Many people overlook the insidious threat that inflation poses to their Self-Directed IRAs and to their financial security in retirement. But inflation is real and must be anticipated in any long-term savings plan or retirement portfolio.
Inflation is simply the long-term tendency of currencies to lose their purchasing power over time. A gallon of milk that cost $1.00 30 years ago now costs $4.00. Homes that rented for $500 per month 30 years ago now rent for $2,000, and so on.
Some areas of the economy experience more inflation than others. For example, the cost of evolving medical care – and health insurance in general – has outpaced inflation substantially over the past 20 years.
As of this writing, the overall inflation rate in the United States seems to have settled into a long-term average of about 2.5 percent. But there’s nothing written in stone that says inflation has to continue at present rates. Indeed, inflation rates ran as high as 13 percent in the troubled late 1970s, while America had a long history of deflationary spirals following the Civil War, until 1913 when they established the Federal Reserve to (hopefully) take the edge off of the devastating boom and bust economic cycles of the 2nd half of the 19th century.
Of course, it was just 16 years after that we had the Great Crash of 1929 and the ensuing Great Depression of the 1930s. Which goes to show you that there is no foolproof set of economic policies yet devised that can reliably take the pain out of inflationary and deflationary economic cycles.
Nevertheless, you’re going to be retired, we hope, for a long time. If you are blessed with a long and healthy life, you’ll live long enough into retirement age for inflation to make its presence felt. At present the 2.5 percent inflation rate is overwhelming the paltry 1.5 to 2.5 percent most people are able to get on safe, risk-free investments like CDs and money markets.
Unless you take some steps to address inflation within your retirement portfolio, you may well be treading water – at best.
What Can You Do With Self-Directed IRAs?
- Own a Real Estate IRA. Real estate has a built-in inflation countermeasure to it – especially if you have a mortgage – because you are using today’s ‘big’ dollars to buy the property, and then paying down the loan with relatively small dollars. Naturally, you have an interest rate attached to the mortgage, which compensates the lender, in theory, for the risk of inflation. But meanwhile, as inflation increases, you get the benefit of the price appreciation of the property itself.
And meanwhile, you get paid to wait. You can rent the property out and get an income – and you can increase your income from rent along with inflation.
Thus, the Real Estate IRA provides double-barreled inflation protection: Price appreciation on one hand, and the ability to increase rents on the other.
- Own a gold IRA or precious metal IRA. Gold has a long history of maintaining value against inflation-ravaged currencies going back millennia. Economic cycles, currencies and entire civilizations come and go: Gold – as well as silver and platinum – have held their value even as currencies have collapsed into oblivion. You can use Self-Directed IRAs to hold gold and real estate as effective hedges against inflation.
- Accept some risk in the expectation of higher long-term returns. For example, own stocks. Inflation hits bond owners hardest because it forces interest rates up and in turn forces bond prices down. But inflation can help buoy stock prices, depending on the nature of the underlying company. You don’t have to limit yourself to publicly traded stocks and mutual funds: Self-Directed IRAs are flexible enough to include closely held corporations, LLCs, private equity and even venture capital, if those asset classes make the most sense for you and your portfolio.
If you plan on being retired for 15, 20 or 30 years, that’s long enough for some of the short-term cyclical risks of real estate and the riskier equity/PE/VC asset classes to even out, in theory. Meanwhile, a good Real Estate IRA exposure within your retirement portfolio can generate solid current income while you wait. Indeed, the two strategies may complement one another well: The strong rental income that real estate investments can generate can provide you enough to live on to give you time for your longer-term, riskier strategies to pay off. For example, your real estate can take care of your living expenses while you wait for that 5-6 year exit plan from a P/E position, also within Self-directed IRAs.
Want to learn more? American IRA is America’s leader when it comes to Real Estate IRAs and Self-Directed IRAs. No matter where in the country you are, we want to work with you. Visit American IRA at our website, www.americanira.com, or call us at 866-7500-IRA (472). We look forward to serving you.
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