Don’t Make This Mistake With Your IRA

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Many fall prey to the common misconception that setting up an IRA and investing money in it will ensure you will be taken care of when retirement rolls around.

The sad truth is, just because you fund an IRA doesn’t mean you’ll have enough to retire with when the time arrives. The fact is, many households (35%) do not even have a retirement savings plan such as an IRA. The ones that do have retirement plans underutilize them.

Many assume that by just funding an IRA there will be enough money at the time of retirement to provide a comfortable living. This is dangerous thinking. When you fund an IRA, your money typically goes into a money market account by default. After taking into account inflation, placing funds in a money market account will be less valuable at the time of retirement than at the time of initial deposit.

To be truly prepared for retirement, you must be proactive.

With social security predicted to run out around 2034, retirement savings will be more crucial than ever for Americans when they retire. This is going to leave the majority of households in the U.S. in a predicament since they either don’t participate in a retirement plan or underutilize the ones they have.

35 percent of U.S. households do not participate in any retirement savings plan and unfortunately, among those households that do hold retirement accounts, many of them have low account balances. The median (50th percentile) household of all ages holds only $1,100 in its retirement account. Even the 70th and 80th percentiles of households have only about $40,000 and $106,000 in their retirement accounts, respectively. Chien, YiLi & Morris, Paul (2018) “Many Americans Still Lack Retirement Savings,” Federal Reserve Bank of St. Louis, www.stlouisfed.org.

By contrast, the 90th and 95th percentiles of households hold considerable amounts, at about $310,000 and $612,000, respectively. The fact is, if you’re not in the 95th percentile of households, you will find yourself unprepared for retirement. For most Americans, $106,000 will not last more than two years.

Those households in the 95th percentile of retirement savings are not there by default. They were proactive and intentional in their retirement saving – not only on the funding side but also on the growing side. For proof, one only has to look at the date behind the investing habits of the top tier of IRA account holders in the U.S., data that is publicly available through Congress’ Government Accountability Office (the “GAO”).

A 2012 GAO report revealed there were 314 taxpayers with IRA accounts valued at more than $25 million each at the end of 2011. A further look into these large IRA accounts revealed that all of them were heavily invested in alternative investments; specifically, real estate, private placements and private equity.

When it comes to growing retirement accounts, many Americans don’t know where to start. Fortunately, the government has provided a vehicle for all Americans to take control of their retirement and grow their savings through the massively underutilized self-directed IRA.

Savvy investors know investing in alternative assets through a self-directed IRA can help them grow a more diverse and more lucrative retirement portfolio. They also know consistently funding their self-directed IRA is a smart habit to develop. Redirecting your retirement funds away from stagnant vehicles like money market accounts and mutual funds towards alternative investments like real estate is the best way to take control of your retirement future.

How did the wealthiest IRA account holders get where they are?

Do they have access to secret tools and vehicles that the rest of us don’t? To a degree, it used to be that the wealthy and well-connected had access to private investment opportunities not available to the rest of us.

However, with the passage of the JOBS Act and the loosening of the advertising and solicitation rules, private investment opportunities are now more accessible to the general investing public than at any other point in human history. To understand the wealthy and how they became wealthy, let’s start with why they gravitate towards alternative investments.

Alternative investments including venture capital, private equity, hedge funds, real estate investments and commodities offer benefits run-of-the-mill Wall Street investments don’t. For one, they’re uncorrelated to the volatility of the broader markets like Wall Street because they’re not tied to the 24-hour news cycle. Although more illiquid than traditional investments, alternative investments also offer potentially higher returns.

Of all alternative investments, real estate is by far the most popular among the wealthy because, in addition to providing shelter from Wall Street and inflation and providing potentially outsized returns, real estate investments are backed by a tangible asset sheltering investors from the threat of total loss. That is why for building wealth, real estate is unparalleled among all alternative investments.

Productive assets like real estate are essential for building wealth.

Real estate, whether through direct investments or through indirect investments in a private fund that provides regular distributions, creates wealth through a compounding effect when the distributions are reinvested in the same or other productive investments. This is one strategy all IRA holders need to utilize, a strategy employed by some of the savviest investors in the country including Warren Buffett.

Avoiding the pitfall many Americans are falling into of being wholly unprepared for retirement will require you to take control of your retirement savings, not only in the amount you fund into your IRA but also how the funds are invested. Following the lead of the top IRA account holders in the country, you will need to consider alternative investments, and once you’ve identified potential investment targets, you will need to vigilantly track and reinvest distributions to grow your wealth. Only in this manner will you be adequately prepared financially for retirement.

One more tip, for many with self-directed IRAs, just having control over where their savings are invested is not sufficient. Having the ability to move funds themselves through checkbook control is a way to cut out the fund administrator and make investing and funding decisions much more streamlined and efficient.

Don’t let your IRA sit idly by. If you’re not proactively investing for growth, your IRA will not only fail to grow but will likely wilt in the face of inflation. Strive to be in the 95th percentile of retirement savers by placing your funds in alternative investments such as real estate to experience exponential growth.

We all want to be financially prepared for retirement so we must be proactively investing for growth now!

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