Why bother with a Self-Directed IRA? Any tool you can use to help you build an unbelievable retirement nest egg is worth your consideration. But to introduce the Self-Directed IRA as an option, we have to think about how life could look if you execute a well-considered Self-Directed IRA strategy. Here’s everything you need to know.
Financial Independence with the 4% Rule
In personal finance, there’s a rule known as the “4%” rule. Here’s how MarketWatch defines that rule:
It’s a rule of thumb that says you can withdraw 4% of your portfolio value each year in retirement without incurring a substantial risk of running out of money. Using this rule, for every $100,000 you have, you’d withdraw $4,000 a year.
The logic is simple. If you have a substantial enough nest egg to live on what you withdraw every year, then you can use that 4% rule to keep yourself in a state of permanent financial independence. There’s no age requirement on this number. If your investments are substantial enough, you’ve achieved financial independence. And with a well-diversified portfolio made possible with a Self-Directed IRA, you don’t have to worry about what the market is doing one day or the next. You can invest with confidence, knowing that there’s stability in your portfolio provided by non-traditional asset classes like gold, precious metals, Single Member LLCs, and even real estate.
Tax-Free Withdrawals on a Retirement Account?
Let’s picture what life might look like if you use a Self-Directed Roth IRA to fund much of your retirement. A Roth IRA uses after-tax money for contributions, which means that you pay taxes on this money upfront; you’re investing from the taxable income you had that year.
The beauty of this arrangement? Once you retire, you can have tax-free withdrawals from the Self-Directed Roth IRA. That means that once you reach retirement age, you can begin your version of the “4%” rule—provided that your Roth IRA has enough funds in it—and begin withdrawing the funds tax and penalty-free. This also gives you more legroom with the nest egg itself. If you don’t have to worry about paying taxes on the back end of the retirement account, you’ll be free to focus on the raw numbers in your Roth IRA.
Using Nontraditional Assets In a Self-Directed IRA
What might retirement look like with a Self-Directed IRA? For many people, retirement is a question of how the stock market is doing. They might look at the stock market one day and see that their retirement is moving with the markets. But if you use a Self-Directed IRA, you’ll find it easy to construct a portfolio that’s not subject to these same whims.
You can, for example, use a nontraditional asset like real estate within your Self-Directed IRA. That means you can own retirement assets that continue to generate cash every month. This means you don’t even have to “withdraw” from your principle amounts if you have a consistent cash flow coming in. And since retirement is all about establishing the cash flow that will carry you through your non-working years, real estate is a powerful way for people to build stable sources of wealth.
Retirement can look very different than many people imagine it. You don’t necessarily have to stock everything up in a stock market fund and withdraw when the time comes. You can take a more active approach in building a nest egg that generates consistent cash flow, which in turn gives you the stability to live retirement on your terms.