Do Self-Directed IRA Owners Have to “Live Frugal” To Succeed?

Do Self-Directed IRA Owners Have to “Live Frugal” To Succeed?

You’ve likely heard of it already. The FIRE movement. It stands for “Financial Independence, Retire Early.” It’s a movement that promotes frugal living to maximize retirement investing and savings, potentially giving people the ability to retire on their terms, even at an early age. There are even people in their mid-30s retiring with millions in the bank. And that got us thinking: do Self-Directed IRA investors need to slash their expenses and live frugally if they’re going to succeed?

First things first: the more money you put aside for retirement—and the more money you invest wisely—the better your chances will be. There’s some very basic arithmetic behind the FIRE movement that makes sense. And no matter what kind of retirement account you have, you’ll likely get some great tax benefits when you use it to its fullest potential. For example, a Self-Directed Roth IRA lets you put away after-tax money so you can maximize the tax-free money you have to pull out of retirement accounts by the time you reach retirement age.

But with a relatively low contribution limit on Self-Directed Roth IRAs, there’s more to the story than living frugally.

Self-Directed IRA investors who are both frugal with their expenses and wise in the way they approach new investments can do anything that a FIRE advocate can. They might even be able to do it better—investing on their terms.

But is it a requirement to “live frugally” if you want to experience long-term retirement success? Not necessarily. Here’s what investors, especially Self-Directed IRA investors, will need to know:

  • Your ability to retire comes from the amount of money in your accounts. Living frugally is one way to get more money in those accounts. But there are other ways of achieving financial independence. But a wise investment in a key real estate property can go way up in value within a Self-Directed IRA, super-charging your ability to retire on your terms. Living frugally will give you more wiggle room to fund investments, but well-chosen investments will have just as big an impact.
  • Your ability to retire also depends on how much money you save by being smart. Living frugally is one way to save money. Another way to save money is to employ the right Self-Directed IRA accounts for your specific situation. For example, if you use a Self-Directed Solo 401(k) to deduct contributions towards your retirement, you’ll save a lot of money in the short-term. This enhances your ability to put more money away. That’s something that FIRE people do naturally, even if they go more extreme with their frugal lifestyle beyond these tips.
  • Your ability to retire requires a long-term commitment. The most powerful way to build wealth is to let it compound over a long time horizon. Using compounding returns, you can invest a relatively small amount of money when you’re young, do minimal investing thereafter, and still retire with a substantial nest egg. Using a Self-Directed IRA from the get-go also gives people the incentives to take a more active role in their retirement, paying off intangible dividends in what they learn about finance and retirement.

FIRE is not required for Self-Directed IRA owners. You may have a long-term approach to retirement that doesn’t require retiring at the age of 45. So no, you don’t have to scrimp and save every penny. But living frugally can give you more resources to maximize your Self-Directed IRA results.

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