May 10, 2012

Investing vs. Cash flow - Just two quick thoughts of mine



I'm still bullish towards REITs (Real Estate Investment Trusts) - these are the best investments since sliced bread.  Where else can one get more than a 15% return on their money?  And pay minimal taxes?  Two REITs that I own are IVR (Invesco) and NLY (Annaly Capital Management).  This allows me to use my money and own a portion of commercial real estate.  

Given the volatility swings consistent in the stock market for the last 4 years - REITs have been a steady stream of income for most investors.  The stock doesn't fluctuate as much as other stocks, and they pay a consistent quarterly dividend that provides a residual income to its investors.  Although my REITs may not be as stable as my investments in utility companies, they still have a place in my overall portfolio.  And it generates a pretty good cash flow.

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Had a thought today - what if everyone stopped investing in their 401K?  What would be the outcome if the money we were saving for retirement was instead used to help pay off debts today...?  What if we used our money today to generate cash flow today?  

Would we be better off once we're in retirement?

I'm just thinking of all of the dangers of stashing away useful cash for tomorrow...instead of putting that cash to use today.  Here are some dangers to waiting until you're 70+ to retire off a 401K:
  • Most people investing in their 401K will face increased taxes when it's time to utilize all of this money that has been saved over the years.  
  • Most people 50+ are not on track to retire and have not saved enough in their 401K
  • Adam Smith thought that saving money - similar to how a squirrel stashes away nuts, was ridiculous. Instead, it is better to have nuts (or cash) come to us every day for the rest of our lives.
My theory:
If we used our money today, that we normally and lemmingly send to our 401K plans, to instead pay off debts early, and build up our cash flow - we perhaps could be better off in the long run.  Why?  Because the government will eventually find a way to go after a person's 401K, IRA, 403B, Roth IRA, Pension, etc. sooner or later (got to pay off the multi-trillion dollar deficit somehow, right?).  

Maybe 401K's will be the first to be overly taxed first before they come after the investors with multi-levels of unearned income...after all, the rich stay rich don't they?

BE FREE