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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).

 

 

 

Self-Directed IRA for Independent Minded Investors

Lots of people want or need a financial advisor to work with them for every financial decision. And that is ok. There is a time and place for that, and there are great advisors and brokers out there who do a lot of good for them.  And then there are the kind of investors who use a Self-Directed IRA.  These investors prefer to diversify or may just want all their retirement funds in alternative assets.

Self-Directed IRA Basics

Structurally and legally, a Self-Directed IRA is just a subset of Traditional IRAs or Roth IRAs. The difference is that the owner of a Self-Directed IRA has chosen to sidestep the Wall Street distribution system – the vast network of brokers and advisors that channel money into the stock, bond and mutual fund markets – and invest money directly, usually in one or more alternative asset classes or in direct placement opportunities that bypass Wall Street.

Assets Commonly Held in IRAs

Conventional (Traditional or Roth) IRAs Self-Directed (Traditional or Roth) IRAs
Mutual funds Mutual funds
Publicly traded stocks Publicly and non-publicly traded stocks
Publicly-traded bonds Publicly-traded and privately-placed bonds
Annuities Annuities
CDs and money markets CDs and money markets
Publicly Traded REITs Publicly and privately-traded REITs, direct ownership of rental real estate
Master limited partnerships Any partnerships, MLPs or privately held
Publicly traded private equity funds Private equity funds and direct private equity placement
Hedge funds and funds of funds (accredited investors only)
Oil and gas investments
Fix and flip real estate
Tax liens and certificates
Private mortgage lending
Hard money lending/bridge loans
Asset-backed lending
Gold and precious metals
Closely-held C corporations
Partnerships and LLCs
Farms and ranches
Accounts receivable factoring
Commercial lending
And much more…

As you can see, the Self-Directed IRA is a tremendously flexible vehicle. If you are willing and able to look beyond the relatively narrow set of asset classes that Wall Street brokers have in their inventory, you can achieve a much more diverse portfolio than you can limiting yourself to paper assets.

In many cases, you can gain exposure to better performing investments, simply by virtue of the ‘go anywhere’ benefit of the Self-Directed IRA strategy. You may be able to reduce risk at the same time, either by investing in very safe and secure investments, or adding investments with a very low correlation to the S&P 500 or other paper assets you may hold elsewhere in your portfolio.

Custodians and Administrators

IRS rules do not allow investors to hold IRA assets directly. Instead, all assets in an IRA have to be held in trust for you, in the IRA’s name, by a custodian, trustee, or administrator such as American IRA, LLC.

The process is simple:

  • Open an account with American IRA, LLC
  • Transfer funds to the account
  • Provide written instructions to American IRA, detailing what assets you want us to buy and sell on behalf of your IRA; what expenses you want us to pay with IRA funds, and what you want us to distribute to you.

Prohibited Transactions.

 You can invest in almost anything with a Self-Directed IRA. But you have to avoid just a few types of investments, and you cannot transact directly with certain family members.

For example: You cannot use IRA money to invest in life insurance, collectibles, alcoholic beverages, jewelry and gemstones, gold and precious metals of uncertain provenance or insufficient purity and mint quality (call us for specifics).

Additionally, you cannot use IRA money to buy or borrow from or lend or sell to yourself, your spouse, any of your lineal descendants, ascendants, or any entities they control. That means you cannot buy a property and let your son or stepdaughter handle the property management for a fee, and you cannot lend them money from your IRA to buy a home.

You also cannot transact with an advisor who provides advice about your IRA investments. Any of these would pose a conflict of interest and potentially be disallowed by the IRS.

Ready to learn more? Download one of our investment guides at www.AmericanIRA.com, or call us today at 866-7500-IRA (472).

 

 

 

Return of Stock Market Volatility Underscores Need For Self-Directed IRAs and Diversification

February 2018 has been a stressful month for stock investors. Volatility is back with a vengeance: The Dow Jones Industrial Average components – what we used to call “blue-chip stocks” for their safety and staidness, took some big stumbles early in the month. This happens every once in a while, – but this time the declines triggered some program trading, computers were programmed to dump stocks as soon as the Dow, S&P 500 or some other signal dropped below a given level. The selling forces stocks lower, triggering even more program trade selling, and so a vicious cycle takes over.

And that, despite an economy that is prospering by most metrics, is how the Dow recorded a record 1,175 point loss on February 8th.

One might call it a reaction to a bull market that stockholders have appreciated over the last year. While we have seen a recovery since then (and stocks are setting new highs), the recent volatility has hopefully reinstated a healthy appreciation for risk: It is pretty scary to see 5 to 10 percent of your retirement nest egg disappear in a couple of days. Volatility can hurt.

Fortunately, the vast majority of our clients did not need to bat an eyelash. Indeed, some of them may even benefit from the volatility, as investors dump stocks looking for safer assets.

Self-Directed Investing means you do not have to worry about what the stock market does every day. Many of our clients have much of their long-term money invested in far more sound assets than stocks such as:

  • Rental properties
  • Commercial real estate
  • Tax liens and certificates
  • Gold and precious metals
  • Closely-held companies, LLCs and partnerships
  • Farms and ranches
  • Land
  • Private equity
  • Venture capital
  • Private lending
  • Mortgage lending
  • Equipment leasing

… and more.

While the value of each of these investments fluctuate, none of them are tied to the day-to-day fickleness of the stock market. Our clients have the luxury of being indifferent to most of the noise on Squawk Box and Jim Cramer’s Mad Money.

Most mature investors regard shows like these as a waste of time. The smart money is always way ahead of what the average consumer sees on TV.

As television and radio personality Dave Ramsey is fond of saying, “investing is a crockpot, not a microwave.” That is the approach taken by most Self-Directed IRA owners, who define holding periods in terms of years and decades, not hours and days. The longer your holding period, and the longer your investment time horizon, the less you have to worry about short-term volatility.

For alternative asset investors, there is no daily price index to track – and certainly no intra-day prices to obsess over. The focus is on the intrinsic value of the investment, and not on the opinions of millions of strangers – most of whom are not very smart anyway.

The lack of intraday pricing, and an overall more deliberate approach to investing and valuation, makes it much easier to avoid falling into the many traps of stock market speculation such as:

  • Focusing on the short-term
  • Panic selling on an impulse
  • Program trading causing you to sell when you should be buying
  • Thinking you are diversified when all your assets tend to move together

For many of our investors, the lack of correlation with the fickle stock market is a source of comfort. They derive piece of mind, knowing however fearful the talking heads on TV are behaving (generally at the wrong times), they do not have to participate in any correction or bear market.

Diversification is a fundamental principal of sound investing. Most individual investors do not do nearly enough of it, and find themselves over-exposed to a volatile stock market at the wrong time.  Self-Directed IRA strategies help you diversify, providing a much-needed hedge against stock market volatility – while still exposing you to opportunities for long-term growth and income.

If you want to do a thorough portfolio review, and find out how you can benefit from implementing Self-Directed IRA strategies in your own retirement investing, call us today at 866-7500-IRA(472).

Are You Ready for a Self-Directed IRA?

A Self-Directed IRA is a proven way for investors to gain access to alternative asset classes not normally offered by most Wall Street investment companies. Most of them readily offer access to trade stocks, bonds, ETFs and mutual funds. Some of them also support trading in options on stocks and margin trading. But for the most part, if you want to diversify your portfolio into other asset classes in order to increase your expected returns, decrease your exposure to volatility, or both, while preserving the tax advantages of a retirement account, you are going to have to look at Self-Directed IRAs.

Self-Directed IRAs is it the right fit for you? Some people just do not have the skills or financial sophistication to take personal charge of their IRA investments, pulling them from the control of a money manager. They may need the assistance of a professional mutual fund manager or stockbroker to help them manage their portfolio. Or, they may simply not have time for managing investments, because they do not enjoy it.

Who is Ready for a Self-Directed IRA?

A Self-Directed IRA can be an excellent match for certain investment minded people. If the following criteria apply to you, you may be ready for a Self-Directed IRA.

1.) You have professional-level knowledge of real estate, precious petals, private equity, technology, small business or some other asset that gives you a meaningful competitive trading advantage over the market.

2.) You understand the different kinds of risk that could affect your investments, including, but not limited to, market risk, systematic risk, interest rate risk, inflation risk, legislative risk and company or investment-specific risk.

3.) You generally have an independent or entrepreneurial spirit.

4.) You know how to read a cash flow statement and a balance sheet.

5.) You understand the rules governing prohibited transactions and prohibited investments in IRAs.

6.) You want to save hundreds and possibly thousands of dollars in fees every year, compared to the high assets under management (AUM), wrap fees, expense ratios, 12-b-1 fees and other fees the Wall Street firms charge.

If all these apply to you, it may be time for you to consider a Self-Directed IRA

There are some important things to understand before you invest:

Self-Directed IRA Rules

You cannot buy an investment in your own name, expecting to transfer it into a Self-Directed IRA later. The law prohibits your IRA from buying or selling to you, personally. Your IRA also cannot transact directly with your spouse, children, grandchildren, parents, grandparents, or any entities they control.

For example: John is an experienced real estate investor and finds a promising property that would make a great candidate for his first investment in a Self-Directed IRA. However, he does not have a Self-Directed IRA account set up with a custodian or third-party administrator. So he goes ahead and has his own real estate investment LLC buy the house. He cannot then transfer the house into his IRA. Since he controls the LLC, the IRS could disallow the entire investment, and force him to take a distribution on the entire value of the account. This would result in a big income tax bill and potential penalties for early withdrawal – plus a bunch of legal fees.

Making Your First Self-Directed IRA Investment

The correct way to go about buying your first Self-Directed IRA investment is to:

  • Contact American IRA, LLC directly at www.AmericanIRA.com, or by phone at 866-7500-IRA(472).
  • Fill out a couple of forms to open an account. You can choose to open a Traditional IRA, a Roth IRA, or if you have self-employed income or a small business, a SEP IRA, SIMPLE IRA or a Solo 401(k).
  • Transfer funds from a qualified source into the account. If you qualify, you can make up to $5,500 in new contributions to an IRA or Roth IRA per year – and you have until April 15th to make IRA contributions for the previous calendar year. You can also roll over money from another IRA or qualified retirement account. In most cases, the best way to accomplish this is via a trustee-to-trustee transfer. This way, you will not take personal possession of the assets – and risk making a costly mistake. If you are transferring money from a 401(k), you also will not have to worry about your old 401(k) custodian withholding 20 percent to forward to the IRS to pay expected taxes.
  • Identify the asset you want to purchase for your Self-Directed IRA (or other retirement account).
  • Provide American IRA, LLC with detailed instructions on what to purchase, from whom, and for how much.
  • Have any attorneys involved draw up the title naming your Self-Directed IRA as the owner, NOT YOU. Mistitling the assets in a Self-Directed IRA can lead to big problems down the road.
  • Confirm the purchase is made correctly.

American IRA will log the transaction and ensure it is completed according to the law.

Note, American IRA handles the transaction. We do not determine whether the investment is appropriate for you or your portfolio. That is between you and your financial advisors. We work with your existing advisors to make sure your directions to us are handled promptly and accurately.

That is part of what it means to have a Self-Directed IRA: You take more direct and personal control of your retirement investments. You may hire some advisors to help you, but ultimately, you, and not some distant fund manager who does not know you or your goals, are in charge of managing your Self-Directed IRA portfolio.

Private Equity In Your Self-Directed IRA

Own tomorrow’s Dow components today! Or we hope, anyway. But you did not have to invest with Steve Jobs while he was still running Apple out of a garage in the 1970s to do well with private equity or private placements in a Self-Directed IRA.

Just invest in solid, well-managed companies with good accounting and controls, who have a viable business that provides a good value and you can do just fine – and even get better returns over the long run, in many cases by taking advantage of the tax benefits of a Self-Directed IRA.

What is private equity?

When a small company wants to raise capital, it can borrow the money, or it can sell off a piece of itself to investors, who are then entitled to a share of all future dividends the company issues. If the company is publicly traded, it can sell shares over the stock market. But if the company is not publicly traded, it will seek out investors anywhere it can, and negotiate a share price privately.

Many companies do not want to go through the time and expense of issuing a publicly-traded security. Just maintaining a listing on boards like Nasdaq or the NYSE can cost tens of thousands of dollars per year. Unless they are getting major investment bank support to help them place their shares, it is just not worth it to these smaller companies.

Many smaller companies with no regular earnings cannot get traditional lender financing, either. Most traditional lenders just are not equipped to serve this market, as borrowers typically do not meet the lending criteria for the banks’ backers. They do not have the regular earnings to support income-based underwriting, and they may not have real estate or other kinds of readily marketable collateral that most banks rely on to justify a loan.

But Self-Directed IRA owners are not limited by these criteria. Moreover, Self-Directed IRA owners also frequently have the long time horizons that companies seeking investment need. For example, if you lend to or invest in a real estate developer, it may be years from the time you provide the financing to the time the real estate developer has a property completely built and sold off so that it has some cash to pay lenders and investors with!

Meanwhile, private equity seekers have to sweeten the deal, to compensate the Real Estate IRA investor for the cost of tying up their money for a long time. That usually means better terms, and better long-run expected returns. That is, private equity seekers (and private debt seekers as well) have to discount their offerings to attract investors.

Qualifying for Private Equity Placements for your Self-Directed IRA

Not just anybody can be a private equity investor and be eligible for direct placements. In order to invest in a direct placement of private equity, you must meet the definition of an accredited investor, according to Rule 105(a) of the SEC’s Regulation D.

Specifically, you must have a net worth of at least $1 million (not including your primary residence), OR;

You must have an income of at least $200,000 in the last two years if single OR;

Have an income of at least $300,000 in the last two years if married.

Reputable brokers or sellers will have you submit proof of your status as an accredited investor before selling you the shares or bonds, if it is a private debt placement.

Because of the substantial returns available in private equity (the potential is virtually unlimited), and the long time horizons involved, private equity placements can make excellent candidates for Self-Directed IRA investment.

Before you invest, though, understand that these investments, like many popular Self-Directed IRA assets, are frequently not registered securities, and are exempt from a number of SEC regulations and reporting requirements.

They also tend to be very early stage companies, subject to substantial economic risks. They may have unproven products, service offerings, inexperienced management teams, difficulty securing follow-on funding, and they could even be fraudsters. It is, therefore important to engage in a thorough due diligence process before you invest in any private placement offering within a Self-Directed IRA.

What should Self-Directed IRA owners do right before they retire?

Are you reaching retirement age soon? Already pushing it? Ever thought about a Self-Directed IRA? It’s time to make some important decisions about your financial strategy going forward. Here are several things you should be thinking about as you transition into the retirement stage of your financial life cycle.

  • Roll back risk exposure. Now’s the time to begin reducing exposure to uncertainty and market risk. While most Self-Directed IRA owners are not fully invested in the U.S. stock market (diversification is one of the reasons why many investors choose to self-direct their retirement accounts in the first place!) investors should conduct a sober review of their portfolio and its exposure to various kinds of risks. For example, we know from the sad experience of 2008-2010 that real estate can be subject to every bit as much risk and uncertainty as the stock market, under some circumstances.
  • Reduce leverage. If your real estate IRA or other retirement account is heavily leveraged, you may think about working on toning it down. The more of your portfolio is mortgaged, the bigger the short-term unexpected swings there may be – and you don’t want to be on the wrong side of a bear market right when you retire, because you’ll have a hard time earning your way out of the hole.
  • Enroll in Medicare. If you’re turning 65 this year or next year, don’t get so focused on your Self-Directed IRA investing that you forget your Medicare initial open enrollment period. You have a window of seven months to formally enroll in Medicare. The initial open enrollment period begins three months before the month in which you turn age 65, and closes three months after the end of the month in which you turn sixty-five.

For example: If you turn 65 in July of 2018, your open enrollment period will open April 1st, and go through May and June – then July, your birth month, and then three more months after that: August, September and October.

If you miss your open enrollment period, you will have to pay significant penalties in the form of higher Medicare premiums.

  • Assess life insurance coverage. As people get older, many times they are carrying a lot of life insurance they don’t need anymore. With no dependent children, and a comfortable nest egg for both spouses to retire on, it may make sense to convert a substantial life insurance policy into an annuity using a Section 1035 exchange. The law allows those who bought life insurance early in their lives to convert their life insurance policies into annuities, tax free, to unlock another source of retirement income. Some people choose to use the annuity to pay long term care insurance premiums. Others just convert the annuity to income, either now, or at a higher rate later.
  • Decide whether to take Social Security Benefits. You can begin taking a reduced Social Security Benefit beginning at age 62. However, the longer you wait, the greater your monthly benefit will be, until you reach full retirement age. In most cases, if you’re in poor health, it makes sense to begin taking the benefit early. If you’re in excellent health, and expect to live well past full retirement age, you’re actuarially better off waiting and maximizing your monthly benefit over a long retirement.

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