t address the source of the problem, high fees and people whose emotion causes them to buy toward interim market highs and sell in panics. I’m proud to underperform the market by about .10% give or take. Does it really make sense to forgo the company match and tax savings of a 401(k) in favor of a second home? Perhaps for those who have already planned well for their retirement. Truth is, I’ve not heard of the book you quoted until now, and I won’t make any judgements on the author’s suggestions until I read it.
‘Average’ is in trouble, I agree. The Average family has a median income of about $46K and that family can barely make ends meet, let alone save for a decent retirement.

4. shaferfinancial - January 16, 2008

I never advise to forego a company match in one’s 401K. That is part of the compensation package and should be maximized. I do suggest limiting ones 401K input to the match however. I think it makes much more sense to invest outside of a 401K envelope and its limitations and taxes. Most 401K’s are managed by large Wall Street firms and have added fee’s as well as don’t generally include index funds. So you are forced into the worst mutual fund situation there is. Personally, I don’t believe you can save/invest in mutual funds your way into wealth. At best you can keep from being poor in your retirement. I find the sales pitches for this strategy disingenuous at best. You aren’t going to get anywhere near market returns. Even assuming investing 10% of income for 35 years is a rediculous assumption. Life happens and it means that there are going to be times you can’t put aside that 10%. This is especially true of young folks just starting out. If you take away a couple of years worth in the first 10 years your accumulation falls off precipitously. Add that folks get laid off or need to pay for emergency things or even want to give their kids a nice wedding and we see the folly of this type of assumptions. Invest to win or not at all instead of invest to be average.

5. Matt Johnson - May 15, 2008

Mr. Shafer, I recently heard about the 401K condo idea from my financial advisor. I am a small business owner and I need to find legal ways of offsetting my tax burden. We have maxed out our simple IRA account. I like the idea of the 401K condo but I do not understand the tax benefits and how they compare to a 401K or simple IRA. I would like to hear your opinion on this matter. My financial advisor also talked to me briefly about a VUL insurance policy, to be used to help fund the condo or second home. How do you recommend I purchase a second home? Thank you for your suggestions.

6. shaferfinancial - May 15, 2008

Thanks for the questions, Matt. First let me tell you that I own a second home and it has been a great experience for myself and my family. The memories we are creating are worth much more than any tax or investment gains. So keep that in mind when making this decision.

Now for the crutch of your question. Folks who join the Shafer Wealth Academy learn to calculate investments by taking into account three basic financial rules. Leverage, risk, tax reductions. In short, people who have acquired wealth leverage their investments, keep in mind risks and always take into consideration taxes. A second home is really just a piece of real estate. So the rules of real estate apply here. The main tax benefits are the mortgage interest tax deduction and real estate tax deduction (See a CPA if you are reaching the limit of $1M for mortgage interest deduction). So if you purchase a 2nd home, put a mortgage on it (80% LTV in this market). With interest rates so low and by being able to offset it with income tax savings the true cost is very low. Secondly, make sure you are buying into an area that has a good long term appreciation history and the fundamentals remain sound. If if is a vacation area check out how the rentals are currently doing in case the need arises to rent it out. And finally, make sure the monthly costs (mortgage, insurance, taxes, fees, etc.) are affordable. If all these check out then go for it. And by the way the data for those who have acquired wealth indicate much real estate ownership, including 2nd homes and many times 3rd and 4th homes. So any long term wealth planning should include investment real estate as well as a 2nd home.

As to the VUL insurance policy. I prefer the equity indexed universal life policies. The expenses inside a VUL are off the chart. EIUL’s have much lower fees. I have blogged on EIUL’s in the past so you can look up those posts. Basically, I prefer them to 401K’s for the basic reason that you can get to your money anytime, without tax consequences. And because it seems you are building up wealth you would have some significant tax obligations when you start accessing your 401K money. However, I don’t consider either 401K funded with mutual funds nor EIUL a true wealth building tool. I think both will give you enough of a return to hedge against inflation and not much else. So the real benefit is the tax free ability to access the cash value in life insurance.

Your real estate investments on the other hand are proven wealth building tools and therefore should be prioritized.

Hope this helps.

Yours in Wealth Creation,

Dave Shafer
If you wish to further this discussion please e-mail me at dave@shaferwealthacademy.com and I will exchange phone numbers with you.

7. Jinny - March 15, 2009

Interesting, I`ll quote it on my site later.


8. A tale of two 401K funds | The Wealth Building Society - March 6, 2015

[…] But that is not all. I travel with my family periodically to Florida, specifically to the Orlando area. My wife works for Disney, and we take their kids there 2-4 times every year. Spending money on hotels would have been outrageous. My wife heard from someone a few years ago cheap condos were. We finally bought one back in 2011 after I figured out that my bonus check that comes every six months could fund the entire thing, mortgage, utitilies, and all. Perhaps you’ve heard of the 401K condo? […]

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