Self-Directed Retirement Accounts and the Importance of Diversification

A recent study of employed adults nationwide, has reported that self-directed retirement account savings balances are way up.

Self-Directed Retirement AccountIt’s about time for some good news! The 15th Annual Retirement Survey from the Transamerica Center for Retirement Studies took a look at the median balances of retirement accounts across three major generational cohorts: Baby boomers, Generation Xers and Millennials, and found that each group was significantly better off than they were in 2007.

The study’s authors credited two things for the improvement in retirement savings balances: A broad recovery in stocks after the 2009 low point and the increased appreciation for the importance of savings.

The millennials seem to be the generation that has taken the importance of a robust savings effort to heart – the study’s authors describe them as a “generation of super savers”.

The news wasn’t all rosy, though. The survey also found that while the median household savings of baby boomers nearly doubled between 2007 and 2014, the current balances for this age group, the youngest of whom are now in their 50s – was $127,000. This amount would be grossly inadequate to sustain a long and prosperous retirement, if it were the only source of income for these individuals other than Social Security.

Transamerica’s authors also found that the number of baby boomers who expect to rely on Social Security to maintain their retirement lifestyles was also up significantly, at 36 percent, compared to just 26 percent in 2007.

The study’s findings underscore the importance of saving aggressively for ones’ own retirement. They also underscore the importance of diversification in your retirement nest egg. The baby boomers were hit hard by the collapse in asset prices in 2008-2010, and many of them, affected by layoffs, had trouble finding work. These people would have been forced to begin taking money out of their retirement plans to live on, even as asset prices were at a low ebb. This is because the stock market is closely correlated to the broader economic outlook. When earnings expectations fall, companies begin tightening their belts, layoffs increase, and stock prices fall, all for the same reason and at the same time.

Self-Directed IRAs

This is part of why we are big advocates of alternative retirement investment strategies, including self-direction. Choosing to take control of your own retirement savings via self-directing allows the investor to sidestep broad market risk with at least part of his or her portfolio. Consider: While millions were substantially negatively affected by the stock market decline in 2008 – including many in the baby boom generation who were not able to wait out the market to recovery, other investors were significantly less affected.

Gold IRAs

Some of them, indeed, did quite well in some areas. Those who held assets in gold and precious metals, for example, were able to log some significant gains, as investors fled riskier asset classes for the safe harbor of gold, silver and platinum.

Even those with rental real estate portfolios did fine. Yes, some property values fell, but the substantial income of rental property and the cash on cash return enabled by leverage allowed these people to hang on through the worst of it, happily renting to people who had actually been foreclosed out of their homes. After all, these people have to live somewhere.

Real Estate IRAs

Some of our clients fixed and flipped houses within their IRAs and other retirement accounts, even through the downturn, and did quite well. The best flippers understood that flipping is essentially a market neutral strategy, and worked quickly to ensure they didn’t hold any particular property long enough for a falling market to affect the deal very much. Meanwhile, they focused on acquiring properties from motivated sellers at a discount, and adding value with their repairs and renovations to sell them to buyers who wanted a nice place to live.

Other people who used self-directed retirement accounts to fund and hold small businesses, farms, ranches, partnerships, LLCs, or who devoted their efforts to other activities not closely correlated to the stock market did just fine with these activities. Some lenders were able to do quite well, moving into credit markets that were abandoned by banks and other traditional lenders. Others were able to realize significant opportunities in tax liens and tax certificates, which provided an avenue to solid returns with none of the risks of the stock market.

Of course, no single asset class is going to do well in all market conditions. And the safer the asset in all conceivable markets, the lower the expected return, most of the time. But by placing at least part of their portfolios in alternative asset classes that were not correlated to the broader markets, many of our clients – and advocates of self-directed retirement accounts in general – found that they were able to lower the overall volatility of their total portfolio – even in the worst of the downturn.

Do you want to take your diversification strategy to the next level? Are you ready to think beyond stocks, bonds, funds and off-the-shelf investment products? We are ready to help you explore your options. Give us a call at 866-7500-IRA (472). Or visit us at We look forward to working with you!



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