Forget About Social Security in Your Financial Plan; Focus on a Self-Directed IRA Instead.
In our last post, “Are You Headed for a Retirement Income Crisis?” we shared some alarming news about the forecasted retirement economic crisis due to hefty cuts in Social Security benefits planned for 2034. That sounds like a distant problem, but someone who is 65 today could very well be dealing with this issue in his or her later years. Millions of retirees depend on Social Security for more than half of their retirement income—and these Americans could be dealing with significant financial hardship due to lack of savings.
While the amount you will get in Social Security benefits when you retire is generally part of many people’s financial plan, estimating those benefits is often difficult due to the variables that go into the calculation for monthly payouts. Factors include your age at which you file to collect, and whether you are claiming benefits before your full retirement age. There are strategies to consider depending on your marital status as well. And then there’s the fact that 18 years from now, those calculations will look vastly different when the cuts take effect.
Here’s a different approach to funding your retirement: close your eyes and make believe there is no Social Security in your future. Try to determine how much you need to save in your retirement plan to fund a comfortable future—one in which whatever you do collect from Social Security will be a nice supplement to your retirement income—rather than the majority of it.
Build more security with a self-directed IRA
Once you and your financial advisor have come up with the amount of money you’ll need to cover your living expenses and support a comfortable retirement, it’s time to think about how you’ll meet those savings goals. Depending on your age, you may need to be more aggressive about the amount you put into your retirement plan every month; if you are in that pre-retirement age range of 50 and over, you should be aware of the catch-up contribution amount.
Here’s another retirement tip: rather than rely solely on the stock market for your investments, open a self-directed IRA and invest in alternative, non-publicly traded assets. Self-direction can be a great way to ramp up your retirement savings with nontraditional investments you already know and understand. Self-direction enables investors to include many different kinds of assets not allowed in typical plans, so you can still diversify your retirement portfolio without worrying as much about Social Security.
For example, if you’re a real estate investor you could include real property in your self-directed IRA. Maybe you already invest in natural resources or have the opportunity to make a private equity investment. These and so many other types of alternative assets can be part of your self-directed retirement portfolio—and those Social Security checks (which are likely to be much smaller in the future) can go towards something fun.
Ready to build a future that doesn’t focus solely on Social Security benefits? Learn more about self-directed IRAs in our whitepaper library, open an account using our starter kits, or contact Next Generation for answers to your questions: 1.888.857.8058 or NewAccounts@NextGenerationTrust.com.
Are You Headed for a Retirement Income Crisis?
Financial advisor Ric Edelman (founder of Edelman Financial Services) was on Capitol Hill this summer with an urgent message for lawmakers: beware the retirement income crisis that will hit in 14 years. He was speaking at an event called “Planning for 75 at 25: Saving for Retirement and How Policy Affects You.” The event was held by the Funding Our Future Coalition, an organization launched by Edelman and the Bipartisan Policy Center in February.
His bottom line was this:
- The country is facing an enormous challenge regarding Social Security and Medicare
- Under current law—which was passed 35 years ago in 1983—Social Security retirement benefits will be cut 23 percent across the board starting in 2034. This cut will be for all retires equally, regardless of financial status.
- This action will lead to millions of retirees facing an economic crisis, because more than half of today’s retirees rely on Social Security for more than half of their income.
- Congress will raise taxes significantly in order to shore up cash reserves to avoid this from happening, creating a massive burden on younger workers.
- Two-thirds of Americans aged 21 to 32 have nothing saved for retirement.
Edelman added that many Americans—including sitting members of Congress who came into office long after the law was passed—are unaware of this legislation.
Open a self-directed IRA and head away from a retirement crisis
As many savvy investors already know, saving for retirement with a self-directed IRA is one way to avoid the forecasted economic crisis during one’s retirement years. By building a more diverse portfolio with alternative assets, and by making all your own investment decisions, you’re in control of your future. Whether you include real estate, precious metals, private equity, commodities, or other nontraditional investments allowed in a self-directed IRA, you can grow your retirement savings with the same tax advantages of regular retirement plans, but with far more investing options.
You can read up on self-direction as a retirement strategy in our whitepaper library and our handy starter kits will help you open an account. The team at Next Generation is here to answer any questions you have about self-directed IRAs; contact us at 1.888.857.8058 or NewAccounts@NextGenerationTrust.com.
Retirement Savings Fall Short of What We’ll Really Need
When we’re working, we are acutely aware of how our income matches up against our cost of living. But what will that cost of living be when you’re no longer working? If you’re planning on retiring, it’s more than you think and you may not be as prepared as you need to be. In fact, according to Northwestern Mutual’s 2018 Planning & Progress Study, a third of Americans have saved less than $5,000. That means those US pre-retirees have only enough in savings to last a few months if they had to retire tomorrow. Could you manage that?
Why the shortfall in retirement savings?
One reason many people haven’t saved enough is that they’ve underestimated the amount of money they’ll need for retirement.
A new Schroders study states that pre-retirees aged 55 and older underestimate this amount by a sizable margin and to make that worse, they have not saved enough even for that underestimated figure:
- Americans estimate that living expenses will eat up about 32 percent of their income when that figure is really 54 percent.
- They anticipate they will need 76 percent of their current salary in retirement but have only saved 63 percent on average—a 13 percent gap.
Plus, Gallup reports that some Americans may be betting that they can rely on Social Security benefits to cover living expenses. However, if Congress doesn’t reinforce the Social Security Trust Fund, it could be insolvent by 2034—which does not bode well for people at age 50, approaching retirement age.
A third retirement expense gap – healthcare costs
In addition to misjudging the cost of living and not saving the funds they’ll need to cover their day-to-day expenses, many pre-retirees don’t appreciate how much of their Social Security benefits could wind up going to healthcare costs. A Nationwide survey notes that a retiree who claimed Social Security at 62 can expect to spend about 64 percent of their Social Security income on health expenditures. That does not leave much for other daily living expenses and the leisure activities so many people look forward to when they stop working.
Self-direct your savings solution
What’s the solution to ensuring that your retirement doesn’t get derailed by miscalculating expenses? For many investors, it could be a self-directed IRA.
With a self-directed IRA, you can take control of your future, bolstering your retirement nest egg by investing in alternative assets that you know, understand, and may already be investing in outside of your existing retirement plans.
Don’t underestimate the cost of living in retirement – it will only continue to rise – and don’t underestimate the value of self-direction. You can open a new account with a relatively small amount of money, enjoy all the same tax advantages of regular plans, and build a more diverse portfolio that you control. For savvy investors who are comfortable making their own investment decisions, a self-directed IRA can often be the difference between a short fall and no fall.
Retirement Challenges for Younger Baby Boomers
Older baby boomers began reaching full retirement age in 2010 and may have positioned themselves for a more comfortable retirement than younger boomers. Younger baby boomers (individuals currently aged 53 to 62) have begun to face serious challenges related to their retirement finances, for several reasons:
They are less likely to have a traditional pension than older Americans, in large part due to the dramatic decline in defined benefit pensions.
According to the Center for Retirement Research at Boston College, 88 percent of all private-sector employees had a pension in 1975 compared to only 33 percent today. Even for those with pensions, many plans were frozen after 2006 when the Pension Protection Act went into effect.
Family-related financial issues.
For people in their 50s and early 60s who are helping cover their children’s college tuition costs, those expenses are higher than ever. According to the College Board, tuition, fees, and room and board for one year at a private, nonprofit four-year institution is now $46,950; it was $29,530 in 1997 (adjusted for inflation). For state schools, these expenses have risen in the past 20 years from $11,860 to $20,770 per year.
The “boomerang” generation of college grads came back to live at home as they try to establish careers and help to pay off student debt. Many are being carried on their parents’ health insurance plans through age 26, which curtails their parents’ ability to save.
An aging baby boomer generation suggests an increase in the number of aging parents who may need help meeting the costs of long-term care, for a longer time period.
The lingering effects of the economic downturn and Great Recession, including lower stock returns than in prior generations.
Less security around Social Security.
Boomer couples born before Jan. 2, 1954 can still file a restricted application for Social Security benefits, meaning that spouses can claim spousal Social Security benefits only, while allowing their own benefits to grow 8 percent annually until they hit age 70. Those born after that date cannot do so.
The age to get full benefits is creeping up. Americans born from 1960 on will have to wait until age 67 for full benefits.
The Social Security trust fund is projected to run out of funds in 2035, when the youngest boomers turn 70 years old. And in other bad news, Medicare’s Hospital Insurance Trust fund is projected to be exhausted by 2029, when they turn 65.
Adding salt to the retirement finance wound is the national savings crisis.
We have written many times in the past about the lack of savings by Americans in general and it becomes critical for those nearing retirement age.
Boost your prospects with a self-directed retirement plan
While self-directing your retirement plan won’t bring back a healthier Social Security trust fund or secure Medicare’s future, it is a way to develop a more diversified retirement portfolio that can help you rise to the challenges faced by those who are trying to save for their post-employment years. These tax-advantaged plans may include many types of nontraditional investments that are not allowed in traditional plans, based on what the investor already knows and understands. These non-publicly traded alternative assets can be a great way to build retirement wealth without relying on the stocks, bonds, and mutual funds offered by many banks, brokerage houses, and typical workplace employee benefit plans.
Are you already a savvy real estate investor who invests in rental properties? Would you like to arrange a loan through your IRA, with terms you and the borrower set? How about including investments in startup companies in your plan? It’s all possible through self-direction within a retirement plan – Traditional or Roth IRA, SEP IRA, SIMPLE IRA, or solo(k) plan), Coverdell Education Savings Account, or a health savings account (HSA) – at Next Generation Trust Company. If you’re someone who is comfortable doing the necessary research and making your own investment decisions, self-direction could be the strategy you never knew you needed.
Want to know more? You can read up on self-direction as a retirement wealth-building strategy on our website or visit our YouTube channel for informative videos that will help get you started. You can always call us with your questions and immediately speak to a live person for assistance at 1-888-857-8058, or email us at Info@NextGenerationTrust.com.