Indecision is the Worst Alternative for Your Retirement

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Are you the type of person that makes major decisions at the drop of a hat – comfortable within your own skin of decision making? 

Or do you fall in the other camp – the type person that tortures yourself over the most minute of details, over the most trivial of matters to the point of indecision? The latter group suffers from analysis paralysis – the inability to make a decision due to overthinking available alternatives, possible outcomes, and data.

In this digital age, plagued with information overload, more and more individuals are suffering from analysis paralysis – unable to make decisions when faced with so many alternatives, so much data, and too many tools for analyzing a course of action.

All this reminds me of the parable of the fox and the rabbit who find themselves one day sitting on the edge of a pond discussing their various plans of escape in the face of hunters. Rabbit boasted of having many escape plans. He could climb up a tree, flee to underground tunnels or hide in the bushes. Fox, on the other hand, only had one plan of escape, and that was to climb a tree. When the hunters finally arrive, fox quickly climbs a tree; but rabbit, on the other hand, begins to analyze all the ways to escape that he knows. But unable to decide which one would be the best, he fails to act and gets caught by the dogs.

There’s one area of investment where indecision may not get you killed like rabbit, but it may very well cause you to lose money and make your retirement unpleasant. It involves self-directed IRAs (“SDIRAs”), a valuable tax-saving tool for the savvy investor, but could also be poison for the indecisive. Because SDIRAs are required to be reported to the IRS, the US Government Accountability Office (GAO) gathers data and publishes relevant statistics and reports regarding SDIRAs. And according to a 2018 GAO report on SDIRAs, 791 individuals have IRA balances between $10 million and $25 million, while 314 are worth over $25 million. There’s a common thread among all these SDIRAs owned by ultra-high-net-worth investors – the preference for alternative investments, particularly real estate.

Contrast the successful SDIRAs with most other SDIRAs. Most SDIRAs are not actively managed. In fact, most owners who open an SDIRA don’t do much with them – never get past the initial fund transfer – leaving the funds in the default money-market account.

In the case of SDIRAs, indecision could sink your retirement.

In the following table, I contrast the difference between what you would earn from doing nothing with an SDIRA and what you could earn if you followed the example of UHNWIs who handily earn annual cash-on-cash returns of 12%. Although the average money market return is close to .25%, I’ll be generous and use 2% as the rate in this example, 2% being on the high end of money market returns. For simplicity, interest will be reinvested (compounded) annually. Here are the returns over a 30-year period:

Initial Annual Investment | Rate of Return | Balance (30 Yrs)

$300,000 2% $543,408.48
$300,000 12% $8,987,976.64

In this example, what’s the price of indecision? $8,444,568.16! The difference between earning a 12% return per year and reinvesting and earning the default 2% money market return by doing nothing. That’s a high price for indecision. And that’s not even taking into consideration inflation.

Assuming an average money market return of .25%, inflation at the average rate of 1.85% (based on the last 10 years) would actually erode your initial $300,000 investment where at the end of 30 years you would be left with $187,755.59. That is not a retirement plan; that’s a poverty plan. 

With real estate investing, it’s easy to get lost in the data and fall prey to analysis paralysis because there are so many factors to consider in evaluating a good real estate investment opportunity.

The basic foundational factors to consider may include:
  • Property Details (for example, number of units, square footage, etc.)
  • Purchase Information (i.e., purchase price, cost of rehab. Improvement, etc.)
  • Financing Details (for example, loan amount, down payment, interest rate, closing costs, etc
  • Income
  • Expenses
  • Demographics

Then, using the foundational information above, financial projections are formulated to determine the potential profitability of a project.

Significant financial benchmarks can include:
  • Cash Flow
  • Rates of Return (ROI, Cash-on-Cash, IRR, etc.)
  • Capitalization Rate (Cap Rate)

The data and analysis required for evaluating real estate deals can be overwhelming. That’s why most SDIRA owners don’t even dip their feet in the real estate investment pool, but how do UHNWIs invest in real estate when evaluating deals seems so time-consuming? Their secret?

They’ve learned how to overcome analysis paralysis by learning to simplify their decision making.

Instead of analyzing a hundred different factors, they narrow down the half dozen or so most relevant to their decision making. That is why most UHNWIs do not invest directly in real estate. They make private investments in real estate funds and defer to the expertise of others. Instead of going through the dozen factors I listed above, they narrow their factors down to just a few – 1) the experience and expertise of the people running the show, 2) the rate of return, and 3) exit strategy.

The most valuable lesson a novice SDIRA owner can learn from a seasoned, successful SDIRA investor is to simplify investment decisions.

Don’t fall into the trap of many potential retirees who assume that just setting up an SDIRA will ensure a secure retirement. The sad truth is, just because you fund an SDIRA, which typically goes into a money market account by default, doesn’t mean you’ll have enough to retire with when the time arrives. This is dangerous thinking, especially when taking inflation into consideration, where your initial funds will actually be worth less at the time of retirement.

Being truly prepared for retirement requires being proactive, but it doesn’t require being able to analyze deals like a computer. It can be as easy as attaching yourself to seasoned and experienced professionals who have already been successfully investing in real estate.

Finding promising deals suddenly becomes much simpler, which, in the long term, will serve to grow your account and provide you with the kind of retirement you seek and deserve.