New Year, New Administration: What It Could Mean for Your Portfolio

Every time a federal administration changes, the media lights up with pundits predicting various outcomes of proposed policy changes. As debates rage on about the future of Social Security and Medicare, one clear thing is that these cornerstone programs are under scrutiny.

Whether it’s election-year rhetoric or genuine policy change, whispers (or shouts) of “gutting” these benefits leave many Americans wondering: What happens if these cuts come to pass? For individuals with self-directed IRAs, now is an excellent time to assess and rebalance your investments to safeguard your future—and your parents'. 

Does Your Portfolio Need Rebalancing?

Although it’s impossible to predict the exact nature of Social Security and Medicare changes, even modest reductions could have a significant impact. Any cutbacks would create financial stress for retirees already dependent on Medicare or Social Security.

For adult children, it could mean stepping in to help parents cover essentials, from healthcare to daily living expenses. The possibility of living out this scenario underscores the importance of re-evaluating your investment strategy to include assets that generate income reliably.

Self-Directed IRAs: A Powerful Tool for Adaptability

Self-directed IRAs offer flexibility and control over your retirement portfolio, allowing you to diversify beyond traditional stocks and bonds. With potential cuts to government programs looming, this flexibility can be your secret weapon. Unlike traditional IRAs, which are often limited to standard asset classes, self-directed IRAs can include:

  • Real estate

  • Private lending

  • Limited partnerships

  • Dividend-paying stocks

By strategically allocating assets within a self-directed IRA, you can create a portfolio that provides stability and income, no matter what changes occur.

Addressing Parental Dependence on Social Security

I’ve written previously about how to help the next generation invest wisely for a future where Social Security and Medicare have run out of funds. However, with the current rhetoric, the loss of these programs could be felt much sooner than our children’s retirements.

If Social Security benefits are reduced, it’s not just their (or your) future retirement that could be affected—it’s your parents’ present-day reality. Many retirees rely on Social Security to cover their monthly expenses, and cuts could leave them with a budget gap. How can you prepare for this possibility?

Strategy 1: Build a Dividend Portfolio

Dividend-paying stocks are a popular choice for generating passive income, and for good reason. These stocks are typically issued by well-established companies with a consistent track record of generating reliable revenue. Known for their stability, dividend stocks are often viewed as a safer investment option, making them an effective tool for balancing risk within a portfolio. By providing regular income while potentially appreciating, they offer a dual benefit for investors seeking both growth and stability.

Reinvesting dividends over time allows your investment to grow through the power of compounding, eventually providing a steady cash flow that can support loved ones or supplement your own income. However, building a robust dividend portfolio requires considerable upfront capital.

For example, to generate $2,000 in monthly dividend income, you would need a portfolio valued at approximately $600,000, assuming an average dividend yield of 3%. This underscores the importance of strategic planning and disciplined saving to reach your income goals.

Strategy 2: Invest in Income-Producing Assets

Real estate is another compelling option. Consider this scenario: a $400,000 rental property purchased through your self-directed IRA generates $2,000 in net monthly income after expenses. This income could help cover a parent’s budget shortfall or supplement your own retirement savings. Plus, real estate tends to appreciate over time, offering a dual benefit of income and long-term growth.

While purchasing a rental property also requires a significant outlay of capital, purchasing real estate allows you to leverage debt and generate income immediately. 

When investing in real estate through a self-directed IRA, remember these key points:

  • All income and expenses must flow through the IRA.

  • You cannot use the property personally or allow family members to use it.

  • Proper due diligence and property management are critical for success.

In other words, it’s crucial to carefully manage how much debt you leverage and ensure your self-directed IRA (SDIRA) has enough funds to cover maintenance and ongoing expenses. Keep in mind that you can’t use personal funds to cover any shortfalls—all expenses must be paid directly from the SDIRA, as it is the official owner of the investment. Proper planning and budgeting are essential to avoid running into compliance issues or financial strain.

Strategy 3: Explore Alternative Investments

For those seeking even more diversification, self-directed IRAs can also hold assets like:

  • Private loans: Lending money to individuals or businesses in exchange for interest payments can provide a steady income stream.

  • Limited partnerships: Investing in partnerships focused on sectors like energy or real estate can yield high returns, albeit with higher risk.

These are more risky investments that need careful vetting and consideration before you undertake them. Using more stable assets is essential for long-term income protection. 

Balancing Risk and Reward

With great flexibility comes great responsibility. The investments you choose must align with your risk tolerance, timeline, and goals. For instance:

  • Dividend stocks: Low risk, lower returns, but stable income.

  • Real estate: Moderate risk, higher returns, but requires active management.

  • Private loans and partnerships: High risk, potentially high returns, but less liquidity.

By strategically combining these assets, you can create a well-rounded portfolio that mitigates risks associated with Social Security and Medicare changes.

Taking Action: A Step-by-Step Guide

If you’re ready to rebalance your portfolio with a self-directed IRA, follow these steps:

Step 1: Assess Your Current Portfolio

Review your existing assets and determine whether they’re diversified enough to weather potential policy changes. Identify gaps and opportunities for improvement.

Step 2: Consult Professionals

A custodian for self-directed IRAs can help you navigate complex IRS regulations and choose investments that fit your goals. Additionally, consult a tax professional to understand the implications of your investment choices.

Step 3: Prioritize Income-Producing Assets

Shift a portion of your portfolio into assets that generate reliable income, such as dividend-paying stocks, rental properties, or private loans.

Step 4: Monitor and Adjust

Regularly review your portfolio’s performance and make adjustments as needed. Economic conditions, policy changes, and personal circumstances evolve over time, and your investment strategy should also.

While the future of Social Security and Medicare remains uncertain, your financial stability doesn’t have to. By leveraging the flexibility of a self-directed IRA, you can build a portfolio that provides income, grows over time, and supports both you and your loved ones through life’s uncertainties. Start planning today, and you’ll be ready for whatever comes tomorrow.

How Chicago Trust Administration Services Can Help

At Chicago Trust Administration Services, we love helping our clients build stability and security for any generation. We encourage you to invite your parents or kids to your next meeting with us so you can deepen the conversation about self-directed investing and give everyone the information needed to make informed financial decisions.  

To schedule your meeting, call us at 312-869-9394 or send an email to steve@ctasira.com.

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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.

Steven Miszkowicz