According to research from Plan Sponsor magazine, 56 percent of us don’t have any kind of retirement income strategy. Of those that do, most of them simply expect to withdraw their retirement income from savings accounts. While Self-Directed IRA investors tend to be more sophisticated than the general market, the same issues tend to apply both to Self-Directed IRA fans and to those who employ more conventional retirement investing strategies.
In fact, 60 percent of Americans expect to take distributions occasionally, as needed. 32 percent expect to take distributions on a regular basis. For most Americans, relying on the old 4 percent rule of thumb isn’t going to cut it anymore. According to LIMRA, that 4 percent figure is too high to safely sustain a retirement income given typical market rates of return and historic market volatility.
Why? Longevity! Of course, it’s a great thing that we’re living longer. But longer life spans mean our retirement income has to last that much longer, or we need to retire at a later age or both.
The latest figures from the life insurance industry are in: If a married couple reaches age 65 together, there is a 50 percent chance at least one of those two individuals will live beyond age 88.
What’s more, there’s a 25 percent chance that at least one of them will reach age 97.
When you plan for retirement, you don’t want to plan on a 25 percent chance of income failure. You want that income to last as long as you or your spouse does.
Lifetime income annuities are a valuable tool for longevity planning, of course. But current rock bottom interest rates make it very tough for annuities and other traditional sources of retirement income to generate yield sufficient to sustain an elderly person and continue to pay mounting medical, nursing, long-term care costs and everything else. The same low interest rates hold down returns on CDs and even reverse mortgages.
Increasing your expected returns and decreasing volatility in your retirement years should both be key objectives when it comes to retirement planning.
That’s where Self-Directed IRA strategies can give you an advantage. People who choose to self-direct their retirement investments have access to a much broader array of high-return strategies than those who limit themselves to publicly-traded securities. For example, you could put your money in a bank CD within your IRA and realize just 2-3 percent in the current market. The bank will typically lend that money back out on real estate, business and car loans, if you’re depositing in a regular commercial bank. But if you take that same money and you can find borrowers yourself, you can realize upwards of 6-9 percent and more, depending on your market and how much risk you are willing to take on. You can do this by direct lending or hard-money lending.
The same is true of real estate strategies, private equity, venture capital, tax liens and certificates, closely-held partnerships, C-corporations and LLCs and other kinds of structures and asset classes, though you do have to be aware of the risks.
The terms are up to you, but if you have good collateral and some time to work out any glitches if something should go wrong with the loan, you should do better than you could in CDs, money markets and even in many safer bond funds.
We’re not dumping on safety, by any means! We absolutely believe in safety of capital! But when inflation is heating up and interest rates on savings are at rock bottom, there’s plenty of risk in that 2-4 percent return on safe assets – especially when you add in longevity risk. If you think longevity risk is bigger problem than it used to be (and it is!), you probably need to generate more returns on your assets than you would have settled for in years past.
But with dividends on the S&P 500 a fraction of what they were a generation ago, and today’s low interest rates on debt instruments, you will probably need to expand the menu of asset classes.
That’s where a Self-Directed IRA comes in.
If you are an experienced investor or have an interest in real estate, private lending or other alternative retirement investments, we want to be your partner. Visit us at www.americanira.com or call us today at 866-7500-IRA (472). We look forward to speaking with you!