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By John Bowens, National Education Specialist, Equity Trust Company
Is America facing a retirement plan savings crisis?
Data suggests a majority of America is not adequately prepared for retirement, forcing Americans to work longer, downsize their standard of living, make difficult sacrifices, or rely on their children or other family members. Gone are the days of corporate-sponsored pension plans with the passing of the Employee Retirement Income Securities Act (ERISA) in 1974, shifting the burden from corporations to individual workers to save for retirement.
What will future generations have to look forward to? What about Social Security? Although these issues might not be widely discussed today, a crisis is quickly surfacing and the generations beyond the baby boomer generation could be facing even greater challenges.
According to a U.S. Government Accountability Office (GAO) study in 2015, half of households age 55+ have little to no retirement savings – 41 percent of which have no savings. The average retirement savings balance for individuals ages 55-64 is $104,000, and for those ages 65-74 it’s $148,000.
Only 12 percent of retirement accounts received contributions, with an average contribution of $3,913 in 2017, according the Employee Benefit Research Institute’s (EBRI)’s most recent data. Roth IRAs were more likely to receive contributions than Traditional IRAs. As of 2022, the annual IRA contribution limit is $6,000 for individuals under the age of 50 and $7,000 for those 50 and older. (Note: you can only contribute $6,000/$7,000 combined between all IRAs you own.)
In other words, Americans are only contributing half of what they could be contributing to an IRA. Traditional and Roth IRAs carry this same contribution limit.
The ERISA passage in 1974 paved the way for our current retirement system and marked the start of IRAs.
The legislation included efforts around maintaining the solvency of corporate-sponsored pension plans, along with encouraging Americans to save on their own through IRA and 401(k)-type plans. The passage also spurred the great corporate migration toward the 401(k), which requires an employee to opt in and defer money from their own paycheck, rather than a company-sponsored pension plan system.
With the burden now on the taxpayers and not corporations, Americans were left to rely on Social Security and self-led financial planning to secure a stable retirement. In 1975, there were 103,346 company-offered defined benefit plans. In 2019, that number was down to 46,870.
According to the U.S. Social Security Administration’s (SSA’s) 2022 report: “The Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivor benefits, will be able to pay scheduled benefits on a timely basis until 2034, one year later than reported last year. At that time, the fund’s reserves will become depleted and continuing tax income will be sufficient to pay 77 percent of scheduled benefits.”
The boomer generation might very well be benefiting and will continue to benefit, but what about future generations?
Video: The Retirement Planning Crisis and What We Can Do About It
The millennial generation, defined as those born between 1982-2004, could be facing greater challenges compared to the baby boomer generation. The wealth gap between these generations is of great concern, which can have consequences not only for millennials but also their Generation X and boomer parents and grandparents.
The boomer generation holds just over 50 percent of all U.S. household wealth, according to The Federal Reserve’s 2022 Distribution of Household Wealth Table. It seems logical that this generation would hold a larger proportion of household wealth given they have been working longer; however, according to an article written by Trust and Will, historical data suggests the wealth gap between boomers and millennials shouldn’t be as large as it is.
One could argue the migration of the pension system to the voluntary 401(k)/defined contribution system was a contributor. We also need to consider that much of the millennial generation was either graduating college or high school during the Great Recession, which started in December 2007. The millennial generation has just 6.6 percent of all household wealth, while Generation X holds nearly 30 percent.
Fast forward to 2022. One could argue this gap could become even greater with the public markets down 15-20 percent year-to-date, inflation reported at 9 percent plus, and reports of negative GDP. For those boomers who run out of retirement funds, the financial burden may transfer to the Gen X or millennial children or grandchildren who care for them. )
There are steps you can take to prevent your own personal crisis in retirement.
1. Increase your annual retirement savings plan contributions.
Maximize your contributions to qualified retirement plans, such as 401(k)s, 403(b)s, 457s, TSPs, or other employer sponsored plans. If you’re self-employed, you can consider a solo 401(k) or SEP IRA. With proper planning and sufficient earned income, you can potentially contribute upwards of $61,000 to a solo 401(k) per year when you’re under the age of 50; when you’re age 50 and older, it increases to $67,500.
Retirement plans have unique tax advantages, allowing you to leverage compounding interest in the absence of taxation. Traditional IRAs and 401(k)s grow tax-deferred, whereas Roth IRAs grow tax-free with after-tax contributions.
Here’s a hypothetical example showing the power of the accounts’ long-term tax savings: An investor starts with $1 today and contributes $6,000 per year over 30 years. With a rate of return of 7 percent and a marginal tax rate of 25 percent, the account would grow to $210,001 in a taxable (non-IRA) environment. In a Traditional IRA, the total after the same period would be $570,839; and in a Roth IRA, it would be $829,432.
To input your own savings rates and see the difference for yourself, check out this Roth IRA vs. taxable savings calculator.
2. Select investments for your portfolio that align with your experience and reduce your dependence on stock market performance.
You are not at the mercy of only investing your IRA in the public markets such as stocks, bonds, mutual funds, or ETFs. With a self-directed alternative asset custodian, you take control of your retirement savings and invest in assets like real estate, rental properties, private equity, private direct investments, gold and silver, cryptocurrency, and a wide array of other non-stock-market-based investments.
Investors self-directing their retirement accounts often are confident they can generate a higher rate of return and that their account balance is more stable than keeping their savings invested in assets subject to the volatility of the stock market.
Consider the rule of 72, which tells you how many years it could take to double your money. You simply divide 72 by your annual rate of return, and this indicates roughly how many years it will take to double your funds.
An example: An Equity Trust client recently made a 32-percent annualized return through the purchase, rental, and sale of a property in their IRA. If the investor continues to perform at 32 percent per year, they will double their money (72/32) every 2.25 years.
On the other hand, the S&P 500 (stock market index) produced an annual return of 6.44 percent from 2000-2022. Applying this return to the rule of 72, an investor’s portfolio may double every 11 years.
To conclude, if you are an active real estate, private equity, or other alternative investor, or you are learning and developing proficiency in alternative-asset investing, you might consider leveraging these alternative investment strategies in a self-directed IRA. “Self-directed” is merely an industry term; the IRA is the same account you’d open at a firm such as Schwab or Fidelity, but to invest in alternatives, the must be opened at a custodian equipped to hold alternative assets.
Transitioning to self-directed investing is not as daunting as you might think: Assuming it’s done properly, transferring or rolling over funds from one retirement plan to a self-directed IRA should not trigger any adverse tax consequences or penalties.
Learn more about self-directed investing and see if it could be the catalyst you need to ensure a secure financial future.
About John Bowens
John Bowens is one of the most sought-after and respected educators in the self-directed IRA industry, partly due to his unique ability to take a complex issue and break it down into simple-to-understand terms. Currently a Senior Manager at Equity Trust Company, John draws from his 15 years in the real estate industry and his experience as an active real estate investor. In his travels across the U.S. and virtually, he has trained 60,000 investors during more than 300 workshops and classes, spreading the message about the power of building tax-free wealth and leaving a lasting legacy by investing in what you know best.
John contributed to the book “Self-Directed IRAs: Building Retirement Wealth Through Alternative Investing” with Equity Trust Company Founder Richard Desich, Sr., and has appeared on several national real estate and finance-related radio shows, including the Rich Dad Radio Show.
What is a self-directed IRA?
How do I set up a self-directed retirement account?
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