Be a Better Self-Directed IRA Investor: Be Aware of Cognitive Biases and Emotional Traps

Are you as ‘squared away’ for retirement as you hope you are? Maybe not.  The Center for Retirement Security at Boston College has launched a new tool to help taxpayers determine whether they are on track for retirement – and to help Americans identify and address common psychological and behavioral traps that can short-circuit your retirement decision-making.  We recommend it for all Self-Directed IRA investors and conventional investors alike.

Curious Behaviors That Can Ruin Your Retirement is an interactive program on behavioral impediments to retirement planning. A host leads users through a series of exercises designed to create an “Aha!” moment as they relate to the behaviors. The host then explains how the behavior can hinder retirement planning and, coaches users through strategies that can help minimize the effects of these subconscious biases and help them develop a more rational decision-making process.

Users can then go to a “Learn More” page, which presents more information in multiple media formats. It is a terrific tool for all ages.

The tool is a fun and lighthearted look at a serious issue: Millions of Americans fall victim to irrational thought processes, emotionalism, wishful thinking, denial and a series of other misconceptions and cognitive weaknesses that cost real money.

A recent research report from Deloitte lists the following behavioral biases that can impact your ability to manage your Self-Directed IRAs:

  • Inertia: When you are used to doing things a certain way, the tendency is to take no action.
  • Present bias: The tendency to prioritize current wants over long-term needs
  • Passive decision making: The tendency to follow the path of least resistance, or to choose from the most obvious, readily-apparent options rather than investigate possible options more deeply.
  • Anchoring: The tendency to base decisions on a set value that may be irrelevant.
  • Partitioning: A tendency to make commitments piecemeal when you would be better served by bolder action. For example, the tendency to “dollar cost average” into a rising market when you may be better off investing a larger lump sum.
  • Peer pressure: Irrationally allowing other equally irrational actors to influence your decision-making.
  • Overconfidence: Excessive belief in your own abilities.
  • Effort aversion: The tendency to embrace the easy wrong option over the difficult right one.
  • Loss aversion: Allowing the fear of possible loss to prevent you from taking reasonable risks in the prospect of greater gains.
  • Endowment effect: The tendency to avoid giving up what one already has, even when a clearly better option is available.

As a group, Self-Directed IRA investors tend to be a rational bunch. Many of our clients are veteran investors and business people who have achieved significant success over the years. But all of us are human, and none of us are immune to any of these cognitive biases.

But forewarned is forearmed: Being aware of these biases and emotional traps can help you prevent falling victim to them. And that is going to make you a better Self-Directed IRA investor.

For more information about Self-Directed IRA investing, or to get started on your Self-Directed IRA investing journey, call us today at 866-7500-IRA (472). Or visit us at www.AmericanIRA.com.

We look forward to serving you.

Real Estate IRAs: Because You May Live Longer Than You Think!

The good news is longevity is way up! The bad news is longevity is way up!  Due to the increase in longevity, Real Estate IRAs are the way to go!

Well, as bad news goes, we have heard worse. It is great that people are living longer. However, longer lifespans present a problem when it comes to retirement planning: Any given nest egg must last a lot longer than it used to.  It must also generate a reliable stream of income the whole time, without fail.

People are underestimating the problem: A recent study of British senior citizens found that people in their 50s and 60s are grossly underestimating the likelihood that they will live to age 75, 85 and beyond.

The report, from the Institute for Fiscal Studies, found that people in their 50s and 60s tend to underestimate their chances of survival to age 75 by around 20 percentage points and to 85 by around five to 10 percentage points. Meanwhile, those who have reached their 80s become overly optimistic about the chances that they will see 95.

The result is a significant gap between the assets required to generate a retirement income for that long and the probable need itself.

“As individuals are given more responsibility for saving for their retirement, and more freedom over how they use those savings in their later years, it is a concern that many are systematically misjudging their longevity,” said IFS research economist David Sturrock. “When people underestimate their chances of surviving through their 50s, 60s and 70s, they may save less during working life, and spend more in the earlier years of retirement than is appropriate, given their actual survival chances.

The Value of Real Estate IRAs

At American IRA, we believe Real Estate IRAs should be part of any significant retirement portfolio: real estate is a proven long-term income generator, which also provides the potential for capital gains, and the prospect of increasing rental income as a hedge against inflation.

Leverage and Real Estate IRAs

Real Estate IRAs also have the advantage of ready access to leverage.  This greatly increases the cash-on-cash return for Real Estate IRA investors as compared to more Traditional IRA asset classes, which are typically unleveraged.

Lenders know that real estate is a relatively stable source of wealth and makes excellent collateral for loans. It is therefore much easier to get financing for real estate than for other forms of investment. While you cannot sign a personal guarantee or pledge non-real estate assets as collateral for a loan to buy property within your Real Estate IRA, there are several lenders eager to help you finance Real Estate IRA properties. You just have to do your borrowing on a non-recourse basis.

This means the loan must be secured entirely by the property in your Real Estate IRA. The lender can have no claim or recourse against you, personally, nor any assets held both inside and outside the Self-Directed IRA.

We often see lenders willing to finance about 65 percent of the purchase price of the real estate investment, though they frequently have tighter requirements for condominiums or properties in historically volatile real estate markets, such as Florida.

You should be aware of the impact of unrelated debt-financed income tax, however, which may result in a current tax liability for gains attributable to borrowed money, rather than your own contributions to your retirement fund.

Real estate is also frequently a much better asset to pass on to heirs than a closely-held small business or other more esoteric investment; as homes are usually easier to sell than businesses.  Real estate investments could also be managed easier than a small business held within a Real Estate IRA, for example.

Real Estate IRAs and Diversification

Real Estate IRAs can also help protect owners against stock market risk: The more different asset classes you have making up your retirement portfolio, the less affected you could be by unexpected declines in any one asset class. We believe Self-Directed IRAs, including Real Estate IRAs, can help investors achieve meaningful diversification across a variety of asset classes that are difficult to access using conventional off-the-shelf retirement products available from Wall Street investment firms.

The combination of steady rental income streams, access to financing and leverage, potential capital gains and the possibility of keeping up with inflation make Real Estate IRAs an excellent addition to many of our clients’ retirement portfolios.

To learn more about Self-Directed IRAs and Real Estate IRAs, call American IRA at 866-7500-IRA (472), or visit www.AmericanIRA.com.

Real Estate IRAs Provide Real Diversification Against Struggling Stock Market

It has been a rough few months for most investors. But, owners of Real Estate IRAs have been doing pretty well.

The last week of March the Dow Jones Industrial Average plummeted 1400 points to reach a low for the year. The Dow fell 5.7 points and the S&P 500 fell 5.9 percent – the worst week for stocks in two years. The Nasdaq fell 6.5 percent that week. The S&P 500 is now 0.68 percent underwater for the year to date. The Dow is now 11.2 percent off its high.

Sure, that is not the end of the world – it is also up by more than 12 percent over the previous 12 months. Stocks have been exceptionally volatile lately. The U.S. stock market is also trading at over 27 times earnings which have been looking favorable. There is ample good news already figured into the stock market. One big earnings miss, or a disappointing jobs report could bring the whole thing down by a significant amount.

“The market has been priced for perfection … and that leaves the market vulnerable to surprises. In this case, it’s trade,” according to Baird analyst Bruce Bittles.

Stock Vulnerability Is Global

U.S. markets were not the only losers. Stocks lost money around the world – this time on fears of a potential trade war between the U.S. and China, sparked by talk of tariffs in Washington. China helped send shares plummeting by slapping retaliatory tariffs on more than 148 U.S. products, including steel pipes, pork, almonds and California wine.

In the above markets, diversifying into international stocks did not shelter investors from the pain.

Real Estate IRAs Outperforming

The investors who chose to diversify into Real Estate IRAs experienced a better outcome:  U.S. house prices jumped 7.3 percent in January compared to the same times last year, according to data from the Federal Housing Finance Agency. Prices were up more than 10 percent in the Mountain region. Prices had jumped 0.8 percent from December to January – the biggest monthly increase since February of 2017.

Real estate has been delivering a solid annual return – on an unleveraged basis – while still showing much less downside volatility. Over the past 12 months, all regions in the U.S. were up, with the weakest regional market – the West South-Central region (Oklahoma, Arkansas, Texas and Louisiana) increasing by 5.1 percent. Home prices in Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona and New Mexico saw double-digit increases.

The Potential Benefits of Leverage in Real Estate IRAs

Real estate investors are doing much better than even those numbers suggest. First, real estate is commonly leveraged. So, an investor in Colorado with a typical real estate portfolio gain of 10 percent for the gain but holding just 50 percent equity is getting close to 20 percent, minus costs of carry.

Furthermore, he or she is collecting rental income the whole time. In this case, the landlord can collect two rents for the price of one, thanks to leverage.

Leverage increases risks, in a down market, it can make things very dicey for the borrower. At the present, however, most real estate investors have been doing much better than stock market investors, with less stress (assuming good tenants)!

The last few months have been excellent for Real Estate IRA investors. The strategy has been working as intended: Real Estate IRAs provide meaningful diversification to portfolios otherwise heavy with stocks. They are delivering solid price appreciation. They are generating current rental income, so investors get paid to wait. And the income they generate has been steadily increasing. Rents have been rising in nearly 9 out of 10 cities, according to data from RentCafe, helping protect income-oriented investors against inflation.

Own Real Estate IRAs

We suggest nearly every American with significant retirement savings or investable assets consider including real estate, including Real Estate IRAs, in their portfolio.

Holding real estate in a Real Estate IRA, Solo 401(K) or SEP IRA can help shelter increasing income from taxes and generate free cash flow on a tax advantaged basis.

Investing in a Real Estate IRA is very easy: Call American IRA, LLC today at 866-7500-IRA (472). You may also download our exclusive guide to Real Estate IRA investing here.

We look forward to hearing from you.

Self-Directed IRA Administrators vs. Custodians

More and more people are coming to understand the power behind Self-Directed IRA strategies.  Further, they are embracing the wisdom of diverse and unconventional asset classes while liberating their retirement portfolios from the narrow outlooks frequently characterizing the big Wall Street investment firms.

As such, with that knowledge comes the increased openings of Self-Directed IRA accounts.  Many of these new investors are not yet clear on the role of custodians and third-party administrators in the Self-Directed IRA industry – and the important distinctions between the two.

Let’s take a closer look.

IRA rules prohibit investors from taking personal, direct possession of assets within their Self-Directed IRAs. Yes, you can own the house down the block within your Self-Directed IRA, but you cannot personally reside there. What is more, you cannot keep the gold coins your IRA owns in a safe in your living room.  To use a more traditional example, it is no different than not being able to personally hold your stock certificates residing in a Schwab IRA account.

Custodians hold your Self-Directed IRA assets on your behalf.  Administrators process the paperwork on behalf of the custodian.  American IRA is an administrator and New Vision Trust Company, a South Dakota chartered Trust Company, holds the assets.  New Vision Trust Company and American IRA, LLC are an integrated financial company providing both custodial and administrative oversight for your Self-Directed IRA transactions.

A custodian handles transactions and holds Self-Directed IRAs and other retirement assets on your IRA’s behalf. The IRS has stringent requirements for Self-Directed IRA custodians. These businesses are subject to regular inspections and audits by federal regulators. They can hold titles, cash, investments and other types of property on investors’ IRAs’ behalf, and handle a lot of transactions.

If you own gold or other precious metals, or physical assets within an Self-Directed IRA, chances are there will be a custodian in the mix, holding the gold or other assets in a secure, insured facility somewhere – or at least physically holding certificates.

An IRA third party administrator, such as American IRA, LLC, has a more tapered scope of engagement. Administrators are the account record-keepers responsible for generating statements and documents. We do not hold assets directly, but work with New Vision Trust Company, a South Dakota chartered Trust Company on your behalf.  New Vision Trust Company and American IRA, LLC are an integrated financial company providing custodial and administrative oversight for your IRA transactions.  We simplify the process, document your transactions, generate statements and 1099s, and work with your advisors to help you stay in compliance with IRS rules and regulations.

We do not advise on the suitability or non-suitability of any particular investment for your individual portfolio. That is up to you and your own financial advisors. We focus on quickly and accurately executing and recording the transaction on your behalf, in accordance with IRS regulations.

Moving down the Self-Directed IRA industry hierarchy, there are other professionals and salespeople known in the industry as “promoters” and “facilitators.”

These individuals do not handle transactions and do not hold assets on your behalf, but they support the Self-Directed IRA process in other ways.

One type of promoter might be a real estate agent who focuses on helping investors find properties for their Real Estate IRAs, and who becomes very knowledgeable in that niche. Others are financial advisors, RIAs, IARs, accountants and attorneys who also promote the Self-Directed IRA approach and help facilitate your Self-Directed IRA strategy.

For example, an attorney may help create entities within your Self-Directed IRA such as C corporations and LLCs which may help insulate other properties and IRA assets against the claims of creditors.

Every Self-Directed IRA investor needs a custodian or administrator affiliated with one or more custodians to create and maintain a functional Self-Directed IRA account. Few are totally go-it-alone beyond that. Most investors require a knowledgeable and experienced, multi-disciplinary team of professionals to get the most out of their self-directed retirement accounts.

Fortunately, getting started in Self-Directed IRA investing is very easy, and our team of professionals at American IRA, LLC is available to help you throughout the process.

To learn more about our services as one of the leading Self-Directed IRA administrators in the country, or to set up an account and get started investing, call us today at 866-7500-IRA (472), or visit us at www.AmericanIRA.com.

You can also read more on this subject at our blog, here.

Do not delay! Give us a call today! We look forward to working with you!

Baby Boomer, Gen X Retirement Saving Inadequate, Study Says

When it comes to retirement saving, the Baby Boomer generation is in trouble.

Despite many of them now entering retirement, the majority of those born between 1946 and 1964 report having less than $250,000 in retirement assets. Only about 1 in 3 Boomers has that much saved up – leading to a retirement income shortfall of between $3,864 and $12,072, according to research from the Insured Retirement Institute.

And things are not looking too great for Gen Xers, either. According to the Insured Retirement Institute’s (IRI) fourth biennial report on Generation X, about 4 in 10 members of this generational cohort do not have money saved for their retirement. Despite an overall improvement in the economy, this represents a deterioration of about 5 percentage points from two years ago.

Of those with retirement savings, about 6 in 10 have saved less than $250,000. On the other hand, the percentage of those who have saved at least $250,000 or more has nearly doubled over the same time frame, rising from 12 percent in early 2016 to 23 percent in 2018.

According to the IRI, about 60 percent of Generation X respondents report being generally confident they will have enough money saved for retirement. Their top three economic concerns are changes in Social Security (66 percent), higher than expected health care expenses (64 percent) in retirement and running out of money (59 percent).

Ultimately, people across the generations need to get serious about putting money away.

Use “Catch-Up Contribution Limits”

The Baby Boomers and the oldest of the Generation Xers can both take advantage of “catch-up contribution” limits, available to those ages 50 and older. Congress anticipated the need for older Americans to sock more money away as they enter their peak earning years and their children have reached adulthood.

For Self-Directed IRAs, individuals age 50 and older can put an additional $1,000 away each year in combined Roth IRA and Traditional IRA contributions – over and above the normal $6,500 annual limit. Some limitations apply for those at higher income levels.

Older Self-Directed 401(k) beneficiaries can also increase salary deferral contributions. As of 2018, those ages 50 and older can contribute an additional $6,000 per year to employer-sponsored Self-Directed 401(k) plans, on top of the generally applicable $18,500 contributions, for a total potential employee contribution of $24,500 per year.

Similar provisions also apply to 403(b) plans, the federal Thrift Savings Plan and many Section 457 deferred compensation plans for public employees. They also apply to Self-Directed 401(k)s and small business Self-Directed 401(k)s.

Those turning 50 and older this year should consider taking full advantage of these more generous tax-advantaged compensation limits.

Working longer

Many Americans will have little choice but to stay in the work force longer and put off retirement. This means more years of earning an income, and more years of potential retirement contributions and compounding within retirement accounts. It also means higher monthly Social Security benefits, if you can put off collecting Social Security until you reach full retirement age.

Staying in the work force also means you do not have to stretch your retirement income over as many years. With today’s advances in health care and nutrition, it has grown commonplace for Americans to live into their late 80s and 90s. Taking income out of your portfolio for 10 years rather than 20 years can make a big difference in the sustainability of your retirement income.

For more information on getting started with Self-Directed IRA investing, call American IRA today at 866-7500-IRA (472).

Survey: Most Americans Have No “Bear Market” Retirement Plan In Place

Federal banking regulators routinely force banks to “stress test” their portfolios, modelling what would happen under various troublesome economic scenarios. They do this so that banks have a chance to shore up wobbly loan portfolios and liabilities before the crisis arises.

Have you done the same with your retirement plan?

A new survey shows that nearly half of Americans have not.

The latest Country Financial Security Index shows that almost half of all Americans could not withstand a sudden 6,000 point hit to the Dow Jones Industrial average, which would slash much of their retirement portfolio’s power to generate income in retirement.

A decline of that magnitude would constitute roughly a 25 percent drop from current levels (depending, of course, on when you read this!)

It has not even been a decade since we have seen a decline at that level – it last occurred in 2009, during the worst of the Great Recession and the mortgage crisis, which spilled over into stocks and real estate – though it was a boon for gold investors and for those willing to pick up real estate and other assets at bargain basement prices.

“Our motivation in asking the question was to get investors’ attention,” says Doyle Williams, executive Vice President at Country Financial, the Bloomington, Ill. insurance and financial services company. “We want them to think about a drop of this size ahead of time, to get them to think about what they would do in the moment,” he told editors of USAToday, ahead of the survey’s publication.

Other findings:

Only about half of Americans – 52 percent – told surveyors that they were “financially prepared” for a 25 percent decline in the stock market as of February 2018. However, only 28 percent reported having any kind of financial safety plan in place. 44 percent reported having no such plan.

What would such a plan look like?

Here are some suggestions:

1.)  Maintain a significant emergency fund. Ideally, you should have 3 to 6 months of financial reserves to see you through any manner of emergencies. For many people, this may not be an easy practice: A 2017 study, also by Country Financial, found that about half of Americans – 49 percent – do not have enough savings on hand to cover three months of expenses if they lost their jobs or other primary sources of income.

If you fall into the above category, chances are your emergency fund can use some shoring up. Checking and savings accounts, money market funds and cash value in permanent life insurance policies are all good homes for your emergency fund savings.

2.)  Reduce debt. Your emergency fund will probably last a lot longer if you do not have any payments.

3.)  Fully fund your IRA or Roth IRA (including Self-Directed IRAs). Your IRA savings can pull double duty: Contributions can grow tax-deferred or – in the case of Roth IRAs – tax free as long as the money remains in the account, into retirement. Yes, there is a 10 percent penalty on early distributions under normal circumstances. But IRAs also have a number of hardship provisions that waive this penalty if the withdrawal is made under qualifying circumstances.

These circumstances include:

  • Disability
  • Death
  • Avoidance of foreclosure or eviction
  • Paying for qualifying medical expenses exceeding 10 percent of your adjusted gross income
  • Paying for health insurance premiums.

Do not rely on 401(k) assets for emergency savings. Many companies do not allow for in-service withdrawals, and emergency hardship withdrawal limits are generally much more stringent. However, if your plan allows for loans against your 401(k) balances, this could help in a pinch. Remember you must pay the loan back to the plan.

4.)  Diversify your portfolio. If you are overexposed to stocks – so much that the prospect of a 25 percent or even a 50 percent decline scares you, it is time to diversify. Move money into other asset classes, such as bonds, real estate, precious metals, and even further afield. A Self-Directed IRA can be an excellent vehicle for diversifying your retirement portfolio while still retaining the possibility for significant long-term gains.

 For more information on using a Self-Directed IRA to increase diversification and potentially reduce your overall risk exposure in the event of a big stock market decline, call American IRA, LLC today at 866-7500-IRA (472).