The good news is longevity is way up! The bad news is longevity is way up!  Due to the increase in longevity, Real Estate IRAs are the way to go!

Well, as bad news goes, we have heard worse. It is great that people are living longer. However, longer lifespans present a problem when it comes to retirement planning: Any given nest egg must last a lot longer than it used to.  It must also generate a reliable stream of income the whole time, without fail.

People are underestimating the problem: A recent study of British senior citizens found that people in their 50s and 60s are grossly underestimating the likelihood that they will live to age 75, 85 and beyond.

The report, from the Institute for Fiscal Studies, found that people in their 50s and 60s tend to underestimate their chances of survival to age 75 by around 20 percentage points and to 85 by around five to 10 percentage points. Meanwhile, those who have reached their 80s become overly optimistic about the chances that they will see 95.

The result is a significant gap between the assets required to generate a retirement income for that long and the probable need itself.

“As individuals are given more responsibility for saving for their retirement, and more freedom over how they use those savings in their later years, it is a concern that many are systematically misjudging their longevity,” said IFS research economist David Sturrock. “When people underestimate their chances of surviving through their 50s, 60s and 70s, they may save less during working life, and spend more in the earlier years of retirement than is appropriate, given their actual survival chances.

The Value of Real Estate IRAs

At American IRA, we believe Real Estate IRAs should be part of any significant retirement portfolio: real estate is a proven long-term income generator, which also provides the potential for capital gains, and the prospect of increasing rental income as a hedge against inflation.

Leverage and Real Estate IRAs

Real Estate IRAs also have the advantage of ready access to leverage.  This greatly increases the cash-on-cash return for Real Estate IRA investors as compared to more Traditional IRA asset classes, which are typically unleveraged.

Lenders know that real estate is a relatively stable source of wealth and makes excellent collateral for loans. It is therefore much easier to get financing for real estate than for other forms of investment. While you cannot sign a personal guarantee or pledge non-real estate assets as collateral for a loan to buy property within your Real Estate IRA, there are several lenders eager to help you finance Real Estate IRA properties. You just have to do your borrowing on a non-recourse basis.

This means the loan must be secured entirely by the property in your Real Estate IRA. The lender can have no claim or recourse against you, personally, nor any assets held both inside and outside the Self-Directed IRA.

We often see lenders willing to finance about 65 percent of the purchase price of the real estate investment, though they frequently have tighter requirements for condominiums or properties in historically volatile real estate markets, such as Florida.

You should be aware of the impact of unrelated debt-financed income tax, however, which may result in a current tax liability for gains attributable to borrowed money, rather than your own contributions to your retirement fund.

Real estate is also frequently a much better asset to pass on to heirs than a closely-held small business or other more esoteric investment; as homes are usually easier to sell than businesses.  Real estate investments could also be managed easier than a small business held within a Real Estate IRA, for example.

Real Estate IRAs and Diversification

Real Estate IRAs can also help protect owners against stock market risk: The more different asset classes you have making up your retirement portfolio, the less affected you could be by unexpected declines in any one asset class. We believe Self-Directed IRAs, including Real Estate IRAs, can help investors achieve meaningful diversification across a variety of asset classes that are difficult to access using conventional off-the-shelf retirement products available from Wall Street investment firms.

The combination of steady rental income streams, access to financing and leverage, potential capital gains and the possibility of keeping up with inflation make Real Estate IRAs an excellent addition to many of our clients’ retirement portfolios.

To learn more about Self-Directed IRAs and Real Estate IRAs, call American IRA at 866-7500-IRA (472), or visit www.AmericanIRA.com.