Real Estate, Retirement and the IRA

Retirement Planning Meets Real Estate (And Really Hit it Off) You are never too young to start saving for retirement. On the other hand, only your specific life circumstances determine if you’re too old. Although earlier is best when it comes to retirement planning, later is still better than never. Whenever you choose to start, it is important to know your options and limitations.

It is difficult to find an employer that offers a consistent pension plan.  Those approaching retirement rely primarily on IRAs to assist in saving for retirement. However, most people never take control of their retirement accounts and passivity can be costly for your nest egg. The majority of IRA money in our country is invested in stocks, bonds and mutual funds. According to MSNMoney.com, about 97 percent of IRA money is dedicated to these traditional investments. That means only 3 percent of our IRA money is dedicated to alternative investments, such as real estate, that have the ability to produce higher returns.

The rules governing allowable investments by IRAs only exclude three classes of investments: collectibles (such as artwork, gems, antiques and most coins), life-insurance and S corporations. All other types of investments are permitted, which makes for seemingly endless investment options. One trend that is beginning to gain popularity is using IRA money to invest in real estate.

Investing in real estate through an IRA widens the range of alternative investments available for individuals planning their retirement. Introducing real estate into your retirement portfolio has obvious benefits. For one, it can act as a means to diversify your portfolio, which can help to hedge against the volatility in the stock market or government-backed investments. Also, for those who are experienced in real-estate investing, or those who seek help from a professional who is, real-estate investments have the potential to protect against principal loss. Real estate can also generate better-than-market-rate returns through income production and capital gains. With the help of a Registered Investment Advisor, your income and capital gains could also be stuffed back into your IRA either tax-deferred (as with a traditional IRA) or tax-free (as with a Roth IRA).

Arguably, the easiest way to incorporate real estate into your retirement plans is to have your IRA purchase the asset and you treat it strictly as an investment. This means you cannot use the property for personal reasons, which excludes the options of purchasing and frequenting a vacation home or purchasing property from relatives. There are no complex issues involved when you treat the asset only as an investment as long as your IRA pays cash for it. But, this is not a feasible option for everyone.

If you have to leverage a mortgage, things get a bit more complicated. For instance, you cannot personally guarantee a loan for your IRA. Also, your IRA will pay tax on something called Unrelated Debt Financed Income, which is the income that can be attributed to the leveraged portion of the loan. If you are not well-versed in real-estate investing, you can run into some major tax complications when trying to use your retirement accounts to purchase real estate. I highly recommend seeking the help of a professional for two specific reasons. First, a professional helps eliminate headaches and complexity. Second, he or she can help to ensure that your retirement account has the best chance to bloom and remain fruitful throughout your entire retirement.

To help simplify the complex process of introducing real-estate investments into your retirement plans, I have uploaded an e-book that you can download for free at www.ThePowellPerspective.com. Inside the “Real Estate Risk and Retirement Planning Pt. 1” e-book you will find:

– How to decide if real-estate investments are right for you right now

– Helpful guidance for introducing real-estate investments into your retirement plans

– How to navigate the different options you have when it comes to real-estate investing

– The importance of holding a diversified retirement portfolio

– How to use real-estate investments as a hedge against inflation 

I have compiled information from a variety of sources to create an e-book that can help readers take the unknown out of a complex topic. It is my hope with this two-part e-book, that readers will find the information they need to take control of their retirement planning and stop putting it off. Retirement can be filled with relaxation, travel and free time to complete a number of your life goals. There is no reason to be worried about your finances later on in life when you can easily take the right steps toward financial security today.

All My Best,

Thomas J. Powell

For the free eBook, please visit www.ThePowellPerspective.com 

Take Advantage of the Future by Investing Now

              Investors at all levels have been tempted to stash their savings away in what they view as safe places: federally-insured banks, gold, their mattresses. But, as retirement creeps closer, or for some of you, continues on, it is difficult to protect the value of what you have. It is even more difficult to take what you have and get it to work for you. However, difficult does not mean impossible. There are tremendous opportunities in this economic climate and these opportunities can do wonders for your future.

              There is no direct financial path to retirement safety, but putting some basic concepts to work can give your investment portfolio a boost and start you in the right direction. A 60-year-old investor needs to plan for at least 30 years of financial security, so investing in the short-term is not sufficient. Planning for the long-term comes with one major obstacle: inflation. Shoving your cash into a large, everything-proof safe will ensure that the cash is always available, but inflation is resistant to safes and will still eat away at your value. Inflation adds to the puzzle of retirement planning, but keeping a stash of conservative investments can help save your portfolio from being deteriorated by inflation.

              Investors do not have to fear that most conservative money-market funds or bonds issued by the federal government will lose their money. But, these are short-term protection strategies. The returns offered by these investments are likely not enough to stave off inflation. If the cost of living significantly rises, you are going to want your savings to do the same. Many investors are turning to TIPS (Treasury Inflation Protected Securities) for peace of mind. TIPS can be very helpful in side stepping inflation woes, but in a low-inflation environment, your returns will be lower than many other fixed-income securities. So, do not go overboard with TIPS.

              Your best weapon is diversification. Having a diverse mix of investments is a great strategy for both conservative and more risk-adverse investors. Diversification will always be your best hedge against inflation. Setting up a brief meeting with a registered investment adviser will help you to build a diverse portfolio that meets your needs. Playing it too safe now is not something you want to try and correct years after retirement. Running out of money later in life is something you can, and should, protect against now. And, again, this economic climate is filled with long-term investment opportunities. 

Living Vicariously Through Predictions

              Despite grim news reported for September that housing starts came in lower than expected, they rose from August rates. The tendency to be disappointed when expectations are not fulfilled adds to the bad news already being forced on us during these difficult times. When a report from the Commerce Department was released in Washington earlier this week, newspapers jumped at the chance to report that the glass was half empty. All predictions aside, housing starts still showed improvement.

              According to The Wall Street Journal, “The rise in housing starts came in at 0.5 percent, climbing to a seasonally adjusted 590,000 annual rate compared to the prior month.”[1]  Housing starts improved, but major media outlets pumped out headlines such as “Bummer for Housing Starts” (Forbes) and “Housing Starts Miss Expectations” (CNNMoney.com). The media ignored projections made by 76 economists in a Bloomberg survey. Their estimates predicted that housing starts would rise somewhere between a rate of 582,000 to 630,000. But, their estimates were made at a time when the August rate was thought to be 598,000. When a correction to the August figures brought the number down to 587,000, the predictions had already been made. If the numbers the economists were using were off by 11,000, then you could assume most of them would have lowered their expectations by the same amount. This would have made the average of the 76 predictions stand at 595,000; which is very close to the recently reported 590,000 figure.

              The point of all of this is that our economy still showed a humble sign of improvement. With the amount of slack still present in the housing industry, it is a small feat to break ground on any amount of new homes. Looking through rose-colored lenses will not do us any good, we need to be realistic. In that same vein, hammering out pessimistic stories when they are not realistic will only bring down the confidence upon which our markets rely. A group of surveyed economists who were making predictions based on false numbers should not have a drastic impact on our economic situation. As Charles Mackay wrote in his well-noted “Extraordinary Popular Delusions and the Madness of Crowds” in 1841: “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

              Negativity spreads quickly. We have enough to go mad over without becoming disappointed when a group of “experts” do not have their predictions come true. I think the real worry here should be in our experts’ ability to make accurate predictions. Instead of “Bummer for Housing Starts” how about “Experts off Again” or “The Facts the Experts Couldn’t See Coming”?  

Oh! I Didn’t See You There, Small Businesses

              Small-business advocates have criticized the White House for not giving more attention to small businesses. But, on Wednesday the Obama Administration announced that it would use funds leftover from the $700 billion bailout package to aid small businesses. Discussion of the new program came in response to dissatisfaction with the initial wave of bailouts that aimed at helping large financial firms and neglected small businesses. Many policy makers have argued for months that the $700 billion stimulus was only used to balance the books of large banks.

              The new plan, which is still nameless, will aim to increase lending at small, community-based banks. As was the case when individual states were dealt federal funds, the banks will be required to submit somewhat-detailed plans outlining how they plan on using the money. Since the new program will aim to get funds into the hands of small business owners, the banks’ plans will need to detail how they will play a part in this.

              After a number of meetings with community banks that will be scheduled through the end of the year, officials hope to determine the amount of capital that will be distributed. The funds are only to be available to small institutions with less than $1 billion in assets. 

              In his announcement in Washington on Wednesday, President Obama said he was prepared to “shift the government bailout efforts from larger banks to smaller banks because small business owners still have too little access to credit.”[2] Officials behind the new program hope that increasing credit to smaller institutions will energize job growth, which is something that has been reported on relentlessly, but has received little government attention.

              Although the exact amount of the remainder of the stimulus funds is unknown, federal officials agree it is enough to support this new initiative. Having the funds already available and not having to wait on them to be raised will help get the program off the ground. The life of many small businesses could depend on the government’s ability to act quickly. Taking months to consult community bankers may delay the program and inhibit small businesses from acquiring much-needed capital. Small businesses have been ignored thus far and, through innovation and flexibility, they have been able to survive.

Thomas J. Powell

---

[1] See http://online.wsj.com/article/BT-CO-20091020-709265.html

[2] See http://www.reuters.com/article/governmentFilingsNews/idUSWAT01385420091021

 

The discussion of investment strategies in this article should not be considered an offer to buy or sell any investment. As always, consult an investment professional to assist you in meeting your investment goals. 

The Strenuous Life of the American Dollar

A weak dollar wrestles inflation.

              With the enormous amount of government spending, some level of U.S. inflation is inevitable; but how high that level might get is debatable. With the global economy crawling out of the Great Recession, inflation-flavored fears now fill news broadcasts. As a result, gold and oil prices have climbed as inflation-conscious investors have poured their money into commodities due to fears of a devaluing dollar.

              Inflation concerns have been on economists’ minds since the Fed started passing drastic measures to combat our country’s troubled economy. Now, as the worst of the storm appears to be behind us, the concerns about the repercussions of our government’s monetary actions are under the microscope. The Fed’s commitment to keep the interest rate near zero for the next year has fueled speculation that other central banks will raise interest rates first—which would make other currencies more attractive than the dollar. Australia’s decision last week to raise interest rates already hurt the dollar and suggested that resource-based economies might recover quicker, and be more attractive to investors, than the United States.

              With credit streams far from unthawed, raising the Fed funds rate in the States at this point could be detrimental. A mainstay in economic reports is the number of challenges the government will soon face with unwinding all the different programs that are currently held up by economic stimulus money. The concern that the Fed will not be able to appropriately remove its massive monetary stimulus has many experts expecting high levels of inflation as the economy continues to recover. However, labor market slack and weak wage growth could be enough to keep inflation at bay.

              A weak dollar does have its upside. In the short term, by making American exports cheaper, a weak dollar can be good for our economy and useful in closing our trade deficit. However, in the long term, if the dollar stays weak, foreign investors will lose interest in putting money into U.S. Treasury securities without the promise of high interest rates. A significant, long-term drop in foreign-investor capital can make it much more expensive for Americans to borrow—something that can only hurt economic growth.

 

The V-Shaped Climb

 

              As manufacturing gains its footing, the stock market strengthens, housing inventories fall and retail spending returns; our economy will continue traveling up the V. However, government provides the stability in many market rebounds.  Once government funds are pulled back, the likelihood of dropping back into a recession could increase.

              Until spending is once again a consumer behavior, instead of a government one, the underlying economic problems will remain—threatening to pull us into another deep recession. In order for consumers to spend again, they are going to need to be convinced that their hours will not be cut, their jobs will not be lost and their wages will not be dropped. Of course, before they can be convinced of any of this, the unemployed will have to be reintroduced into the workforce.

              We will continue wrestling with high unemployment numbers until business owners are confident that their products and services are once again in demand. Currently, businesses are getting by with nearly-depleted inventories. But, as consumer demand rises, business owners will beef up inventories; which will produce the need for more employees in the manufacturing industry. Business owners are scraping by with the bare-minimum number of employees. Larger inventories require new employees to sell, stock, ship and manage the products.

              So, as consumer demand slowly returns, so too will new jobs. As we crawl out of this recession, a number of positive signs fuel consumer demand. As home prices continue to rise, homeowners will no longer be underwater and their confidence will get a boost. As the stock market continues to climb, so too will investors’ confidence. Major markets are all interrelated. Signs of growth in one market have the ability to positively impact another. The process is slow and filled with pockets of discomfort, but the climb has begun and the journey is forecasted to be slow and steady. Being patient and taking the right steps now will help our economy avoid falling down the second trap in the dreaded W-shaped recovery.

 

Protecting Your Wimpy Dollar, Not Fearing it

 

              Fearing inflation is a reactive investor’s behavior. This group of investors waits until something drastic happens in the marketplace that demands they respond. Active investors prefer to take more proactive measures to prepare for unappealing market conditions, such as inflation. Wise investors salt the slugs of inflation long before they have the chance to take over their gardens and devalue their investments.

              First, let us be clear that our country still may be on track to side step a nasty bout of hyper-inflation; which could cause a gallon of milk to cost a truckload of fifties. Our policy makers have to make the right decisions as we trudge through this recovery. To recognize the silver lining, an economy needs to have ultra-low unemployment levels and rising wages to effectively foster a period of hyper-inflation—both of which we are lacking at the moment. Unemployment is flirting with the 10-percent mark and real average hourly wages fell from December, when they were at their recent high point, to August at a seasonally-adjusted 1.5 percent.

              Some may consider worries about inflation to be premature, but there are countless signs suggesting that the dollar will continue to considerably weaken over the next couple of years. The most concerning: Our government has borrowed hundreds of billions of dollars in efforts to hold up our banking system and this has added to our country’s already-enormous debt responsibilities. Having far too much money and too few goods is the root cause of inflation. Therefore, the biggest worry is that our government will continue to print money to pay for its extraordinary debt. Even if some experts are arguing that inflation concerns are premature, there are proactive actions an investor can take to protect his or her investments.

              Some assets rise in value during times of inflation and having a dose of them in your investment portfolio can do wonders for its performance. The following are widely-considered to be the best performers: 

• Real estate: Traditionally, investors have used real estate as a hedge against the spontaneous performance of portfolios that are overloaded with stocks and bonds. Real-estate assets can also act as a hedge against inflation. Plus, today’s affordable prices and availability have real estate looking extremely appealing as an investment opportunity.
• Commodities: Inflation causes the price of materials to rise. So, why not hold interest in the materials themselves? Investing in commodities through exchange-traded funds can help small investors avoid the many drawbacks that come with investing in commodities (like deciding where to store 1,000 barrels of oil).
• Gold: With our currency no longer anchored to gold, it can lose value—and often does. The magic with gold is that it often moves opposite the value of the U.S. dollar.
• TIPS: Treasury Inflation-Protected Securities are similar to other Treasury securities in that they are long-term IOUs that pay a fixed rate of interest until they mature. But, with TIPS, the government adjusts the payments up or down each month according to inflation levels.  

All My Best, 

Thomas J. Powell  

The discussion of investment strategies in this article should not be considered an offer to buy or sell any investment. As always, consult an investment professional to assist you in meeting your investment goals.  

---