As You Pay Down Debt, Don’t Forget About Retirement Savings, Too

Founder/CEO of Next Generation Trust Company, a trust company specializing in custodial & administrative services for Self-Directed IRAs.

Younger workers who won’t retire anytime soon still have plenty of time to save for their golden years. Word to the wise: Don’t get stuck with debt going into retirement, as many retirees struggle with this.

The Employee Benefit Research Institute’s Spending in Retirement survey revealed that feeling satisfied and secure in retirement is related to having sources of guaranteed income, low debt, a strategy for spending their retirement savings and retirement services from an employer, to include advisory services. The survey divided respondents into five groups (based on self-reported data); the ones in the “struggling” group (the lowest rung on the financial health ladder) not only had low assets and savings, but also higher levels of debt, such as credit cards and medical bills. Their life satisfaction and overall health scores were also the lowest among respondents.

In another study issued this year, which surveyed people across age ranges, backgrounds, and life stages: 59% associated financial health with their lifestyle quality, 57% linked overall happiness with financial health and 55% reported their financial health and mental health are connected.

How’s Your Debt Level?

Many millennial workers are juggling a lot of expenses, no question: student loans and mortgages/home ownership chief among them. Older millennials might also be thinking of saving for their children’s college expenses. The struggle is real for many Americans. Even if their employers offer participation in an employer-sponsored retirement plan, these individuals may find it difficult to squirrel away that 3%-6% of their income every paycheck to contribute to that plan (and qualify for an employer match). A survey of 1,000 older millennials conducted for CNBC Make It revealed that 23% are limiting retirement contributions because of their student loan payments.

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Taking Control Of Your Future Through Self-Directed Retirement Savings

As one becomes more financially stable and established in their career, one option for building healthy retirement savings is with a self-directed individual retirement account (IRA). You needn’t aspire to financial independence — rather, you can plan for it by investing in the alternative assets allowed through self-direction.

Consider this scenario: You are 35, maybe you own a condo or a house and are making the mortgage payments, and you can see the end of those college loan payments a few years into the future. You have worked your way up in your company (or perhaps you are an entrepreneurial self-employed person), and your income is steady. You’re covering your living expenses and can set aside something every month for retirement plan contributions.

You have investing knowledge about certain types of assets, such as real estate, private equity, precious metals, cryptocurrency or various types of non-publicly traded investments. You take that knowledge and open and begin funding a self-directed retirement plan. You can then invest in a wide array of nontraditional investments that a typical workplace retirement plan does not allow — the types of alternative assets you already know and understand.

Bear in mind that investments are never guaranteed — regardless of how well you may understand a particular asset class. Therefore, as with any investment strategy, self-directed or with the advisement of a financial planner or brokerage, risk should always be assumed.

Additionally, when you are starting out with a small amount of funds in your retirement account, custodial or administrative fees may seem high compared to the amount in your account; however, those fees are typically offset by the tax advantages you gain once those funds are invested.

Another issue to be acutely aware of is making prohibited transactions, which will endanger the tax-advantaged status of your retirement plan. These include self-dealing, in which you as the account owner personally benefit from the asset (rather than the retirement plan, which has made the investment), and to avoid transacting with disqualified persons. Internal Revenue Code Sections 408 and 4975 identify a disqualified person as: the IRA holder, the IRA owner’s ascendants or descendants, and any entity controlled by any of those individuals. Disqualified persons are prohibited from engaging in certain types of transactions regarding the IRA. You’ll find a good outline of this on the IRS website.

Self-Direction And Debt Management

Since alternative assets tend to be non-correlated with the stock market, this puts more control in the hands of the investor. As an investor, you have the potential to leverage those types of investments for a quicker return, which often depends on the type of investment you choose. Once the asset is liquidated, or sold, those funds would be available for you to withdraw without penalty to pay down your debt, once you reach age 59 ½. When you are not of age to be eligible for distribution without penalty, you would likely wait to pay down that debt and continue reinvesting the funds into new projects. You can think of this like a “trade-up” method, except that instead of “trading up,” you are growing that value by reinvesting the earnings from a previous investment in more deals that could accelerate your return. This can be done even once your debt has been paid off once you’re of distribution age, allowing you to continue saving for those retirement years debt-free.

When it comes to debt management, the potential accelerated growth of self-directed retirement accounts can make them more attractive than traditional saving methods (such as savings accounts or IRAs that limit investments to stocks, bonds and other public securities). Your self-directed IRA can contribute to your financial health — and so can you for many more years to come as you build a more diverse retirement portfolio through self-direction.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


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