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Investor Insights Blog|Top Reasons to Save for Retirement

Self-Directed IRA Concepts

Top Reasons to Save for Retirement

elderly couple riding bikes in retirement

If you’re relatively young, the thought of saving for retirement might be the last thing on your mind when it comes to financial priorities. You may be dealing with car payments, mortgages, student loans, children… the list goes on. If you’re not already saving for retirement, you might want to consider starting. Here’s why.

Why You Should Save for Retirement

1. You Can’t Rely on Social Security

There’s a general rule of thumb that you’ll need 70 percent of what you make at the peak of your career in retirement. This 70 percent mainly deals with your standard of living, such as budget for food, entertainment, living costs, etc. In addition to this, you need to be prepared for unexpected expenses individuals don’t always plan for, such as medical bills or long-term care as you get older.

In the past, many Americans’ retirement plans consisted solely of Social Security. However, in the next 15 years alone, the ability to rely on this form of income in retirement will diminish.

According to the 2020 annual report of the Social Security Board of Trustees, the trust funds that disburse retirement, disability and other Social Security benefits will be depleted by 2035.

It’s also worth noting, “The coronavirus pandemic could also have a significant impact on the system’s long-term finances, as large-scale job losses cut into the payroll tax revenue that largely funds Social Security” according to AARP.

Even if Social Security isn’t completely gone by the time you retire, you will more than likely need an extra 30 to 40 percent of that 70 percent to live comfortably.

2. Achieve Your Retirement Goals

While some people find they have fewer expenses in retirement with children moved out and loans paid off, it’s important to consider what your retirement goals entail when it comes to saving for retirement. You might want to travel the world, start a small business from a hobby, purchase a second home on a beach or in the mountains, for example.

When you start saving for retirement at a young age, you potentially allow yourself to have a wider array of options in retirement to achieve these goals and dreams. The sky can be the limit if you start saving early.

3. The Numbers Make Sense

Without getting into the nitty-gritty of it, saving for retirement in a tax-advantaged account is a great way to grow your funds in general.

In general, if you contribute to a retirement account:

  • The amount of taxes you owe on income decreases
  • The earnings you make on your investments can either defer or avoid taxes
  • Compound interest can be a powerful thing

4. Compound Interest

Compound interest can be powerful, so powerful it can stand alone as a reason to start saving for retirement.

Here’s a short example to illustrate the power of compound interest:

graph showing compound interest growth

Think about how much of an impact compound interest has when you have even longer than 25 years to save in a tax-advantaged retirement account.

Take this example from Investopedia:

“Let’s say you start investing in the market at $100 a month, and you average a positive return of 1 percent a month or 12 percent a year, compounded monthly over 40 years. Your friend, who is the same age, doesn’t begin investing until 30 years later, and invests $1,000 a month for 10 years, also averaging 1 percent a month or 12 percent a year, compounded monthly. Your friend will have saved up around $230,000. Your retirement account will be a little over $1.17 million.”

Getting Started: Saving for Retirement

If you’re convinced that you should be saving for retirement but you’re not sure where to start, here are some next steps:

1. Decide what type of account you want to open. Does your employer have a retirement plan option? If so, that may be a place to start. You can also look into other custodians, such as Equity Trust. We offer a variety of tax-advantaged accounts.

2. Start making contributions, even if it’s not the full annual limit. A little is better than nothing. (See the annual contribution limits.)

3. Choose investments that feel right and fit your area of expertise. A self-directed IRA at Equity Trust allows you to invest in assets such as real estate, lend money through notes, cryptocurrency, mutual funds and more.


Should I wait to open an account if I don’t have an investment ready right now?

There are several reasons to open your self-directed account at Equity Trust Company, even before you have selected an alternative investment.

  1. If you are transferring cash/assets to your account from another custodian, you should allow time for the resigning custodian to process your request and deliver the account holdings to Equity Trust.
  2. You have the ability to invest in traditional assets while you are researching other opportunities.
  3. Once you have selected an alternative investment, you will not have other actions in process that may delay the funding processing.

What’s the difference between a self-directed IRA and a traditional IRA?

A self-directed IRA is technically no different than any other IRA or 401(k). A self-directed IRA is unique because of the investment options available. Most IRAs are used for stocks, bonds, mutual funds and CDs. A self-directed IRA allows those types of investments along with real estate, notes, private placements, and other investment options.


What investments can I make using a self-directed IRA?

With a self-directed IRA, your investments are up to you, within the bounds of the IRS rules and guidelines. The IRS does not provide guidance on what investment types are permitted, but dictates only what is NOT permitted. Examples of prohibited IRA investments include collectible (such as artwork, stamps, rugs, antiques and gems), certain coins and life insurance. See IRS Publication 590 for more information about prohibited investments.

15-minute guide to Self-Directed IRA Investing

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