As you transition from a net retirement saver to a net retirement spender, it’s important to ask yourself a crucial set of questions that go directly to your retirement income strategy. This is true whether you are a Self-Directed IRA owner or whether your approach is more conventional – though we will take a closer look at income-generating investments in the self-directed context in an upcoming blog.
- What is my monthly nut? Think of it in terms of what you must have to maintain your bare minimum desired lifestyle. How much income does it take per month, times 12, for you to keep food on the table and a roof over your head? If you don’t have access to public transportation, you’d better include the cost of keeping a car running as well. This is income you need to have wrapped up in something pretty safe. One option is a lifetime income annuity, of course, and that should be on the table – especially if you’re not too worried about passing on a legacy to the next generation, or if other money or life insurance is taking care of that.
- What is the likely rate of inflation? You need to counter the effects of inflation, as well. Consider: If both of you retire at age 65, chances are good at least one of you will make it to at least age 85. That’s 20 years. Apply the rule of 72s to a 3 percent inflation rate, though, and you’ll see that the cost of living doubles every 24 years. Can your portfolio support nearly double the expenses, or even more, before you exhaust your savings? Will you be able to keep up the bare minimum level of expenses you need to cover, even as you spend more on prescription medications and medical aids?
While a pure income strategy may appeal to investors in the short run, when people take a longer view, they often find that they need to consider growth in income as well, over time.
This means your portfolio should probably have at least some growth component in it, reserved for spending needs 5 to 10 to 20 years off.
- Do I have a stable income base besides Social Security? A stable income base is one with guarantees. If you have a secure and adequately funded pension, or a military pension funded out of the general obligation fund of the United States Treasury, you have a stable income base. If not, you can create your own, to some extent, using guaranteed or risk-free assets like life annuities, U.S. Treasuries, and even to some extent a diversified portfolio of investment-grade bonds, each with a low likelihood of default and plenty of assets behind the company’s ability to make interest and principal payments.
If you have a stable income base, and it’s sufficient to cover your minimum monthly nut or year, you can take more risk with the rest of your portfolio. You’ve protected your bare necessities, so you can be somewhat more aggressive.
If you don’t have a stable income base, you’ll need to be more careful about taking risks with your overall portfolio.
- Can your surviving spouse manage your portfolio? What happens when you pass on? You’re the one reading investment-related blogs. Will your spouse be able to unravel and utilize the investment portfolio you’ve built? You may have extensive expertise in private lending, or in running your venture capital empire. But when something happens to you, what is the plan to turn this into something your spouse can grasp and effectively monitor, and turn this into something he or she can rely on as a source of support for the rest of his or her life?
This is a crucial question, especially for Self-Directed IRA owners, because of the occasionally complex or high-maintenance nature of some of these investments.
Working with an eye toward liquidity, as well as taking steps to ensure transparency and simplicity sufficient for a surviving spouse to take the reins will go a long way to helping ensure your strategy works when theory meets practice.
For more information, or to download our seven free guides to self-directed IRAs, 401(k)s, SEPs, SIMPLE IRAs and other options, call us today at 866-7500-472(IRA).
American IRA, LLC is a nationwide leader in self-directed retirement account administration, and we can work with clients in all 50 states.
Most of all, we look forward to working with you.
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