Home Pay off Build vs. Reduce: An IRA Income Strategy

Build vs. Reduce: An IRA Income Strategy

0

Ignite Funding: offering short-term investments for long-term investors since 2011.

We talk a lot about the need to save and invest for our financial future. The typical path most of us take to save is through our 401(k)/company retirement plans, or perhaps the old standby of contributing to an IRA. Some may even buy and maintain rental properties for income. Next, we are asked to create an elaborate estate plan, coupled with a strategy for growing and protecting the wealth that we have obtained because we know it is essential to creating a successful retirement and personal legacy.

Unfortunately, not much thought is given to creating a strategy for how to use retirement assets effectively once we reach these final stages of life. Most people will dip into their retirement accounts in large chunks. Pieces that will pay off a mortgage, pay for an extended vacation, a major purchase, or help out a family member. As the retirement account is depleted, so is the income-generating potential of that account. Creating a retirement strategy that allows you to comfortably live off the interest and dividend payments from the capital raised will ensure that these diligently accumulated assets will last a lifetime and even leave a legacy for those dear to us.

Needs of retirees

There comes a time in our lives when we look back at all we’ve done to support our families, raise our children, and hopefully save enough for our retirement years to enjoy the fruits of our labor. Life changes quite drastically when the house is empty and we no longer need to go to work. Retirees experiencing these life changes have specific needs that must be met:

  • Replace work income with fixed income investments, rather than equity investments to supplement other sources of retirement income such as Social Security and pensions.
  • Protect and preserve hard-earned capital to be able to weather the unpredictable, such as market fluctuations, inflation, changes in public policy, etc.
  • Have enough to pay for medical insurance before Medicare kicks in at age 65.
  • Have enough to pay for health care costs that increase with age, including elderly housing and caregiving.
  • To be able to enjoy the fruits of their savings.

Closing the income gap in retirement

The main problem facing retirees is how to replace the income they used to earn to live on. Sources of income from pensions, social security, disability and income properties may still not be enough. People who are of retirement age and have saved their money in a retirement account, can use that retirement account to produce an additional source of income that will last their lifetime! Imagine if you could withdraw $120,000 from a retirement account and generate $1,000 a month of income in perpetuity without spending a penny of the $120,000. Sounds too good to be true, right?

One of the ways to do this is to invest in trust deeds or secured promissory notes as they are commonly called. Trust deeds with Ignite Funding can be an effective tool for creating a retirement income strategy. They have unique product features that make them solid investments to use in a retirement income strategy:

  1. Fixed income – Trust deeds do not fluctuate in value like many securities. They produce a fixed monthly income.
  2. Physical, Tangible and Real Estate as Collateral – Real estate is a durable asset that retains its value even in the worst conditions, making capital preservation a key feature of this investment.
  3. Inflation protection – Real estate tends to appreciate at the rate of inflation over time and is directly correlated to population growth.
  4. Trust deeds will typically produce a conservative 10% to 12% annual return and are short-term investments that typically last six to 18 months.

Here is an illustration to demonstrate how $120,000 can be used to generate $1,000 per month of income in perpetuity.

Obviously, this is a very simplistic illustration. There are other variables that need to be considered. Variables such as trust deed defaults, custodial fees (IRA), interest lapse time between investments in the trust deed, and changes in interest rates offered by trust deeds . However, the basic illustration gives the retiree an extra $1,000 per month in interest income without ever reducing the value of the account! Also, if the retiree does not take the income distribution, the initial investment in 10 years: $1,000 per month x 12 = $12,000 per year. $12,000 per year x 10 years = $120,000. The retiree could double the size of the retirement account, increasing the opportunities for income generation in the later years of retirement as expenses continue to rise.

All investments involve risk

The fundamental risk associated with trust indentures is “liquidity risk”. Simply put, although these investments produce monthly income, they cannot be turned into cash on demand. Deeds of Trust are loan agreements with borrowers that pay interest only for the term of the loan and repay the principal with the sale or refinancing of the property. On rare occasions, borrowers may default on the loan agreement and interest payments stop. When this happens, Ignite Funding will act on behalf of the investor to seize the property, manage the asset until a buyer is found, then sell the property to recover the investor’s principal. This process can take some time, on average about one to three years.

Ignite Funding uses an intensive underwriting strategy that allows for diversification, whether across different borrowers, geographic locations, or types of real estate. This strategy, coupled with low investment minimums, means investors can minimize the risk of an investment failing and being seized. In our example, we used six trust deeds at $20,000 investment, instead of just one at $120,000 investment. So if one of those six were to default and be foreclosed, the investor could reduce their distribution to around $800 per month until the default is resolved.

Case study

We don’t live in a perfect world, so let’s look at two scenarios. One that reflects a retiree who, in his fear of retiring, has depleted a significant portion of his retirement account to pay off a large portion of his debt. Essentially, reducing the retirement account which is the way to earn income during retirement, without realizing the impacts that will be felt later. It happens a lot and, frankly, it’s out of fear of the unknown.

Take Ms. Allen as an example, she initially transferred over $200,000 into a self-directed IRA to invest in trust deeds as she sought to diversify into alternative investment and tax-free income in her Roth IRA. In the first scenario, when she retired, she, like so many others, paid for her house by taking a distribution of $120,000.

All looks good on the surface of this illustration as the value of his IRA account has increased since 2007. But the big question is whether everything will look like this in the future or will the distribution of $120,000 for paying off his house is going to have a future impact on the value of his IRA account that can’t be predicted?

We’ll take a look…

The illustration is starting to change and not in a good way. The value of the account decreases as the distributions become larger than the income generated. It’s no secret that as we age, the costs of care rise. Over time, it will deplete the value of the IRA account, eliminating the ability to generate income in perpetuity. Everything looks good on the surface of this illustration because the value of his IRA account has increased since 2007.

What if she didn’t pay for the house? Let’s take a look at scenario two…

What a difference a decision could make. Not only did the value of the IRA account increase by more than $250,000, but she could increase her income by $20,000 a year if she wanted to and still hadn’t touched the original IRA amount from 2007. .

Conclusion

The decisions we make today could have a lasting effect on our future. We can’t stress enough the importance of taking the time to create an “withdrawal” strategy that will use retirement assets more effectively. Make the most of the income-generating potential of your retirement account to ensure that these diligently accumulated assets will not only last a lifetime, but also leave a legacy for those dear to us.

If you’re ready to add trust investments with Ignite Funding to your retirement strategy, you can schedule a consultation at your convenience or text the word “Investments” to 844-552-7022.

Ignite Financing, LLC | 2140 E. Pebble Road, Suite 160, Las Vegas, NV 89123 | Phone. 702.739.9053 | T 877.739.9094 | F 702.922.6700 | NVMBL #311 | AZ CMB-0932150 | Money invested through a mortgage broker is not guaranteed to earn interest and is not insured. Before investing, investors should receive the applicable disclosure documents.

Members of the Las Vegas Review-Journal editorial and press team were not involved in the creation of this content.