Retirement is no longer as easy as it once was, and there is no shortage of reasons to be worried about your retirement. Most people do not have pension plans and it’s hard to know what while the government programs like Social Security will look like 10 years from now. At the same time, previously trusted assets like the stock market seem riskier and more volatile.
Smart investors are looking at how they can protect their future plans today. Self-directed IRAs are one strategy gaining popularity – and for good reason. This type of retirement account allows you to invest in a much broader range of assets – like real estate, precious metals, and business partnerships – which can restore peace of mind about your retirement.
Read on to discover how self-directed IRAs can address some of the most common retirement fears:
“I’m going to lose everything in a stock market collapse.”
The stock market collapse of 2008 was one of the worst in history, with the market losing about 50% of its total value in just one year. For many Americans, that meant losing a huge chunk of your life savings as well.
It’s no surprise then, that investors today are still worrying about the next big downturn. But it is important to remember that while 2008 was an extreme case, downturns are a regular occurrence, happening about every ten years. How much will you be impacted by these downturns? That depends on the state of the markets when you retire, and it’s impossible to know exactly when these downturns occur. Unfortunately, in many traditional retirement plans, market-based assets are the only investment option.
Self-directed IRAs allow you more investment options so that you can expand your portfolio to different asset groups. A diversified investment approach protects your savings by thereby reducing risk—some assets will probably decline in value at some point, but it’s unlikely that every investment will lose money at the same time. Thus, losses from an inevitable market downturn are less likely to impact your overall savings as much as they would if they were all in one place. For example, investing in precious metals such as gold can be viewed as complementary to stock market assets – since data from the past 10 years shows “little to no” correlation between the two.
“Inflation will wipe out my savings.”
Inflation occurs when the purchasing power of your money decreases – in other words, each dollar become less valuable and can buy less. Historical data demonstrates that some amount of inflation should be expected and factored into your retirement plan. However, it is harder to anticipate, and therefore harder to compensate for, sudden and dramatic spikes in inflation, without anticipating this possibility ahead of time.
Traditional IRA investments like stocks, bonds, and money market accounts typically lose money when inflation is high. On the other hand, physical assets like precious metals and real estate tend keep their value when inflation is high. By diversifying to physical asset investments through a self-directed IRA, you can help protect your savings against inflation.
“I will not have enough income during retirement.”
Once you retire, your savings need to generate enough income to meet your needs for the rest of your life. Traditional investments, like bonds and CDs, may have the advantage of carrying low risk, but they produce very little income. Stocks are more volatile, so you could see some windfalls, but you are also subject to a downturn that could wipe out your source of future income.
But there are alternatives under a self-directed IRA. Real estate can be one good option for post-retirement income streams. Investment properties generate steady, reliable rental income that is often higher than what you would earn from “safer” choices like bonds/CDs. Plus, you don’t have to worry about stock market volatility.
Of course, the real estate market is also subject to its own downturns, so remember that creating multiple sources of income is your safest bet. While one income source might run into problems, it’s very unlikely that they would all stop producing revenue at the same time.
“I don’t fully understand my investment plan.”
Stocks and bonds are not the most intuitive topics. It can take years to truly understand how markets work, what you’re actually buying, and what red flags to look out for. Indeed, even among financial experts there’s disagreement on what is good or bad for the market. When it comes to most types of investment, it’s very easy to make costly mistakes, or end up paying hidden, unnecessary fees (and it’s always good to do your research!).
Real estate investments, on the other hand, are much easier to understand. Everyone has dealt with real estate issues – whether renting or buying – at some point in their life. With a self-directed IRA, you can move your money out of complicated financial assets into something that you understand, providing greater confidence in, and more control over, your investments – and your retirement.