Pursuing a Secure Future: How to Set Retirement Goals for Your Self-Directed IRA
As we journey through life, we encounter moments that remind us of the importance of designing and living a meaningful and fulfilling life. For some of us, that might translate into living in the moment (which is encouraged!), but it's not a permission slip to neglect preparing for your future.
We see this happen all too often with retirement planning — we're so busy thinking about our immediate dreams and goals that we often postpone or ignore the proper planning of our long-term goals.
Perhaps you’ve got the fundamentals down, like maximizing your retirement accounts. Still, many of us have yet to go the extra mile to craft a well-thought-out retirement plan that gives us a specific retirement goal to work toward instead of saving without a clear direction.
Whether you've already set your goals for the year or are still in the planning phase, make this the year you focus on intentional retirement planning. Intentionality involves purposeful planning, clear objectives, and focused effort. A purpose-driven strategy can help you stay committed to your retirement goals in the long run, even if you occasionally stray from them.
Allocating time to plan for retirement can yield a significant return — a comfortable future (we'd say that's a worthwhile investment!). If you're not sure where to start, we've got you covered with four simple steps to set you on the right track:
Determine how much of a retirement nest egg you need.
Decide on the best saving and investment vehicles.
Diversify your investments.
Regularly review and monitor your accounts.
Future you will appreciate your commitment this year, sparing you the stress of figuring it all out as retirement looms closer!
1. Determine How Much of a Retirement Nest Egg You Need
Even when you've broken down your big retirement goals into smaller, manageable steps, it's always good to have a specific end goal in mind to ensure you're making progress. When it comes to retirement planning, you'll need to know how much money you need to retire comfortably and when you'll need it.
For many people, this might feel like plucking numbers from thin air, given the many unknown variables, especially if retirement seems so far away. But not having all the answers doesn't mean you can't make some reasonable assumptions to create a realistic goal, even if it needs refining along the way. After all, tweaking your goal is often better than delaying your start.
To get things rolling, start plugging some numbers into an online retirement calculator to help you determine how much of a retirement nest egg you may need and how much you need to save now to meet your retirement needs.
If you need more clarification on any of the inputs, many calculators provide guidance and explanations to assist you in filling in the blanks.
You can experiment with the inputs, like adjusting your ideal retirement age or your desired income in retirement, to see how your current plan stacks up against the changes needed to meet your retirement goals.
Remember that the retirement nest egg or monthly savings goal calculated based on your current circumstances isn't set in stone; it serves as a starting point. These figures can change as your circumstances do, highlighting the importance of periodically revisiting and fine-tuning your retirement goals.
2. Decide on the Best Saving and Investment Vehicles
Now that you have a monthly savings target, it's time to figure out how exactly to allocate that money.
Many employers offer employer-sponsored retirement plans, such as 401(k)s, 403(b)s, and SIMPLE IRAs. If you're self-employed, there are various retirement plan options designed specifically for small businesses. Beyond these employer-sponsored plans, anyone with earned income can open and contribute to an Individual Retirement Account (IRA).
However, it's worth noting that these retirement plans all have annual contribution limits, which means you might need to utilize multiple savings and investment vehicles to meet your target savings.
Apart from retirement accounts, you can explore non-retirement options that don't have contribution limits, such as taxable investment accounts or certificates of deposit (CDs).
Now that you know some of your vehicle options, you might be wondering about the most effective way to divvy up your retirement savings. There isn't a one-size-fits-all solution, but there are some key factors to consider when it comes to retirement accounts specifically:
Employer Match: Many (not all) employers match your contributions to the company's retirement plan up to a certain limit. Even if you're not maxing out your account each year, consider contributing at least the minimum required to snag the full employer match so you don't leave any money on the table.
Tax Benefits: Retirement accounts offer several tax advantages, which can vary based on the specific type of account:
Tax-Deferred Growth: Contributions made to traditional retirement accounts, such as Traditional IRAs and 401(k)s, are typically tax-deductible (more on that below), and the earnings on the investments grow tax-deferred until withdrawal. This means you won't pay taxes on the gains as long as the funds stay in the account.
Tax-Free Withdrawals in Retirement: Roth IRAs and 401(k)s are funded with after-tax dollars, but qualified withdrawals in retirement, including earnings, are tax-free. This provides tax-free growth on your investments over time.
Tax Deductions: Contributions to traditional retirement accounts may be tax-deductible, lowering your taxable income in the year of the contribution and potentially leading to immediate tax savings.
Non-retirement accounts may not come with all the match or tax benefits, but they still have their perks. For instance, they have no contribution limits and give you the flexibility to access your money whenever you need it without any penalties.
If you still need help deciding where to stash your cash, you can chat with a financial professional to help determine a plan that best suits your retirement goals and needs.
Let's say, for example, that your goal is to spice up your investments and work toward a more diverse retirement portfolio beyond the usual stocks and bonds you've been investing in for years. In that case, you might consider opening a Self-Directed IRA (SDIRA) because of the flexibility in investment options it offers compared to a traditional retirement account.
You may be familiar with Traditional and Roth IRAs, but the less commonly known SDIRA is a type of IRA that gives you more control over your investments. Unlike Traditional or Roth IRAs (or other traditional retirement accounts), an SDIRA allows you to invest in a broader range of assets.
Control and flexibility may be the primary drivers for someone to explore an SDIRA, but they're not the only benefits. Let's take a closer look at the potential benefits of adding an SDIRA to your retirement account lineup:
Diversification of Investments: We've briefly touched on this, but to expand, an SDIRA opens up opportunities for investing in a wide range of assets like real estate and private equity. This reduces the risk associated with a concentrated portfolio.
Potential for Higher Returns: By including alternative investments like real estate or private equity in your SDIRA, there is a potential for higher returns compared to traditional investments. This creates the potential to enhance the overall growth of your retirement savings.
Same Tax Advantages as Traditional and Roth IRAs: Like Traditional IRAs, contributions to a Traditional SDIRA are often tax-deductible, and earnings grow tax-deferred until withdrawal. Roth SDIRAs, on the other hand, allow for tax-free withdrawals in retirement since contributions are made with after-tax dollars.
Investing in What You Know: With an SDIRA, you can invest in areas where you have expertise and knowledge. This can be particularly advantageous if you have a background in real estate or a specific industry. Investing in what you understand can result in more informed and strategic decisions.
SDIRAs have the same contribution limits as Traditional and Roth IRAs (and it's important to note that your total combined contributions to all IRAs can't exceed the annual contribution limit!).
However, if you have an existing IRA or a retirement account from a previous employer, you can move those funds into your SDIRA as long as it shares the same tax characteristics.
This means pre-tax dollars would need to go into a Traditional SDIRA and Roth, or after-tax, dollars would need to go into a Roth SDIRA. This move can boost the funds available to creatively invest with!
On a final note, it's always wise to do your homework when considering any account for your retirement plan. But if you’re thinking about incorporating an SDIRA, that due diligence becomes even more critical. SDIRAs demand a deeper understanding of IRS regulations and potential risks, so it's encouraged to consult with a professional to ensure you're making compliant and well-informed decisions.
3. Diversify Your Investments
We've all heard about the importance of diversifying your portfolio, and for good reason. You can think of diversification as the secret sauce for managing risk and optimizing long-term growth.
By spreading your investments across various asset classes, like stocks, bonds, and alternative investments, you're essentially creating a buffer against the ups and downs of the market. This can potentially boost your returns in the long run and safeguard your nest egg against the fluctuations of any single investment asset class or industry.
It's all about balancing potential rewards with risks and creating a more stable and resilient retirement plan.
While achieving a diversified portfolio is undoubtedly possible using more traditional savings and investment vehicles like 401(k)s, IRAs, and taxable investment accounts, we introduced the SDIRA into the mix, given the opportunity it creates for an extra layer of diversification.
Some asset classes and industries carry more risk than others, and your portfolio allocation will boil down to your circumstances. It's common to have a more aggressive portfolio in your early working years and to dial down the risk as you inch closer to retirement, but age and time aren't the only factors to consider.
If dealing with high market volatility isn't your cup of tea, you might opt for a less aggressive strategy, even in your younger years. However, that might require you to bump up your savings to still hit your nest egg target.
Many financial institutions offer questionnaires designed to gauge your risk tolerance, which can help you evaluate whether your portfolio aligns with your comfort level for risk. Or, if you prefer a more personal touch, you can always engage a financial professional who can guide you in the right direction.
4. Regularly Review and Monitor Your Accounts
While there might be some initial upfront work in figuring out how much of a nest egg you need, deciding where to put your money, and how to invest it, the subsequent steps are typically less cumbersome — automating your contributions and investments and letting things ride out!
If you're in it for the long haul, you're likely doing more buying and holding than constantly tweaking your positions. It's an effective way to ensure your money keeps working, even when you're not monitoring it daily.
However, avoid falling into the trap of having such a passive approach that you neglect regular monitoring of your accounts. Your retirement strategy will likely need some fine-tuning as your circumstances, goals, and needs change along the way, which is why it's so important to periodically review your plan and accounts to stay on track.
Make it a habit to check on your retirement plan and accounts. If you need some accountability, you can regularly meet with a financial professional for your checkups. As life unfolds, plans shift, and economic conditions change; staying on top of things that impact your future is just good practice.
How Chicago Trust Administration Services Can Help You Plan for a Purposeful 2024 and Beyond
It can be frustrating and disheartening when we fall short of our financial goals year after year.
There are many reasons why missing the mark isn't so uncommon. Sometimes, we lack intentionality, set goals that are either too vague or overly ambitious, or fixate solely on the "big" result without breaking it down into manageable steps. Other times, we take no action at all.
Understandably, a task as significant as planning for a retirement where you don't outlive your nest egg can feel overwhelming. After all, it's a responsibility that your future hinges on (which is also precisely why you shouldn't keep putting it off for another day!).
If you're feeling uncertain about where to begin or could use a second opinion on your retirement plan, especially if you're considering a Self-Directed IRA, our calendar is open for you. At Chicago Trust Administration Services, it’s our mission to help you build the foundation for a prosperous retirement.
We invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com. Cheers to making 2024 a purposeful financial year!
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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.