Common Retirement Conundrums
I have a passion regarding self-directed retirement account investing, and the more work I do for clients in that field, the more I run across the same three conundrums vexing many people who want to retire but are afraid they won’t have enough money to do so:
- I am already too old.
- I don’t have enough savings.
- I’m not earning a high enough rate of return.
These feelings can quickly lead to frustration, shame and giving up. It doesn’t have to be that way. You can address these conundrums by focusing on the three variables you can control:
- The type of retirement account you select – Choose a retirement account that allows you to contribute more than just $5,500 or $6,500 a year into it, such as participating in your employer-sponsored 401(k) or doing your own solo 401(k). If you are self-employed with a couple of employees and don’t want to do a 401(k) plan, you can do a SEP or Simple IRA. There are pros and cons to each, but the bottom line is that you need to be pushing money into a Roth-styled retirement account, be it a Roth IRA, a Roth component of a 401(k), or the conversion of a SEP, Simple or Traditional IRA into a Roth IRA. You want a Roth account because the money grows tax free, and qualified distributions from the account are tax free for both you and your beneficiaries. This allows you to build retirement dollars that can benefit you and the next generation.
- The age you choose to retire – You can begin taking distributions from your retirement accounts without paying penalties once you reach the age of 59½. Many people I speak to, however, are choosing to delay taking money from their Roth retirement accounts until they are between 67 and 70 years of age. Individuals who have only Traditional retirement accounts can choose not to take any money until they are required to take distributions beginning at age 70½. The rationale for delaying distributions is that it allows your money more time to grow through compounding interest and good investments. Money taken out of your account most often stops working for you.
- The rate of return you are making with your retirement account investments – This one is the reason I am so enamored with self-directed retirement accounts! If you choose to invest your retirement account money exclusively in stocks, bonds, mutual funds, ETFs, etc., the rate of return is limited by the general market performance of that investment. There are good growth stock mutual funds out there with long-term track records of achieving over a 12% annualized rate of return. That is substantially better than what most banks and money markets are paying. However, many self-directed retirement account investors I know are making rates of return of 34% per year or greater. They are achieving those rates of return through skillful and diligent application of concepts they have learned and by investing in assets they know and understand. It might be lending money, buying tax liens, rehabbing houses, or a myriad of other opportunities.
Over the course of the next few posts, I plan to go into more detail about the various topics I’ve raised here.