Reader Story: Saving for Retirement with More Than Mutual Funds
Published on - October 16th, 2011 (by J.D. Roth) This guest post from Randy is part of the “reader stories” feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success — or failure. These stories feature folks from all levels of financial maturity and with all sorts of incomes.
For the past twenty years, I’ve saved a significant percentage of my income due to career growth, semi-frugal living, and not having any offspring. I’m now 55 years old. Because I’ve made some non-traditional choices, I want to share how I’ve grown my wealth.
Each year, I allocated part of my savings to traditional tax-deferred 401(k) and IRA accounts, using mutual funds (stocks) from Fidelity, Janus, Vanguard, etc. The Roth IRA didn’t exist yet, or I made too much money when they did exist. I also allocated a large part of my savings to after-tax, taxable investments, likewise using the same or similar mutual funds.
Lately I’ve been emphasizing after-tax investments (non-Roth, just plain old taxable investments) even more. Why?
- If the investments perform well, capital gains taxes paid on after-tax investments will lower my total long-term tax bill compared to traditional IRAs where all dollars when withdrawn are treated as regular income.
- You can (and I do) own real estate in self-directed IRAs (both traditional and Roth), but owning real estate in an IRA is kind of a pain in the butt. When you do this, the IRS requires that you deal with a third party through a custodial company.
- Having non-Roth, after-tax investments gives you huge flexibility in life to invest in opportunities with much greater upside potential than mutual funds have. My personal examples include funding my own business startups (plural), making sizable down payments on rental properties when they were devalued three years ago, buying subdivision lots in resort areas with cash, and paying off a mortgage on a nice 3400-square-foot home in twelve years.
Obviously you want to use employer matches in 401(k), IRA, and similar programs to their fullest extent. But beyond that, each person should look critically at how she invests the rest. For many people, maxing out tax-deferred investing is best since they don’t have the willpower to invest the remainder and leave it invested. Others who do have willpower but don’t have entrepreneurial tendencies should do the same.
However, for some people — people like me — who have the willpower and the inclination to spend time and energy researching and managing alternative investments, traditional options tend to be highly overrated. If you can make a better return with alternative investments, then that is what you should do.
Unfortunately, both advertising dollars and news-media hype have convinced most Americans to follow a highly overrated route. Why would this be? Because that’s how the financial industry makes its money. There’s no real conspiracy here; it’s just the financial industry trying to obtain and keep customers. When individuals invest in their own businesses or small real-estate transactions, there’s no money being made by the mutual fund companies, the investment banks, the financial advisors, the financial columnists, the financial television show hosts, and so on.
Here’s another aspect of the issue: When you’re in your twenties and thirties, you don’t even realize that you might want these non-401(k), non-IRA dollars available to give you the flexibility in your forties and fifties to try some other ways of investing. Like most people, I kept those after-tax non-Roth dollars in mutual funds for many years, but when the opportunities came to start businesses, buy rental houses, etc., I was ready, willing, and able.
As a final note, one of my subdivision lots (in a self-directed IRA) did lose a great percentage of its value during 2008 and 2009. My solution was to purchase a second nearby lot with IRA money, then have both lots appraised and convert them both to a Roth IRA account at the lower appraised values. By the way, I have the cash in hand to pay the taxes due upon conversion to Roth because not all of my dollars are locked up in IRAs.
Saving for retirement with traditional methods is a fine thing, but it’s not the only way to get rich slowly. If you’re willing to think outside the financial box, you can find other ways to diversify your investments.
GRS is committed to helping our readers save and achieve your financial goals.Savings interest rates may be low, but that’s all the more reason to shop for the best rate.Find the highest savings interest rate from Ally Bank, Capital One 360, Everbank, and more.
This article is about Advanced, Investing, Reader Stories, Retirement
Disclaimer: This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.
Discover is a paid advertiser of this site. Reasonable efforts are made to maintain accurate information. See the Discover online credit card application for full terms and conditions on offers and rewards.
SEARCH FOR RECENT ARTICLES
If I get what you’re saying, you’re recommending diversifying your portfolio to include real estate options?
There are very good reasons to start with and stick with low fee index funds that are passively-managed and match the market rather than trying to beat it. (Since, before fees, 50% of actively managed funds do not beat the market– exactly what is predicted by random guessing, and then there are fees taken out.) Once someone has “enough” of these then branching out into real estate, whether it’s paying down an extant mortgage, investing in real estate funds (REIT), or spending the time and energy actively managing one’s own real estate can be a good idea as it offers some measure of additional diversification.
Starting out with real estate rather than basic index funds severely limits diversification because it is too concentrated on one sector, and if not REIT, it is too concentrated in one geographic location or one property.
Investing in real estate and actively managing it by repairing, managing, land lording etc. also includes a lot of sweat-equity and time, which is similar to working another job (and in fact, many people are employed doing such things for absentee landlords). A person should think about the trade-offs between working these real-estate related jobs vs. other earning opportunities. Perhaps getting a different second job or working harder at the primary job to get a promotion would be more appealing. Perhaps not.
loading....
I don’t think the writer is recommending just real estate. What I think he’s looking at is a “Watch for a great deal” account, though the deal is larger than peanut butter on sale. It could be real estate, it could be starting business, or any other opportunity.
One item I think the author misses, but it may because he assumes the audience knows, is that with a Roth IRA you can withdraw the principal tax free as you have already paid taxes on it. I’d recommend putting the max into the Roth, then focus on non-tax deferred accounts.
My wife and I are in our thirties and do realize we may want to do an alternative investment when we’re older, so we’re putting away 65% net income while on 1 salary and 2 kids.
loading....
Good for you to be able to save! Most people automatically spend more when they have kids.
loading....
As the submitter, I did not recommend real estate over other alternatives. You are certainly correct that being a landlord has challenges (furnace quits working on a winter Saturday night, problems with the A/C and sprinklers in the summer, replacing toilets, having to repaint and carpet). It would depend on how well qualified you feel to start your own business, make a down payment on a rental home close to your own home and manage it yourself, purchase a subdivision lot and hope it appreciates, whatever suits your situation, available cash, time horizon, and risk tolerance. My original submittal stated alternative investments are not for everyone, and that I do use traditional tax-deferred 401(k) and IRA accounts, using mutual funds (stocks) from Fidelity, Janus, Vanguard, etc., and that I convert IRA accounts to Roth IRA accounts. As for getting a second job, that would just make matters worse; I’m trying to invest my excess cash wisely, not work for fewer dollars per hour at a second job and then look for ways to invest even more excess cash. To the next respondent about Roth IRAs, I stated I could not contribute, but I do convert. To the next respondent about not having kids helps, this is true. Currently I donate to the lifestyle of my wife’s kids and college funds of the grandkids, but I agree this is not the same as raising a few kids for 18 years plus college. The trick is living somewhat below your means. There are families with 2 or more children with a gross income of 50k to 80k per year who are able to save money based on their choices, and similar families with a gross income of 200k per year who live paycheck to paycheck.
loading....
I wouldn’t recommend any type of index investing, as a lot of academic research has shown that it is possible to make money with direct investment in stocks and shares. Buying an index means you float up and down on general sentiment.
Also I am wary of real estate. It might have worked in the past but the real estate market in the US and UK is now so damaged, I think it will takes years to recover.
Finally, although the tax rules are different in the UK and US, the basic idea is to shield your income and capital growth as effectively as possible – even if that means not using tax-shielded accounts (as the author describes)
loading....
Most academic research as shown that active investors underperform the market. Further, it has shown that the more active the investor is, the greater the underperformance.
loading....
“Possible” to make money with individual stock picking is not the same thing as likely. For the casual investor the odds of outperforming the market are not good and a portfolio with only a few stocks is going to be more volatile than a fund with hundreds of stocks.
The benefit of index funds is the low management cost ~0.2% compared to actively managed funds ~1% and relatively low taxes due to a buy and hold concept.
loading....
“Also I am wary of real estate. It might have worked in the past but the real estate market in the US and UK is now so damaged, I think it will takes years to recover.”
That’s exactly how I feel about mutual funds. I’m getting very weary of the break-neck ups and downs of the markets that are happening at shorter and shorter intervals. It seems everything is going to hell in a handbasket these days.
FWIW, we’ve got our savings tied up in mutual funds (60/40 equities/dividend funds), real estate (our own and two rentals), and a thriving small business. We’re ready for anything. ::puts on helmet and settles in for a bumpy ride::
loading....
“I’m getting very weary of the break-neck ups and downs of the markets that are happening at shorter and shorter intervals. It seems everything is going to hell in a handbasket these days.”
Unfortunately there is no perfect alternative. Every type of investment has its own risk profile, nothing is certain. The best bet is to have a well diversified portfolio. Then save as much as you can, and more.
loading....
Index funds, if used properly can be a great way to diversify a passive portfolio. Many people don’t have time to actively manage a portfolio of individual stocks.
loading....
I have a feeling this article will get a lot of negativity (and the early comments are proving me right!) but to me this is the BEST article I’ve ever seen on GRS. Randy isn’t suggesting this is necessarily the best approach for everyone, but for someone who’s actively interested in growing wealth and wants to go beyond the standard route, this is great advice.
I’ve been thinking more and more lately about whether the various types of retirement accounts are such a great deal. Sure they can offer tax advantages, but they are so limiting and also are meant to benefit in retirement, so generally you won’t see any benefit until your 60s. Randy’s strategy allows for wealth and income TODAY to the point where retirement could easily be a decision made without considering finances. In my experience, Randy is on the path to true wealth by not following the traditional rules.
loading....
I understood very little of this article. Can you live in your roth Ira owned house?
loading....
No. Can you pay for groceries with your Roth-IRA owned index funds? Of course not.
loading....
That is not the same thing. Groceries are disposable. My house has value. I don’t understand the whole real estate part of an Ira. I think it is a legit question- not a sarcastic one.
loading....
Sorry, I didn’t mean to sound sarcastic. I thought it was evident that I meant a rental house, not a personal residence. With a Roth IRA you can invest in properties, but there are rules against using the properties for personal use (i.e., no personal residence and no vacation residence in a Roth IRA).
Similarly, in a Roth IRA you can invest in pretty much anything else that has value, but there are rules against things that can be used personally. For example, you can’t invest in artwork (except maybe under certain guidelines) because then people would only decorate their house through IRAs.
loading....
I don’t understand this article. What is the author suggesting? I *think* the point is to not invest only in 401ks and IRAs but keep liquid funds for other investment opportunities?
loading....
One paragraph sums it up: “However, for some people — people like me — who have the willpower and the inclination to spend time and energy researching and managing alternative investments, traditional options tend to be highly overrated. If you can make a better return with alternative investments, then that is what you should do.”
loading....
Ok, so I guess that is the take-away then. It would have been nice to hear some specifics. I am learning more from reading the comments to this article than the article itself.
loading....
Admittedly I am left a bit puzzled by this article as well. I’m not sure what to take away from it. I get the impression that the author is knowledgeable and has developed a financial path that works well for him … and he is trying to share it with others … but it feels more like a teaser than practical advice with steps we can realistically follow. I have read a bunch of books and blogs on personal finance … and yet I have never come across that particular suggestion about holding real estate in an IRA. I would have liked more insight from the author on how he learned about these nontraditional opportunities, whether he had mentorship or merely figured things out through trial and error (with successes and failures), etc.
loading....
Use a web search engine for “self directed IRA” (works for traditional and Roth), and spend a few hours viewing the advice, and websites of the companies who act as custodians. I ended up using Sterling Trust Company as my custodian. Their fees are reasonable, but I have had to spend a bunch of time babysitting them through quit claim deed submittals and other transactions. I have only used an IRA custodian for one rental condo and a couple of subdivision lots. Friends have used them for partial ownership in small businesses. If you are not totally comfortable with the custodian’s explanations and forms, be sure to consult with an accountant and/or attorney before committing to anything. Related to starting my own businesses, I was laid off (1999), but since I had non-IRA investments, I knew I could sell mutual funds to pay my mortgage if I needed to. This provided incredible flexibility to seek my own customers (as an environmental consultant – but for you, whatever your education and experience dictates). My income only increased and I never had to liquidate any funds, but knowing that I could is what made all the difference.
loading....
The biggest problem with this article is that it endorses a returns-chasing mentality that can be dangerous. The author’s argument that “if one can make a better return, one should” is backwards personal finance. Instead, one should set a goal (“in order to retire I need $X by a certain date”) and then seek out investments appropriate for that plan. A slush fund for alternative investments is nice to have, but is difficult to use appropriately outside of the context of a well defined plan.
loading....
That’s what I like about this article so much…it finally breaks free from the mold that personal finance blogs seem to be locked into. There are tons of ways to approach personal finance, and one of those approaches is what might be called “the entrepreneurship model.” There’s a little more risk but the potential for a lot more reward. And truthfully, there’s a lot more CONTROL of that risk than there is when you invest in a mutual fund, index fund, etc. When you buy a stock, you have NO control over what happens to that stock price. If you buy a rental property, there are many aspects of that investment you can control which go a long way toward the success or failure of that investment.
loading....
I disagree that it is a returns chasing strategy. It’s simply a strategy to allow one to invest their IRA money in anything (business idea, real estate, mutual funds, etc) instead of just mutual funds.
loading....
To me, the allegation of chasing returns implies following the crowd after an asset run up. I’m talking about buying low, whether an it is an undervalued rental house or starting a small business (in your field of expertise) with little startup cost or with co-investors. The context of the well defined plan is, keep some of your money in non tax deferred low cost (indexed or sector) mutual funds, then be able to seize an opportunity rather than let is pass you by due to lack of available funds. Having the non tax deferred cash is also a big benefit if a layoff occurs, large medical bills arrive, you need a new roof, etc.
loading....
I like it. I think that this reader emphasizes the importance of traditional ways to save for retirement, while also emphasizing the importance of having money available to invest in great opportunities that arise.
loading....
If you own a house, you have plenty of exposure to real estate — plus managing real estate is a headache.
The bulk of your assets ought to be in stocks, commodities, and, if real rates ever go positive, bonds.
There are places for taxable accounts. They are great for harvesting tax losses. But most people ought to max out Roths, 401(k)s, and IRAs first, then put extra savings into taxable accounts.
loading....
I had to laugh because the biggest path to wealth was listed in one phrase, “no offspring.”
Fine, if that is what you choose, because it will sure make a big difference in your bottom line.
loading....
Currently I donate to the lifestyle of my wife’s kids and college funds of the grandkids, but I agree this is not the same as raising a few kids for 18 years plus college. The trick is living somewhat below your means. There are families with 2 or more children with a gross income of 50k to 80k per year who are able to save money based on their choices, and similar families with a gross income of 200k per year who live paycheck to paycheck.
loading....
I think the key point here is that you don’t have to rely on mutual funds alone for retirement savings. Most people put the majority of their retirement savings into mutual funds or index funds.
They aren’t saying to avoid 401k or IRA exactly. They do say to utilize 401k up to a match which of course makes sense. At one point they also do mention a ‘self directed IRA’ which is a special kind of IRA that lets you invest in things like real estate investments.
loading....
Nice article. Thanks for contributing! I really appreciate your statement that in your 20′s and 30′s you don’t even have an inkling of the opportunities available to you in your 40′s and 50′s. Which is a shame because at that point you may have all your money tied up and unavailable when you figure it out. Thanks for your perspective and ideas.
loading....
This is a really interesting take on saving for retirement. I am 29 and am not able to save through a 401-k at work for another 18 months before I become eligible, so I am maxing out my roth ira. I feel like I should be saving more than 5k a year for retirement, however, but am not sure what my other options are since I am not eligible for a 401-k through work. Complicating this is my 130k in student loans at 7.6%, which I wonder if I should just pay off before worrying about saving more than 5k per year towards retirement.
loading....
In the current market 7.6% (even if it is pre-tax depending on your income) is a pretty fair return. In your shoes I would very seriously be considering a focus on student loan reduction rather than retirement savings.
loading....
I mostly agree with Andrew (below). Suze Orman would too. Once you have a savings or money market account with (depending on your situation) possibly 6 months or more of living expenses and maybe more for car repairs, etc., go to work aggressively on the student loan after you max out the Roth IRA. When the student loan is paid off, save the monthly payments and don’t increase your discretionary spending.
loading....
I wish GRS would publish more “think outside the box” articles like Randy’s! Whether or not his suggestions work, I think these type of articles challenge us to think about all the possibilities that lie beyond the traditional options. For example:
Everyone manages risks differently. Many (not all) baby-boomers manage risk by sticking with the same employer for thirty years or more. They develop expertise in one area and form strong professional relationships.
While that might be considered job security, an alternative definition might be “the confidence in your own ability to provide valuable service across a broad array of sectors”. If you get laid off (which is obviously happening to lots of folks), you could fund your own startup or move into a freelance career. THAT seems more secure to me, and I think our country’s high school and college students are already starting to realize this dramatic shift…
In order to manage risk effectively, you have to process new information. I applaud Randy for sharing his endeavors. Thanks for the read!
~Nick
loading....
I think most of the people are not as conscious about their financial future as you were when you were young.And not having kids also played a big role in your financial success because nowadays for kids specially for their college parents have to spend a lot of money.But anyway congratulations for managing your finances in such a good manner
loading....
Good to see a different point of view, and a timely article for me as it comes just as I have begun thinking about alternatives to standard retirement vehicles.
loading....
I have to agree with some of the previous posters. This article feels like a run of the mill “get rich quick” sales pitch. It’s focusing entirely on the reward with no real discussion of the risk involved. The author may have intended well but I can’t imagine these suggestions will benefit many readers.
loading....
90% of the articles on this site appeal only to a small subset of readers. It’s still useful to the other 10%.
loading....
I was happy to see that I am not the only one with questions about using IRAs in certain situations. I am in the borderline too high income for a Roth and the putting money in a tradional IRA only saves on taxes if the capital gains taxes turns out to be higher than my income taxes after I draw from the fund. How am I supposed to know my what my income tax rate is going to be 30 yrs from now?
I found the real estate investment advice a little too pat and brief to be of use. Someone already invovled in real estate/property management might be able to add this as a side job and make better returns than tradional investments, but the vast majority of us lack the knowledge and/or time. I am better off using mutual funds and picking up extra shifts to boost income.
loading....
If your income is too high to make regular Roth contributions, you may want to look into the “back door Roth” option: http://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html
loading....
There seems to be some misunderstanding about traditional IRA’s.
The whole point of them is that you *deduct* income tax on the year(s) that you put the money in, and only pay that income tax on the year(s) that you take the money out. In the meantime, the money grows *tax-free*. In terms of net worth, it has nothing to do with whether your income tax rate is higher than the capital gains rate; putting money in a traditional IRA is tax-advantaged compared to leaving money in a plain investment account, period.
To put it another way, for a normal investment account, you’re paying both income tax (when you first make the money you’re putting in) *and* capital gains tax; in a traditional IRA, you’re *only* paying income tax. This is a win no matter which way you slice it, and it’s an even bigger win when you consider the large dollar amounts and long time span that retirement accounts generally deal with.
loading....
Except for the fact that if I had not had the comfort level of non tax deferred assets as a backup, I would have sought employment in 1999 instead of starting my own businesses, doubling my income, turning my commute time to zero, working about the same number of hours per week but at my convenience, lowering my stress and blood pressure a bunch, having the time to find decent real estate investments that on the average I believe will outperform mutual funds, etc. My original post clearly stated this is not for everybody.
loading....
So how did these alternative investments perform compared with index funds?
What percentage of his assets are in the non-traditional investments?
How long has he been investing this way?
How much time does he spend managing his non-traditional investments?
loading....
Having existing non tax deferred funds, not worrying about paying bills, that was huge because it enabled me to work part time for my existing contacts while building a successful small business (in my case environmental consulting, in your case could be anything). The returns very much outperformed index funds (I have a bunch of them too). I also dabble in real estate – so far better on average than index funds, but I have lost money on a couple of the subdivision lots and I am still holding them. Remember that you won’t know you want access to such funds until the event in your life or the opportunity arises. Your next question, over 50 percent of my assets are in non-traditional investments. I am 55. In part, I began investing this way at age 35, but at that time it was just putting some of my after tax money into mutual funds. The business and real estate activity began at age 45. How much time do I spend? The small business time I don’t count because I’d have to be working anyway, and the income it generates is double what an employer would pay me. As for two rental houses, lots, IRA owned lots, and a Roth IRA owned condo, more time than I’d like, but I’d guess average of 15hours per month.
loading....
I enjoyed this article, but would like a lot more detail. It’s a good executive summary though. I’m in my thirty’s, I max out my 401k and have invested in real estate. I also have a modest amount saved in a taxable account (index funds and a few blue chip stocks). The last ten years haven’t been great in the stock market and I’ve been evaluating putting more of my taxable account into more real estate and/or a business that my wife is looking into.
Right or wrong, my main goal with real estate is to create a option in the future if I would want to leave my job (or if I’m laid off, etc.) I’ve always felt that I don’t really want to golf or watch TV all day when I retire, but would really enjoy being able to spend my time on 3 or 4 different income producing activities. That is my reason for investing into real estate anyway.
Would love a follow up article on the self directed IRA, allocation between stocks, real estate etc., and any other lessons learned that you think your 30 year old self should have known. Thanks for the article.
loading....
All in all, I’m glad I took the route I did, and on average, it has worked well. Research your wife’s new business carefully. I did extremely well in two, lost tens of 1000s in a third, am currently co-investing in a fourth. I can only speak for myself when I say subdivision lots are a crap shoot, and for rental houses, we planned on a 20% down payment at least, houses about 1,700 square feet, 2 car garages, 10 or so years old, decent but not expensive neighborhoods, make sure the local rents will provide enough excess to be saved for eventual repairs including appliances, new furnace, A/C, roof someday. I talked about self directed IRAs in a reply above. As for allocation between stocks, real estate etc., I’m not qualified to advise you. I just did what suited my skills, opportunities, and risk tolerance. You could try consulting a couple of financial planners (but I always wonder, if they are that smart, why are they working for a living)? The most important lesson is not the subject of my post; it would be pay yourself first and live below your means.
loading....
J.D.,
I’m a long time reader that has taken a break for the last 6 months. I wanted to let you know I noticed a rather large SEO problem with the site. When you page through the site, the page name is set to the first blog post on the page. For example, on http://www.getrichslowly.org/blog/page/2/, the first post is currently “Got the Urge to Splurge? Use These Strategies to Fight It (or Not)” the page title is the same. You can get penalized for having duplicate page titles and can confuse Google. Google won’t be sure to rank http://www.getrichslowly.org/blog/page/2/ or http://www.getrichslowly.org/blog/2011/10/11/got-the-urge-to-splurge-use-these-strategies-to-fight-it-or-not/. This is potentially a large problem that should be relatively simple to fix.
loading....
I took the point of the article to be to explore diversification of assets beyond index and mutual funds.
My husband and I are both self-employed and have self-directed traditional IRAs and self-directed Roths. Currently, it is all invested in mutual funds. Earlier this year I spent some time researching adding real estate to our IRA portfolio. I do not have the time to commit to doing that kind of investing right now, but in a few years, I might. I think the author does a good job of encouraging readers to think outside the box when it comes to diversification.
loading....
I own a lot of real estate, and have briefly looked into investing in real estate through the self directed IRA option. It just seems too cumbersome , and like you side, a pain in the butt..
loading....
Good article which says there is more than one way of doing thing. As in life, there is no one single approach that fits all. It is suggested that one should go to school, college and then earn. Steve Jobs, Bill Gates are examples of college dropouts who made big.
Yes one can become rich slowly by looking for avenues beyond mutual funds-stocks, real estate, starting a business. One needs to find what suits one best.
Whatever one chooses one needs to start and start early for compounding helps and Albert Einstein has said “Compounding is the 8th wonder of the world”
loading....
great story! thanks for sharing your perspective and the opportunities that have worked for you. I too am sick of the mutual fund peddling. I’m glad that GRS is putting out more writing on alternative investment strategies for those of us who are ready for it. I’d like to see a follow up post from Randy with more details and information about the tactics and tools that have helped him make good investment decisions. Thanks!
loading....
The story is great – very detailed and specific. The author goes into the intrinsic details of the investing.
However we are missing the real figures -what are they? I am not quite sure what is the “significant percentage” and why being 55 s/he invest in the Stocks, not bonds….
I think every little helps on your way to financial independence, but some numbers would be useful.
loading....
Please see the other replies I posted tonight that provide some insight into my personal decisions. Beyond that, each investor has to decide on asset allocation. My comfort level may seem inappropriate to you.
loading....
I completely agree with the idea of creating buckets of qualified and non qualified money. And while I believe in diversified portfolio that exclusively consists of mutual funds (approx 80% index funds)I also like the options that those different buckets present.
If nothing else, when one reaches retirement age, he/she can orchestrate his/her tax liability by withdrawing from the bucket that makes the most sense tax wise. As a former financial planner, I cannot count the number of clients who didn’t need and didn’t want to take their RMD. The three buckets/three legged stool approach – traditional IRA, Roth IRA, non-qualified investments can minimize that problem somewhat.
loading....
Not to be tinfoil hat-ish, but after-tax investments would also be less tempting to a desperate government or irate populace.
loading....
I like hearing about investment alternatives because I have made jack all gains by investing regularly/holding a diversified mix of ETFs/mutual funds for the last 15 years.
loading....
“I have made jack all gains by investing regularly/holding a diversified mix of ETFs/mutual funds for the last 15 years.”
That’s the nature of risk, sometimes it shows up. That doesn’t mean the alternatives are less risky. “Jack all gains” for 15 years may be a sign that you need a more diversified portfolio, but then again, most everything has been taking a beating for some time.
loading....
I enjoyed this article and would also love to hear more about self directed IRA’s. I have looked into them, but really don’t know where to start including picking out the custodial 3rd party.
loading....
Use a web search engine for “self directed IRA” (works for traditional and Roth), and spend a few hours viewing the advice, and websites of the companies who act as custodians. I ended up using Sterling Trust Company as my custodian. Their fees are reasonable, but I have had to spend a bunch of time babysitting them through quit claim deed submittals and other transactions. I have only used an IRA custodian for one rental condo and a couple of subdivision lots. Friends have used them for partial ownership in small businesses. If you are not totally comfortable with the custodian’s explanations and forms, be sure to consult with an accountant and/or attorney before committing to anything.
loading....
Randy, thank you for the additional info. I have looked at Sterling before and just didn’t stick with it. This article has started me thinking in that direction again! Would love to see more guest blogs from you in the future!
loading....
You’re making a solid case for a multi-layered retirement plan and that’s the best approach. Maximize 401k, 403b, Roth and traditional IRA contributions, but also look to non-tax sheltered investments including real estate.
One area you didn’t mention was investing in businesses. It may be possible to invest some money in passive business ventures that not only would provide for additional income during retirement, but would also provide earned income that would permit additional retirement savings after retirement.
loading....
Good question. As for investing in “passive business ventures”, to me that implies you are not the subject matter expert in the selected business, you are not going to spend a significant amount of time participating, and you are likely going to own less than 50% of the business. Possibly a friend or relative is the expert. Be careful. For the one business venture of mine that lost money (tens of 1000s), I was not the subject matter expert. I was even 50% owner and a participating business manager. I did learn some important lessons that I can apply to future business situations. If you will be an investor with less than 50% ownership, you should consult with an attorney regarding the company’s bylaws, operating agreement, or similar documents. There must be a limit on salaries, bonuses, stock options of the shareholders. It is easy for majority shareholders to siphon money out of the company, then tell the minority shareholders there are no profits, or even losses. There are other games the majority owners can play, so a few hours of an attorney’s time would be protective for you.
loading....
The only trust company that I saw that specialized in self-directed IRAs was Pensco trust. Does anyone have anything else they would recommend looking into?
loading....
I discussed my experiences with Sterling Trust in one of my replies above.
loading....
I am in much the same situation as Randy. I have the usual retirement accounts, but I hold significant liquid assets outside those retirement accounts. This arrangement gives me a whole lot more flexibility in what I can invest in, since there are good opportunities out there that are definitely not allowed in retirement accounts, such as small businesses, yours or someone else’s.
Index funds are a great investment for at least part of almost any portfolio and are a really good place to start investing. However, for those who know more and are able to accept more risk, there are a lot of other opportunities out there. There’s no shortage of ideas for a DIY business or people out there you already know who have a great idea, a solid plan, and a loan rejection from a bank.
loading....
nice article. Liquid assets always add flexibility. It is better to have these invested and run the risk of taking a small loss than keeping them in money market accounts and losing out on huge upswings.
loading....