December 1, 2023

Reinventing Retirement Planning

By John Solari, Published November 24, 2013

The old paradigm of retirement planning went something like this — sock away up to 5% of your paycheck in a retirement account (ideally matched by your employer) and hope the diversified index of stocks and bonds you buy grows enough over time to finance a comfortable and anxiety-free retirement.

But times have changed, and retirement strategies are changing with them. Many investors — especially those that saw much of their retirement savings vanish in the recent financial meltdown — have grown skeptical of the stock market as the reliable retirement option.

To boot, retirees are living longer, requiring more return out of their investment strategies to fund longer retirement periods. So, in response, alternatives to the traditional IRA or 401(k) are popping up. And while these alternatives are not for everyone, entrepreneurs with solid business experience and savvy investors who intimately know the industries they are investing in are being attracted to two new forms of IRAs that offer all of the same tax advantages of traditional retirement planning while providing potential high returns from investments like real estate, venture capital or precious metals.

These changes are making waves in the $5-trillion-dollar IRA industry. Self-directed IRA companies like Provident Trust Group, which recently acquired the rights to Guidant Financial’s $1.45 billion self-direct IRA business, are capturing growth in one of these new breeds of retirement accounts — one where knowledgeable investors take control of their retirement future by moving their retirement savings out of the publicly traded space and putting it into anything from real estate to private equity funds. This investment approach introduces more risk into the equation, but it also increases the potential for high investment return for the qualified, knowledgeable investor who is willing to take a more hands-on approach to retirement planning.

Similar to self-directed IRAs, ROBS (rollover as business start-ups) retirement funds have gained popularity as funding mechanisms for entrepreneurs who need capital to start their own business venture. While this retirement strategy puts even more eggs in one basket — risking the loss of income, retirement and business capital if the business goes under — it provides one more option for entrepreneurs with solid business ideas who have a hard time securing other forms of business capital.

In the self-directed IRA sector, part of the increasing interest can be traced back to disillusionment with the current publicly traded stock market investment environment. The 2008 stock market crash, mixed with news of technical glitches like the infamous “flash crash” of the Dow Industrial or the recent outage at the NASDAQ, as well as supercomputer-aided high-frequency trading, have fueled a distrust in the fairness of large public stock exchange investing.

While self-directed IRAs are complex arrangements that typically require consultation with tax advisors and investment experts, in many ways they also represent a return to a simpler form of investing. In an era of electronic stock exchanges, high-frequency trading and complex multi-national corporate structures, a return to the simplicity of buying a rental property or investing in a commercial building across town can represent a much more tangible and intelligible investment opportunity that also has the upside of making a positive economic impact on the community an investor lives in.

Self-directed IRAs are not for every average retirement investor. But they are understandably attractive to a sizable segment of entrepreneurial-minded individuals unafraid to take a hands-on approach to their retirement planning.

And they represent what may be a looming and disruptive sea change in the retirement finance industry — where the market evolves to respond to consumers by offering options other than mutual fund indexes and stock choices and account for a souring public perception of the fairness of the stock market and a need to increase retirement account revenue to account for lengthening retirement periods.