Can you Pass the Financial Literacy Test about Your Own Retirement Savings?

Published on August 20, 2015

financial-literacyYou can’t get there if you don’t know where you’re going. That adage can easily apply to your retirement plan and your savings /investment strategy.

First things first: how’s your financial literacy when it comes to saving for retirement? Writer Selena Maranjian of Motley Fool offers a simple financial literacy quiz to take and ponder.

The bottom line is, we all have to be savvier about managing our money and saving for retirement, including those individuals who are self-directing a retirement plan, which may include many types of alternative assets.

Whether you’ve already opened a self-directed IRA or are thinking of doing so, here are some questions to ask yourself, to give you an idea of how to direct your retirement strategy.

What is my net worth?

Take into account all your assets (cash, savings and investment accounts, home, car and other possessions); subtract your total debt (all loans, credit card balances, etc.) to arrive at this figure. Depending on where it is today, will help you determine how aggressive you need to be about saving and investing to reach your goal.

Which should take priority—paying off high-interest rate debt or saving for retirement?

Talk to your financial planner about your overall financial picture; chances are, it will be wiser for you to tackle the high-interest rate debt first, which costs you so much more over time. Just as compound interest can help you build up assets, the interest on credit cards adds up big time and eats into your disposable income (that can be diverted into your self-directed retirement plan). Paying off this debt first will free you up later to save more for retirement, with less to worry about.

When’s the best time for me to start saving?

As soon as you can and often! Millennials, take heed—there’s no time like the present for starting to save, even if you are trying to establish yourself, become independent, have student loans to pay … there’s always a way to put a little bit of money aside and get into the retirement savings habit. The younger you are, the longer your savings time horizon. The Motley Fool author offers this example: If you save and invest just $5,000 per year, and it grows at 10% annually, it will become $315,000 in 20 years. Over the course of 40 years (assuming you start saving this amount in your 20s), it would be … wait for it … $2.4 million!
Can’t be that ambitious just yet? She also says that if you put away just $1,200 at age 18 and it grows at 10% for 47 years until age 65, it will top $100,000. The main point: your earliest dollars have the most growth potential.

How much money will I need to accumulate for retirement?

This is a subjective issue and we always recommend you consult with a financial advisement professional about your particular needs and issues. There’s a lot to consider! You will want enough money to cover all your regular living expenses; to pay for hobbies and interests, such as travel, that cost money to enjoy; and there are unforeseen (and potentially enormous) medical expenses in the future. There’s also inflation to consider and you may not be able to rely on having some Social Security income. Depending on how much you estimate you’ll need (or want) for annual income in retirement, multiply that by 25 to determine the size of your nest egg, since the average length of retirement years is now about 25 years (we are living longer).

Which grow fastest over long periods of time—stocks, bonds or real estate (the most popular self-directed alternative asset)?

Stocks grow much more quickly than bonds over time if the companies are healthy and market conditions are stable—but the market fluctuations leave a lot of investors struggling to keep up.

If you are self-directing your retirement plan and are including nontraditional assets such as real estate, the picture changes dramatically. We all know the housing market has experienced serious setbacks in recent years but depending on your investing timeline, holding onto smart real estate investments can help you develop real tax-advantaged retirement wealth. For certain savvy investors, including real estate in a self-directed retirement plan can be a great way to build up your retirement nest egg.

The professionals at Next Generation Trust Services can answer your questions about including domestic or foreign real estate in your self-directed IRA and you can read more in our helpful white paper.


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