It is one thing to open a Self-Directed IRA account. It is another thing to be diligent about funding it to the max, year in and year out. But every dollar you can sock away in a Self-Directed IRA account now increases your chances of achieving an economically secure retirement, sufficient to provide a reliable income for the remainder of your life and the life of your spouse.
How Much Do You Need to Save?
No one has a crystal ball, but the general rule among retirement professionals is that savers must sock away 15 to 20 dollars in retirement savings per dollar of annual income you need. That is in addition to any income you may expect from Social Security and pensions. For example, if you want to have a retirement income of $100,000 per year, and you expect a combined $50,000 in Social Security and pension income, your Self-Directed IRAs and other retirement savings will need to generate the other $50,000. That amounts to a target nest egg of between 750,000 to $1 million.
Looked at another way, unless your Self-Directed IRA is generating substantially above-market investment returns, for every $100,000 you want to generate in reasonably reliable income from your investments during your retirement years, plan on amassing a total nest egg of $1.5 million to $2 million.
It is doable – especially if you start saving aggressively while still relatively young. Consider:
Assuming you contribute the current maximum annual contribution to a Self-Directed IRA, and you are able to earn an average of 6 percent per year, it would take 42.51 years to save $1 million. If you can get an average return of 8 percent, it would take 35.65 years to save that amount, with an annual contribution of $5,500.
But you are not limited to that $5,500 per year ceiling on Self-Directed IRA contributions: If you are married, you can contribute another $5,500 per year to an IRA, in the form of a “Self-Directed Spousal IRA.” This is true even if your spouse does not work. So now you can contribute up to $11,000 per year to a traditional or – if you meet the income requirements, a Self-Directed Roth IRA.
But if you own your own corporation or LLC, or if you have self-employment income, you can turbo-charge your retirement savings even more. For example, you can start a Self-Directed Solo 401(K) plan for yourself or your small business (with only you or your spouse as full-time employees), or a simplified employee pension plan – both of which enable you to increase your contributions to more than $50,000, given enough income, though Self-Directed SEP IRAs limit your contributions to not more than 25 percent of compensation.
The combination of Self-Directed IRAs and small business retirement plans allow self-employed individuals and small business owners to boost tax-advantaged retirement savings to more than $65,000 per year – and potentially double that figure, in the case of high-earning couples who own their own businesses.