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Alternatives to 401(k) plans

By Barbara Whelehan ·
Friday, July 13, 2012
Posted: 5 pm ET

This week, the Center for Retirement Research at Boston College released a dismal status report of the 401(k) plan. The median 401(k)/individual retirement account balance for households approaching retirement in 2010 was a disappointing $120,000, according to Alicia Munnell, the study's author.

I'm not going to rehash all the findings of the study since my colleague Jennie Phipps already posted a blog about it. But I'm convinced that lousy investment returns over the past decade make retirement planning a challenge for 401(k) investors.

Are stocks passe?

The other day on Squawk Box, Jay Jordan, founder of his eponymous private equity firm, was a featured guest. A trustee of the University of Notre Dame, Jordan manages some money for the university and has donated many millions of dollars to his alma mater. Andrew Ross Sorkin asked him what kind of return one can expect in these uncertain markets. Jordan replied that over the past 10-15 years, his firm was able to achieve a compounded annual return of 12.5 percent for Notre Dame.

"Can you do that in the stock market?" Sorkin asked him. "Can an individual do what you're talking about by themselves anymore?"

Jordan replied that he didn't know; he's not a stock guy. He invests in private equity, hedge funds, real estate and real assets.

Yet stocks are supposed to be the growth engine of our company retirement plans. We really have no other growth-oriented alternatives to work with.

Missed opportunities

Last Sunday, my husband showed me a real estate ad in the local paper. It depicted a fourplex apartment building situated on a third of an acre in Stuart, Fla. Its listing price is $279,900.

"It could be a good source of retirement income," I remarked.

I called John Martucci, a real estate agent with Patrick Stracuzzi of RE/MAX, at which the property is listed. I've worked with John before. He showed me some properties during the real estate bust, town houses that had fallen in price from $150,000 to $60,000. Very tempting, but my husband always talked me out of it.

This fourplex seemed like a good deal, though. So I asked John to tell me everything he knew about the property.

John told me it was built in 1978 and was last purchased in October 2011 from a bank by a corporation based in Melbourne, Fla. The property was improved earlier this year with a new roof, some electrical work and upgraded AC/heating systems, according to the permits on record. Two of the four apartments were updated. The property has four tenants and altogether is generating $2,500 worth of income a month.

I told my husband that if we got it for $250,000 and put down $50,000 -- heck! I could borrow the money from my 401(k) -- after accounting for principal, interest, taxes and insurance, we could clear $600 a month from it. "That's a potential 15 percent return on investment," I told him. "Plus we'd potentially save a bundle on taxes."

But my husband only saw the potential for unending headaches. "You're assuming the rosiest scenario," he countered. "What happens if a tenant stops paying the rent?" He then began listing all the possible things that can go wrong with a rental: broken major appliances, a plumbing disaster, hurricane damage, backed up septic system -- you name it. Suddenly investing in real estate seemed like a bad idea.

Later I said, "You know what? We're never going to get rich. You don't want to take any risks."

"I'll risk three bucks for lotto," he replied.

But, hey, I can't blame him. This wouldn't be a great deal for us. It will be a great deal for the corporation that bought it last October. It paid just $125,000 for that property, and now it's looking to get a huge profit on its investment – much more than 12.5 or 15 percent.

It really isn't easy trying to make big bucks as an individual investor, no matter what market you're playing in.

What do you think? Have you tried alternative investments, and have they worked out for you?


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