Investment Information

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Traditionally, custodians control IRA investments and may not always promote all the investments approved by the IRS. They have created the notion that stocks, bonds, CDs, annuities and mutual funds are the only investment options available. Over the past few years, there has been an increasing awareness about the use and advantages of self directed IRA accounts. Many savvy investors have begun to move away from the volatile stock market, and divest into alternative investment available through a self directed IRA.

Self directed IRA accounts allow individuals to enjoy diversified investments not readily available through most custodians. Almost any investment in allowed except: collectibles (such as coins, artworks, stamps, etc.) and life insurance contracts. If your financial planner does not offer any of the investment options that are allowed by the IRS, it may mean the time has come to approach another financial planner more familiar with self directed IRA accounts.

The Self Directed IRA as a wealth builder

The self directed IRA is an effective tool that you can use to build your wealth while putting total control in your hands. One of the reasons why your financial planner may not have explored all the investment opportunities available with an SDIRA is that their services may no longer be required, resulting in loss of revenue to them from your retirement account. The latest IRS rules make it easy for you to invest your IRA account in alternative investments. You can put money into commercial and residential real estate IRAs, buy a business entity, loan your money for mortgages, notes, tax liens and foreclosed properties. You can be the manager of your property. If you do not have all the funds to invest in real estate, you can opt for an IRA loan to leverage your investment. A real estate loan obtained with your self directed IRA must be a non recourse loan.

If you have not heard of a self directed IRA before, it is possible that your financial planner does not deal with all the investment options that are allowed. For example, if your financial planner is a bank, your investment options are limited primarily to CDs. If it is a brokerage firm, you can only invest in stocks and bonds. Moreover, since your financial planner more or less manages your entire retirement account, they may not want to present you with investment options from which they cannot earn revenue. After all, their services are offered for a fee. To protect their fees, they may withhold information, offer very sketchy details, or discourage any alternative investments altogether.

It is also likely that your current financial planner assumes that you don’t want to control your own retirement investments, simply because its been implied it by them managing it for you. Some people actually prefer to status quo their decision-making and leave it to an expert. In fact, many people are unaware that they can invest in real estate with their IRA. Those that want to, however, do make their own investment choices and enjoy tangible returns. Real estate investments make a good choice particularly in combination with an IRA loan which, in addition to protecting your various IRA assets, also indemnifies you personally from all liability. You can also use your IRA loan to refinance a property you own free and clear in your self directed IRA. Thus, a self directed IRA, potentially allows for larger and more profitable investment options, compared to traditional investments.

If you love doing what you’re doing you’ll most likely never want to retire. It’s often said that most of the wealthiest people in the world still work in their own companies not because they have to but because they want to and enjoy it. However, I bet you they all have retirement plans folded away neatly in their back pockets.

For many people their job-description becomes their self-description and so when they retire from work they can feel worthless and wither away fast. To cap things off, many retirees at 65 die within 2 years of retiring. Jeez, what an anti-climax! It’s no wonder people don’t bother planning their retirement!

No Job, No Stress, No Pay!

A popular rule-of-thumb claims you need roughly 70% of your pre-retirement income (90% if you wish to maintain your pre-retirement standard of living). Work-related expenses will decrease whilst healthcare, leisure-related expenses increase. This assumes you’re in relatively good health and medical care costs are modest. If your health is poor your healthcare expenses will escalate.

Financial security during retirement is probably priority no. 1 for most people. To live securely and comfortably in retirement for many people means at the very least generating sufficient income passively by means of some retirement savings plan or other financial assets to allow them to live according to their usual standard of living.

There are 4 typical sources of retirement income:

• Social security benefits
• Employer-sponsored retirement plans
• Post-retirement employment income
• Personal savings and investments

Whilst you may be diligently putting away for your retirement, the real challenge is to know your retirement income needs way before you ever want to retire. Try one on the many retirement income calculators available online to work this out.

When calculating the expenses you will have in retirement, keep in mind that they are in today’s dollars. To get a better idea of what they will be when you are ready to retire, you should adjust them for inflation. A current income need of $20,000 per year adjusted by 4% inflation year on year translates to a requirement of $43,800 per year 20 years later.

Cat Food or Caviar!?

A standard employer-sponsored retirement savings plan such as a 401(k) is the mainstay in most financial retirement plans. Individuals can utilise a standard IRA or Roth IRA also. Many self-employed people opt for a Self-Directed 401(k). Relying on a standard retirement savings plans will prove unsatisfactory as it generally will fall way short of your retirement income needs. However, faced with a choice of having a standard retirement savings plan (e.g. a 401(k), standard and non-standard IRAs etc.) versus having no retirement savings plan at all, I would definitely prefer to have even a standard 10% of my earnings invested in standard retirement plan than in nothing at all. If nothing else it’s a good habit to “save and invest” a % of your income. However, unless you are putting away large chunks of cash into your retirement plan, it alone is probably not going to give you more than a lower-middle class lifestyle during your retirement.

Typically, if your retirement income needs are modest, social security benefits may provide 20-30% of your retirement income whilst employee-sponsored retirement plans may provide 20%. Therefore, it is your personal savings and investment strategies that will be the key differentiator between you living off cat food or caviar!

Till now most investors used to focus purely on making investments into various instruments, like Mutual Funds, Insurance, Gold, etc. This was hardly ever backed by a thought on financial planning. Now, however, a lot of them seek to create a financial plan which guides them on how much to save and helps them select the right investment instrument to channelise their savings in. This is done after a detailed study of their existing investments, income, expenses and risk profile.

Financial planning has become quite a buzzword today.

In the last couple of years and especially after SEBI banned entry loads in mutual funds almost a year ago, there has been a sea change in the perception about financial planning, both in the minds of investors as well as service providers. And thanks to the media for the awareness created, as most investors now seem to understand the concept (although vaguely).

Today, almost everyone in the financial services industry claims to do financial planning.

In fact, major banks, brokers and distributors of financial products have opened departments or divisions which deal specifically with financial planning.

So, let us understand the various kinds of service providers who are involved in this activity:

Banks: They are the most ubiquitous ones. They offer you everything from opening a bank account to remittances, to investments and now they help you get a financial plan as well.

Brokers/Distributors: They offer stocks, mutual funds, insurance, post office schemes, fixed income products etc. Your neighbourhood mutual fund distributor, insurance agent, larger national level private distributors form a part of this segment.

The larger focus of banks and distributors is to sell (and not advise) you financial products, so that they can earn commissions on those products. Infact, they have been instances of mis-selling, whereby the broker protects his interest (through commissions) first rather than the client’s (wealth creation).Investors still flock to them. Why? Because you as investors have fallen in love with one stop solution shop – this is encouraging them to portray themselves as financial planner. It may add a lot of value to the perception of investors, but the focus on your financial health is not much. Most often, this service is offered for free since you are expected to buy financial products from them. Financial planning is not their focus area. It is a means to achieve their targets of selling financial products and earning commissions.

Pure Fee based planners: There were not many pure fee based financial planners in the country a couple of years ago. But since then many individuals and companies have emerged on the horizon now, especially in the larger cities where the awareness of the concept is better. They are now quite serious about pursuing the business model of offering pure fee based financial planning services. Well, some of them are well known and others are not. Thanks to the awareness of financial planning education, most of them have also acquired the Certified Financial Planner (CFP) tag.

Service providers offering both services: As is evident, these service providers offer financial planning as well as distribute financial products like mutual funds, insurance, stocks, etc. Financial planning becomes a vehicle which they use to distribute their products. A lot of brokerage houses have converted themselves into planners.

Charge for Financial Planning:

The financial planning industry is yet to come to terms completely with charging for the service. While some who offer only planning services charge a fee which can vary from Rs. 5,000 to Rs. 50,000 and sometimes more, there are others who charge as a percentage of the assets you invest through them which typically varies from 1% to 2.5%. While some others have a mixed fee model and they charge you a flat fee for a plan and then an investment fee on your investments.