Financial Literacy Month: The Knowledge Gaps That May Affect Retirement Investing 

Many investors feel confident in their financial knowledge but don’t realize there are gaps that could be holding them back. Even small misunderstandings about compounding interest, diversification, and the full range of retirement account options, including self-directed IRAs, can have an impact on their long-term wealth.

These gaps are often not obvious at first, but over time, they can create meaningful differences in outcomes. By identifying and addressing these areas early, investors can feel more confident in the decisions they make over time and build a more diversified, tax-advantaged approach to retirement planning.

Underestimating the Power of Time in Investing

The Gap: Many investors delay saving for retirement because it feels so far away. They assume they can catch up later, or they can’t afford to set aside 10% of their salary each year. What these investors may not understand is the power of compounding interest and how even small investments can make a huge difference 40 years down the line.

Time is one of the most influential factors in long-term investing, yet it is often overlooked in favor of short-term priorities, especially when it comes to retirement planning and long-term wealth building.

The Fix: Investors may consider starting as early as possible with an amount they can afford and increasing their contributions over time as income grows or expenses change. Over time, earnings begin to generate their own earnings, creating a snowball effect that becomes more impactful the longer it continues. This is called compounding interest, and it’s why starting earlier with smaller amounts may lead to greater savings than contributing a higher amount later.

Here’s an example:

$100 a month x 40 years = $48,000 compounded annual at 7% = $239,562.13

$200 a month x 30 years = $72,000 compounded annually at 7% = $226,705.89

Thanks to compounding interest, you could invest $24,000 less and still wind up with $12,856.24 more by the time you retire.

Limited Understanding of Investment Diversification

The Gap: Many retirement portfolios only contain a mix of stocks, bonds, and mutual funds. However, that means that these portfolios rise and fall with the stock market. Relying too heavily on a single asset class may expose investors to risks that could potentially be reduced through broader diversification. Not all investors are aware that they can invest in far more than what many traditional plans offer.

The Fix: Exploring a wider range of investment types may help investors better align their portfolios with their goals, interests, and risk tolerance. Investing in alternative assets through a self-directed IRA can give investors a chance to diversify their portfolio beyond traditional assets and may help reduce exposure to market volatility.

This also means that investors can invest in what they already have a deep understanding of. Having familiarity with an asset type may help investors feel more informed when evaluating opportunities within that space.

Not Knowing the Full Range of Retirement Account Options

The Gap: Not understanding all of the account options you have can lead to you missing out on investment opportunities and tax advantages that could have an impact on your long-term wealth. Retirement accounts are also not one-size-fits-all. Different account types offer different features and not understanding how they work together may make it more difficult to create a retirement plan to suit your goals.

The Fix: Take your time to research the different tax-advantaged retirement accounts that are available, including self-directed IRAs. Consult an attorney or financial professional to address questions related to your specific needs. Understanding the contribution limits, tax benefits, and available investment types can help you build a retirement plan that aligns with your goals. Some investors may even benefit from contributing to more than one retirement account at a time.

Taking a thoughtful approach to account selection may help ensure that your retirement plan reflects your individual circumstances and supports a diversified retirement portfolio.

Lack of Ongoing Financial Education

The Gap: Financial education doesn’t end after graduation, your first job, or even once you decide on a retirement plan. It should be an ongoing process. The financial landscape continues to evolve, and staying informed may help investors adapt to new opportunities and changes.

Without continued learning, it may be easy to overlook tools or resources that could support your long-term goals.

The Fix: Make financial learning a habit, rather than a one-time lesson. News stories, webinars, books, blogs, podcasts, and video lessons can help you stay up to date on the latest news and insights to help you reach your retirement goals. Look for trusted publications or institutions that regularly provide education to make sure you’re getting accurate and helpful information.

Setting aside time regularly to learn about financial topics may help build confidence and support more informed decision-making over time.

How Self-Directed IRAs Can Help Address Financial Knowledge Gaps

Many of these financial literacy gaps can be improved by understanding how a self-directed IRA works and the flexibility it offers. A self-directed IRA allows investors to expand their investment options beyond traditional assets, within a tax-advantaged retirement account.

With a self-directed IRA custodian, investors can:

• Diversify their retirement portfolio with a broader range of asset types, including alternative investments
• Access tax-advantaged retirement structures, depending on account type
• Invest in assets they are familiar with, such as real estate or private companies
• Build a portfolio that may not be solely tied to publicly traded markets

By incorporating a self-directed IRA into a broader retirement plan, investors may be able to align their investments with their long-term financial goals.

Building Financial Knowledge for the Long Term

There are many things you may not realize could be impacting your wealth. Financial literacy is an ongoing process, so you can always make the best decisions possible for yourself and your retirement. If you want to learn more about self-directed IRAs and how they may support your retirement planning goals, Schedule a call with an IRA counselor.

Equity Trust Company is a directed custodian and does not provide tax, legal, or investment advice. Equity Trust Company is not a fiduciary and does not endorse, recommend, or opine on suitability of any specific asset class or investment.  Any information communicated by Equity Trust Company is for educational purposes only, and should not be construed as tax, legal or investment advice. Investing involves risk, including possible loss of principal. Questions related to your specific tax, legal, and investment needs should be directed to an attorney or financial professional.