By Brian Davis
Looking for a reason to invest in rental properties?
Consider the following uncomfortable question: What happens when workers are saving and investing less for retirement, employers are increasingly unable to pay their existing pension obligations and people are increasingly living longer?
The answer, of course, is that employees must work longer and spend less money once retired, and employers must stop offering as generous retirement benefits. And those are the lucky ones – some people will need to live with their children or require other assistance, and some companies and government agencies will need to make drastic cuts elsewhere.
A recent study by the Employee Benefit Research Institute reveals some startling truths about Americans and their retirement investing. The study shows that 57% of American workers have less than $25,000 in savings/investments, excluding their primary residences (up from 49% in 2008). Even more shocking, 33% of workers have no money saved for retirement (up from 25% in 2009). A full 28% of American workers report having "no confidence" they will have enough money to retire comfortably.
And then there are employers, who are equally in trouble. Companies' pension obligations for existing employees could rise by $97 billion in the coming years, just from upwardly-revised life expectancies. Publicly-traded U.S. companies' pension obligations totaled $1.93 trillion at the end of 2012, up from $1.60 trillion only four years earlier in 2008.
All but the oldest, most established companies have thrown out their old pension retirement systems because of the skyrocketing costs, with only 3% of private employees enrolled in pensions in 2011 (down from 28% in 1979). This, in turn, means workers should be saving and investing more, not less. And governments are even worse shape, with their higher likelihood of offering outdated pension plans, which pay out for the life of the employee.
And Americans are living longer… and longer. The Society of Actuaries recently updated its longevity projections, showing the largest jump in life expectancy in 25 years. A man who reaches age 65 in 2013 is expected to live an additional 20.5 years, up from 19.5 in previous projections. Women turning 65 this year are now expected to live an additional 22.7 years, up from 21.3. If those seem like small increases, consider both that they are moving targets (and growing longer every year), and that every month that employees of the old pension system live longer, someone has to write them a paycheck for work they have not performed.
What does all this have to do with rental investing?
While traditional retirement accounts are drawn down over time (eventually hitting $0), income from rental properties continues forever. Not only does it continue indefinitely, but rents typically rise over time, while mortgage balances decline. At a certain point, rental properties are owned free-and-clear, allowing the landlord to simply pocket most of the rent each month as income.
Employees looking to diversify their retirement portfolios would do well to consider a few well-chosen rental properties among their retirement assets, to keep the income rolling inward long after their friends have had to move in with Junior.