Impact Investing Through a Self-Directed Retirement Plan
Younger investors are changing the investing landscape as they start putting more of their dollars into sustainable investments. This category of investments includes those that consider environmental, social, or government practices.
More and more, millennial investors want to include investments that align with their values within their retirement plans—including their self-directed IRAs.
According to the Morgan Stanley Institute for Sustainable Investing, interest in sustainable investing (SI) has grown among the general population and even more so among millennial investors in recent years.
- In 2015 among the general population, 71% of those surveyed indicated they were interested or very interested in SI in 2015. In 2019, that rose to 85%.
- In 2017, 84% of millennials were interested or very interested, which rose to 95% in 2019.
- When it came to actually having sustainable investments:
- In 2017, 42% of the general population and 50% of millennials had sustainable investments.
- Today, 52% of the general population and 67% of millennials do.
- Investment into sustainable funds has nearly tripled in 2019 from the prior year ($13.5 billion to date).
To name a few ways that social impact investing is showing up in self-directed retirement plans, investors have been including assets such as organic farmland, FINtech, innovative startups, or renewable energy. Popular target investments cited in the Morgan Stanley report were those related to plastic reduction and climate change.
The social impact side of this is important to investors – a majority (83% of the general population and 89% of millennials) said they believed their sustainable investments could create economic growth and reduce poverty. Around one-third of these investors (33% of the general population and 36% of millennials) are also screening investments in order to avoid putting money behind something they object to.
Sustainable investments in a self-directed IRA
Given that self-directed investors have more options in terms of the types of investments their plans can include, it’s no surprise that those interested in supporting environmental and social causes, innovations, and companies are including organic farmland, renewable energy resources, or innovative startups within those plans.
Some other examples of social impact and sustainable investing are:
- Climate mitigation projects
- Clean energy projects or companies (wind, water, solar)
- Organic farms, sustainable tree farms
- Affordable housing
- Equity funding in companies that produce devices that increase water or energy efficiency or life-saving medical equipment for rural areas or Third World countries
Self-directed investors make all their own investments decisions – usually based on experience with assets they already know and understand. Self-direction can be a powerful way to put what moves investors most into their retirement plans because it can give investors better control over their earnings. Added benefits of self-direction include portfolio diversification for investors who also wish to continue investing traditionally, and a hedge against stock market volatility.
If you’d like to learn more about the many options available through self-direction as a retirement strategy, register for one of Next Generation’s complimentary educational sessions. Alternatively, you can contact our team directly by phone at 1-888-857-8058 or by email at NewAccounts@NextGenerationTrust.com.
Why Yes, Millennials are Saving for Retirement
The Millennial generation—those born between1977 and 1996—is projected to equal or surpass the size of the Baby Boomer generation over the next 20 years. They currently comprise the largest segment of today’s workforce. So what is this age group doing about saving for retirement?
Although Millennials are often misrepresented as “live in the moment” folks who prioritize life experiences over long-term financial planning, you may be surprised to find out that they are also more engaged at an earlier age with retirement savings in the workplace.
According to the Pew Charitable Trust Retirement Savings Project, Millennials had higher balances in their defined contribution plans than their Gen X counterparts did at a similar age (based on U.S. Census Bureau data). In addition, Millennials between ages 25 and 31 are saving more into retirement accounts than those right out of school.
The Transamerica Center for Retirement Studies supported this with the following statistics:
- Seventy-one percent of Millennials are saving for retirement through employer-sponsored plans
- The median age to start saving was 24, which is younger than prior generations
- Those participating in a 401(k) or similar workplace plan are contributing a median of 10 percent of their annual salaries
- More than half of Millennials surveyed said they expect their primary source of retirement income to be self-funded through retirement accounts (such as IRAs and employer-sponsored plans) or other savings and investments
- The estimated median amount that Millennials have saved in all household retirement accounts is $23,000
Given that the Social Security Trust Fund Reserve may be depleted by 2034 and benefits reduced, these savers are not only being proactive, they’re being smart.
Another smart savings move for savvy Millennials: Self-directed IRAs
Motivated savers can build a more diverse retirement portfolio, given the diverse types of alternative assets these plans allow. By making their own investment decisions, Millennials and others can take advantage of market shifts they are following more nimbly, or choose to invest in assets they care about or that reflect their interests—from becoming an investor in a theatrical production to owning shares in a specialty farm business.
If you’re a younger investor looking to do more with your IRA, you probably have some questions about self-directed retirement plans. As a convenience, Next Generation offers complimentary educational sessions with easy scheduling. Alternatively, you can contact us via email at NewAccounts@NextGenerationTrust.com or call 888.857.8058.
Millennial Business Owners are Fans of Retirement Plans
Here’s something that may surprise you: younger business owners of the millennial generation are putting their employees’ retirement on their radar more so than their older counterparts (Generation X and baby boomers). According to a Nationwide survey, millennials are more aware of the importance of a workplace retirement plan and are nearly twice as likely as the average business owner to say they will offer retirement benefits to their employees in the future (69 percent vs. 36 percent).
Having grown up during the Great Recession, this generation has seen firsthand the importance of planning ahead financially. In addition to their own spending, money management, and retirement savings, they are thinking of their employees’ financial futures as well. The survey revealed that:
- Fifty-seven percent of millennial business owners think it’s their responsibility to help their workers save for retirement, compared to 44 percent of Gen X and 31 percent of baby boomer bosses.
- Fifty-one percent of millennials said a retirement plan is a good recruiting tool in a tight job market, to help attract and retain talent.
- Thirty-two percent of millennial bosses are increasing retirement contributions which is nearly double the overall figure (18% of all business owners).
Self-directed retirement plans for employees and employers
A SIMPLE IRA retirement plan can be established by employers, including self-employed individuals (sole proprietorships and partnerships) for the benefit of their employees. Eligible employees can contribute part of their pretax compensation to the plan. For individuals who are savvy about nontraditional investments, they can include those in their self-directed SIMPLE IRA. As you know, self-directed IRAs allow investors to include a wide range of non-publicly traded alternative assets, such as real estate, precious metals, lending and private equity.
If you are a business owner and would like to offer a SIMPLE IRA to your employees, or open a SEP IRA for yourself—or as an individual, you wish to open a self-directed IRA and build a more diverse retirement portfolio—Next Generation’s team can help you get started. Contact us at NewAccounts@NextGenerationTrust.com or 1.888.857.8058 today!
Are Americans on Track to go Broke?
Americans Aren’t Breaking the Retirement Bank…
But They Can Get on Track with a Self-Directed IRA
A 2018 Retirement Savings survey by GOBankingRates found that American adults on average are not doing well when it comes to saving for retirement. While this isn’t new, the percentage of Americans with nothing ($0) saved has dropped, and the percentage of those who have at least $300,000 in their retirement plans has increased over the past three years.
The survey targeted three age groups: Millennials, Generation X and Baby Boomers, with about 1,000 respondents per group. They were asked to estimate how much they have saved for retirement and were given assorted ranges to select from (less than $10,000 to $300,000 or more).
The alarming result is that 42 percent of those surveyed have less than $10,000 saved—that’s not even enough to cover one year’s worth of living expenses, which according to the Bureaus of Labor Statistics, is on average, $46,000 a year for adults 65 and up. Included in this group, 14 percent have nothing saved for retirement. Luckily, as noted above, this percentage is dropping.
Summary statistics: The percentage of people who could retire broke, with less than $10,000 saved, has shrunk in recent years as per the GOBankingRates Retirement Savings survey:
2016 – 56 percent
2017 – 55 percent
2018 – 42 percent
Here’s a silver lining: the survey revealed the majority of Americans have more saved for retirement, broken out as follows:
- Nearly 7 percent saved $10,000 to $49,999
- Nearly 13 percent have $50,000 to $99,999
- More than 12 percent have $100,000 to $199,999
- Nearly 10 percent have $200,000 to $299,999
- About 16 percent have $300,000 or more in retirement savings
Among the reasons cited for not saving, about 40 percent said they don’t make enough money to save, and around 25 percent reported they are struggling to pay their bills.
Statistic: 57 percent of Millennials have $10,000 or less saved for retirement
Millennials had the highest percentage of respondents with nothing saved (18 percent). Given they are still in the early stages of their careers, it’s not that surprising. Another 39 percent of Millennials have less than $10,000 saved—but at least they have a longer time horizon to catch up. However, the total percentage among this group that reported nothing, or less than $10,000 saved, dropped significantly from last year and the percentage of this generation with $300,000 or more saved has grown slightly—all encouraging signs for these younger workers.
Baby Boomers, who are now facing retirement, are also facing some challenges in terms of saving for retirement.
Statistic: Although 23 percent of Baby Boomers (55 and over) have saved $300,000 or more, about one-third have less than $10,000 saved
Don’t be a statistic! Start saving for retirement with a self-directed IRA
Whether you’re a younger worker, a mid-career Generation Xer or a Baby Boomer looking to retire now or very soon, there’s time to catch up on your retirement savings. With a self-directed IRA, you could build a more diverse retirement portfolio with alternative assets such as real estate (investment property), commodities (agricultural, energy, livestock), precious metals, private placements, and many more.
You can open and self-direct a Traditional or Roth IRA, a SEP IRA if you are self-employed, or a Solo 401(k). If you are comfortable making your own investment decisions or already know and understand certain non-traditional investments, you can include them in a self-directed IRA. It doesn’t take much to start; you can even roll over or transfer an existing retirement account into a new self-directed plan.
Should Millennials Pay off Student Loans First, Before They Save for Retirement?
With the right planning, millennials can pay off student loans and save for retirement through a self-directed retirement plan
Even though many millennials feel pressured to pay those student loans first, this is not necessarily a chicken-or-egg question. Although retirement is years ahead, saving for it is something that must happen now and continue into the future. It might be wise to consult a financial advisor to work out a plan to pay off student debt AND put money away for retirement at the same time.
Millennials – take advantage of your longer savings horizon
Learning how to balance these long-term and shorter-term priorities is important—and it’s not impossible.
Remember that a longer time horizon for savings is in your favor. Even if you chose to save a small amount every month over 20 years in tandem with making student loan payments, you would still enjoy the growth that your retirement savings would gain while building equity for your future (those loan payments can’t do that for your future). Waiting until you’re done paying off student debt means starting to save for retirement much later and much closer to your retirement age, with less time to play catch up.
An example by TIAA (Teachers Insurance and Annuity Association of America) illustrates the value of starting your retirement savings early. It compares two people who choose to save $30,000, beginning at different ages: Person A starts at age 25, and Person B at age 45. They both save $30,000 within 20 years but because A’s money has a longer time to grow, she ends up with more than three times the amount of money than B.
Meeting with a financial advisor can help you assess what your debt is costing you vs. what you can earn on investments, take your living expenses into account, and factoring in relevant tax issues. This will also help you see what is truly feasible for your unique financial situation, as you and your trusted advisor work out your allocation plan.
Boost those savings through self-direction
Creating a budget that allows for minimum loan payments and small retirement savings can work, and as your career advances and your earnings rise, you can chip away at the loan amount a bit more, while steadily increasing your retirement savings.
If you invest through a self-directed retirement plan, you’ll get the same tax advantages of regular retirement plans and potentially build a more lucrative nest egg through the alternative assets these plans allow. The good news is, it is possible to invest in certain alternative assets without a huge chunk of change and if you start saving early, you’ll be able to do so that much sooner.
For example, private placements into a startup do not always require a lot of money up front, so you could invest in a friend’s new coffee roasting business or robotics firm at an amount and on terms you both agree. You can make a loan to someone and your self-directed IRA will earn the interest on that loan (growing the value of your retirement plan). Or, you can partner up with others to invest in rental property or a Broadway show, with shares for each partner reflective of his/her investment amount.
There are lots of ways to build a diversified retirement portfolio through self-direction—and the professionals at Next Generation can provide lots of helpful information regarding these plans and nontraditional investments. Even better, they provide client education at no cost! Check out our helpful videos to get the basics, use our Starter Kits to open a self-directed IRA, or contact Next Generation for assistance: NewAccounts@NextGenerationTrust.com or 1.888.857.8058.