When most people talk about retirement goals, they usually approach it from the standpoint of net worth. They want to be a millionaire by 65. By 75. They want to make sure that they have enough investments in Self-Directed IRAs — or any type of account — to handle what life throws at them.
But is net worth really the best barometer for your retirement success? For some people, that answer might be a resounding NO. Here’s what you will need to know if you are setting your retirement goals right now:
Net Worth: the 4% Rule
According to Investopedia, the 4% rule is as follows: build a net worth that allows you to steadily withdraw 4% of your assets every year. For those in the Financial Independence/Retire Early (FIRE) movement, this rule of thumb is the goal. Theoretically, if you build investments that allow you to withdraw 4% every year, the appreciation of the other assets should tend to pay that back over time. That means that when you achieve this status, you have financial independence and you are ready for retirement.
There’s nothing wrong with this math. Data suggests that over time, if you stick to the stock market, you can usually get away with withdrawing 4% of your investments and expect the markets to pick up the slack.
The problem with this approach is that it does not take a variety of assets into account. Let’s say that you have your home and a rental property that also factor into your net worth. Let’s say you own precious metals that have gone up in value. You’d factor those into your net worth, but it’s hard to withdraw money from an investment like a home.
Income with a Self-Directed Real Estate IRA
If you use a different approach, your net worth might not be a barometer of your retirement success so much as it is a nice fact to know.
The 4% rule often works out mathematically. But just as valid is this simple math: if you can generate enough cash flow to handle your expenses, and this is something you can do on a regular basis, you have achieved financial independence. That’s all there is to it.
That’s why many people turn to a Self-Directed Real Estate IRA to build a retirement nest egg. With money flowing into the investments on a regular basis, this cash flow helps you build a nest egg that’s not only growing but growing every single month. Even if the stock market goes down, that cash flow can keep coming in, so long as your real estate investments have tenants.
How to Use a Self-Directed IRA to Build Cash Flow
There’s no doubt that both approaches to retirement work. The question is what works best for you. Do you enjoy trying to identify the best real estate investments for your retirement nest egg, or do you prefer a more hands-off approach? For those who love finding the right investments, a Self-Directed Real Estate IRA helps to protect those assets. Using non-recourse loans, you can also keep the IRA as a separate entity that helps you protect your private assets as well.
It’s true that you cannot own your own home within Self-Directed IRAs. But an investment property will still be part of your net worth. That means you can take on either approach with your retirement and still end up just fine. The only questions are: which goals make more sense to you, and which measurement of those goals (net worth vs. cash flow) better suit your style?