Entrust New Direction Blog

Recent surveys from Wells Fargo/Wachovia and The Center For Retirement Research indicate that Americans, including people who should be pretty close to retiring (ages 50-59), are nowhere near ready to retire.

Of course, it's in Wells Fargo/Wachovia's best interest to scare people into using their retirement vehicles, but the numbers of many surveys are similar.  

The Wells Fargo report indicates that pre-retirees (ages 50-59) estimate that they'll require $800,000, but they've only saved $300,000 (median).  They plan on spending 10% of their retirement total each year, which is over double what most advisors recommend.  So not only will this group have not enough money upon starting retirement, they'll also spend it quicker than most experts say they should.

With an organization like the Center for Retirement Research of Boston College, which has no obvious benefit from indicating a dark and stormy retirement outlook, I'm more likely to pay attention. 

Their "National Retirement Risk Index: After The Crash" reports that 51% of households are now at risk of not retiring with a reasonable amount of retirement income.  This is pretty scary, especially considering the many estimates that indicate social security's limited life span and the dearth of real pension plans.

To me, this is motivation to ensure my and my family's retirement comfort, because it tells me that the government will be no help.  Even if the government wanted to help, they'll likely be helping the folks who starting planning for retirement too late, if at all.  

Now my wife has been working on my inherent cynicism, which I consider, of course, realism.  So I'll try to reframe this in a positive light.  Hmmm.  Hardly anyone has enough money saved for retirement.  Many less companies are matching retirement funds.  The folks in 401(k)s who had saved for retirement lost huge amounts in the stock market crash.  Let's see... I got it!  The beach will be empty because everyone but us will still be working!

Photo courtesy of jmenard48.

It is with great joy that I am able to report that over $2 Million in commissions have been paid to real estate professionals through IRA investments administered by our office.  Real estate professionals who know about self-directed retirement plans have been brokering deals involving IRAs purchasing or selling real estate for their clients for years.

Entrust New Direction has overseen over 900 real estate transactions for clients. With each deal paying an average of 4% to the buying agent and 3% to the selling agent, that adds up fast.

As a self-directed plan administrator, we are not allowed to give investment advice, make recommendations, or sell any products. Being a marketing person, our limitations put me in an awkward spot at times. Potential clients call, are excited, and want to know how to find that first piece of real estate for their IRA. I can’t help them with that. That’s why we spend so much time building relationships with professionals who can.

The key for professionals is just letting clients know that they can make these investments and then following up with listings of available investment properties. Knowing how to analyze the investments for the client’s retirement plan is key. This education can be a cornerstone to building sales and catering to investor clients.

Many professionals are just starting to realize what this growing market of investors could mean for their business. We continue to try to reach these professionals through continuing education and other events in the metro area and teach them how to use the tool to build sales. Entrust offers education both online and in their on-site classroom and has several events planned for this fall. For a full list of upcoming events, visit our self-directed IRA events page.

Agents and brokers can take the MRE approved course online through Van Education at www.vaned.com. Entrust New Direction will also be the featured course author in Van Education’s booth at the Colorado Association of Realtors convention in Colorado Springs from 11am - 3pm at the Broadmoor on October 19^th in the 'Africa' zone in booth #551.

Two follow-up classes are planned after this event and qualify for 2 hours of Continuing Education credits. The Introduction to the Real Estate IRA offers an overview of how it all works and how professionals can incorporate self-directed investment tools into their business to help sell properties. It will be offered on October 28^th from 8:30am – 10:30am and again on November 12^th again from 8:30am – 10:30am. Both classes will be held in Entrust New Direction’s classroom, registration is available online through vaned.com.

Uncle Sam wants YOU to save more funds for retirement. Why?

First, the facts.  President Obama announced three ways for you and I to save more retirement funds.

The president wants to make it easier for small businesses to automatically enroll their employees.    Next, there is an option for tax refunds to be converted automatically to US savings bonds.  Third, if employees have sick or vacation time remaining when leaving a job, they can convert that time to retirement funds. 

These stipulations will be enacted without Congress intervention, through the Department of Labor.

At first glance, these may seem to be altrustic moves by the government.  Behavioral economics studies indicate that if one is automatically opted in to a retirement fund, they're unlikely to opt out (and vice versa).  Certainly it's better for people to have more retirement funds, right?  While savings bonds won't exactly turn your retirement dreams to gold, it's good to have more options that aren't the stock market.  And regarding the vacation/sick time, again, more retirement funds and more options are positive. Seems like maybe the government is helping us out?

Or maybe our federal government is just watching out for itself, acting more like Big Brother than a big brother.

Maybe the federalis realize that if we individual citizens don't have enough of our own money saved for our own retirements, we will rely on a social security system that, if status quo continues, will be dead soon. When the number of Social Security collectors goes up a record 19% in the 2009 fiscal year, as reported in USA Today, that indicates to me that:

A) Seniors are not finding supplemental income

and/or

B) Seniors want to take advantage of social security while it's still there

What will the government do with millions of hard-working Americans who rely on social security when there is no social security?

It's a classic conservative versus liberal argument.  Shall we help the people in rough fiscal circumstances or should they be required to take care of themselves?  Should those with sufficient funds be required to support those without sufficient funds?

President Obama also provided a quick sketch of some more possible changes which would require Congressional approval.  My personal favorite is automatically opening an IRA for employees at small companies without 401(k)s. Again, Big Brother stuff, and again helpful to the government.  But my perspective as a tax-payer and a person who is concentrating on retirement funds, this law would also help me as an individual.  Why?  Because if more citizens have their own retirement account, chances are less likely that I will have to pay for any one else's retirement with my taxes.

While the retirement funds are still your money, and while it's not difficult to opt-out, these are nanny state proposals.  One side of the political spectrum would say stay out of my paycheck, and the other would say we're helping you help yourself before it becomes an emergency.   But no matter which side you're on, it's clear that this administration wants you to save, not spend our way to success and happiness.  And it's clear that these will benefit the federal government itself, as much or more than individual Americans.

Painting by James Montgommery Flagg

Entrust New Direction has never recommended an investment nor provided investment advice, and we never will.  What we try to do sometimes is describe what some of our clients are doing - we provide examples and options.  Usually we deliver positive examples, such as the client whose self directed IRA bought a tractor and rented it out hourly, daily, weekly, monthly - enlarging his retirement account after every rental.  We love to share the good examples and will continue to do so.

This week, however, we're providing some cautionary tales.  Such as the story of the retirement investment vehicle stuck in the mud.

We've described how to care for your single-member LLC (AKA the checkbook control IRA).   We've described this in detail because there are many many details, many hoops for the retirement investor to jump through when investing in a single-member LLC.  Some of the hoops are extremely flammable.

Our president shared her point of view on Swanson, a case which many people use to justify single-member LLCs/checkbook control IRAs.

We've also described that the IRS may be firing a warning shot over the bow of those who invest retirement funds into their own businesses.  Frequently, these two gray areas are combined, and this situation describes our first horror story.

The Horror Stories

Early one morning, a man called as soon as we enabled the phone system, his voice trembling, "I think I may be in very big trouble", he said.  He took some money from his LLC and spent it on his own personal company without tracking it, not realizing that this was a taxable, penalizable occurrence.  "It was my LLC," he said, "I always thought I could do what I wanted with it.  Nobody told me different."  He was the client of another firm, a firm that specializes in single-member LLCs, and they wouldn't call him back.  We are still doing our best to help him.

Another man sold a real estate asset from within the LLC and used his own Social Security number on all closing documents.  Consequently, he received a 1099 and owed taxes on the proceeds of the sale, which severely cramped his personal finances.  If some folks, myself included, happened to do the same, we would have to declare bankruptcy.

A woman with property in Honduras sold the property, which was held in her "checkbook control" IRA, and she put the proceeds into her personal bank account without our knowledge.  She used these proceeds to purchase commercial property in her own name. The purchase had to be reported as a prohibited
transaction. We don't know the end of this story as she's out of the country. This could end up as a criminal matter.

• Fines. 
  
• Penalties. 
  
• Forced distribution of assets.
  
• Gargantuan tax bills. 
  
• Jail time.

These are a few of our least favorite things.

As stated up top, we do not and will not advise our clients on investments, unless they're trying to perform a prohibited transaction.  We give as much information as the client will take, and hope for the best.  We want our clients and potential clients to know their options - by no means is a single-member LLC the best or only option for self-directed IRA investment. And by no means is Entrust New Direction one of the many firms who will push you into a checkbook control IRA. What we do provide is expertise in the rules, an experienced sounding board for you and your investment ideas.

We now resume our regularly scheduled stories of successful and happy investors.

Photo courtesy of phototram.

Some brokers argue that 401(k) holders need all the help they can get.  It's true that some people with 401(k) accounts have little knowledge of finances and little interest in stocks, bonds and mutual funds.  But this regulation was like the fox guarding the hen house. 

It's possible that the advisers would direct the 401(k) holder independent of the possible commissions earned by the adviser, but an independent adviser is more likely to provide independent advice.

Phyllis C. Borzi, assistant secretary of the Department of Labor's Employee Benefits Security Administration, said, "Today's workers will benefit from quality investment advice - advice that is both affordable and unbiased."

Maybe if this sort of common sense continues, there will be a provision allowing more choice among retirement investment providers.  Sure, the 401(k) is the best option for the company, but what if they're no longer matching?  In my opinion, the employee should have more choice.  Likely if the average 401(k) holder knew that had choices, they would be motivated to educate themselves so they wouldn't need any adviser, independent or affiliated.

Photo courtesy of skedonk

Like most Americans, Juan did his best.  He worked 50 hours a week, took his kids fishing in the summer and sledding in the winter, occasionally fit in some golf games with his pals.  Every day, Juan tried to be the best dad, best husband, best friend he could be.  Juan also wanted to provide for himself and his family as well as possible, for now and the future.   So Juan contributed to his 401(k).  He figured as long as they matched 3%, he should figure a way to get that free retirement money, even if it meant a little less income right now.  

Then the stock market sunk and his 401(k) dropped 40%.

Then Juan was laid off.

Talk about a flying drop kick to the stomach. 

While surfing the web, ostensibly looking for a new job, Juan ran across a press release targeting the newly unemployed.   "What? I can invest the retirement money however I want?  No way!  I can't believe it!"  Since Juan was screaming in the empty basement, his wife ran downstairs to make sure the idleness of unemployment wasn't atrophying his brains.

When Juan explained about DIY retirement investing, and the discount, Juan's wife, Jenny immediately thought it was a scam.  "I don't think so.  Why haven't we ever heard about this?  The government is going to let regular people decide what to do with their retirement money?  There must be a catch." 

Still, Jenny had a small hope that this self-directed IRA investing was true, because she knew exactly where to invest some of the money - in her friend's new start-up kitchen gadget company.

Juan continued researching and discovered that there is an entire industry of self-directed IRA custodians and administrators, and one was located right in town!  Juan and Jenny happily transferred the funds from their 401(k) into a new self-directed Roth IRA.  Juan and Jenny took the buy direction letter home, and Jenny called her friend the kitchen gadget start-up company CEO.

Her friend the CEO was so excited, she knew Jenny loved the idea.  But then she  remembered the words of her start-up lawyer, "Accredited investors only." 

"Um, Jenny, are you an accredited investor" the CEO asked, knowing the answer.

Jenny's investment dream was smashed.

Jenny and Juan's IRA was not an accredited investor.

Juan and Jenny were able to find some other investments - they put some money in real estate, some in gold and some in CDs, but Jenny watched her friend's gadget company double, triple and quadruple in size.

Has this happened to you?  Maybe you know of a great investment opportunity but you don't have the requirements of an accredited investor.  Questions?  Watch this blog for more information on accreditation and discussions and what the little person can do.  

Kick photo courtesy of mighty mighty bigmac.

Bottles photo courtesy of shkumbin.

Many Realtors® and Real Estate Investors have been upset and up-in-arms this summer about bill HR1728, which passed in the House and is in process in the Senate.  This bill has admirable, if late, aspects aiming to prevent predatory lending.  That's not what makes many Realtors' stomachs churn.   The bill also takes on seller financing, which is increasingly utilized in a credit-desert environment like ours today.

Seller Financing allows the buyer and seller to work out a deal on payments, frequency of payments and interest rates, independent of banks or professional mortgage companies.  Seller Financing is what allows a self-directed IRA owner to lend money on real estate and create passive income for their IRA.  These deals happen thousands of times each year by real estate investors, IRAed or not.  Many real estate sales could not have happened in this credit-crunch environment without seller financing. Under this bill, an individual is only allowed one seller-financed deal every three years, or else register as a lender.  This is, to say the least, a complicated process.

The National Association of Realtors® initially supported the bill.  From their newsletter May 11, 2009: "NAR is supportive of this bill because it protects both the consumer and housing sector."

However, the NAR swung on this issue.  The latest "news" comes from correspondence from NAR clarifying their position.  The NAR reports that the Senate Banking Chairman, Chris Dodd, indicated that “this issue is not on his ‘mustdo list’".  

I would like you to take the following two messages from this e-mail and NAR. First, the bill looks like it will die due to inactivity in the Senate. Meaning, these requirements, which are not in effect, will not go into effect anytime soon. Second, if the bill begins to move in the Senate, NAR will work diligently to have a full exclusion for seller financing added to the Senate's version of the bill, or increase the limitation so it does limited harm to consumers that have to utilize this type of financing.

This is one case where congress's tortoise pace might be to our benefit as real estate investors and Americans.  

Photo courtesy of MiiiSH.

The EBRI, Employee Benefit Research Institute, makes my job easier and more fun.  They've surveyed thousands of Americans on retirement planning and other benefits over the years, and released many interesting (albeit dry) reports on the findings.  I wish they'd do a report on self-directed IRAs, but considering we SDIRA holders are maybe 4% of the market, we're likely not loud enough to be counted.  Regardless, EBRI's latest indicates that, on average, retirement plan finances aren't as bad as many thought.

For example, while the Dow Jones dropped approximately 35% between Jan 1, 2008 and June 19, 2009 (don't ask me why they chose these dates), the median account balance for retirement plans dropped only 16%.  This number was worse for families who had more than 100k (22% drop) and worse still for those in the top 10% net worth bracket (28%).   Still, that's not so bad. 

As always with the stock market, experts disagree and the regular Joe and Jolene are wondering - why?  Why is the average retirement plan loss (of those surveyed) less than the DJI loss? 

Diversification.

And what is better than smart diversification?  More smart diversification.  Many think their only options are stocks or bonds (with a commission paid to the broker, of course.)  But now is the time to really diversify, especially with more employers no longer matching.  When the stock market drops, you can make money on real estate.  If real estate is rough, you can ride it out with a private placement.  If your mini-microsoft dies, your IRA is making money on the personal loan.

Diversification works for squirrels, who "scatterhoard" their winter storage in many different locations, and it'll work for retirement investment.

Be the squirrel - diversify.

Photo courtesy of Gilles Gonthier

The Employee Benefits Research Institutes's 2009 Retirement Confidence Survey could be called the 2009 Retirement Crippling Fear Survey.  Those surveyed who voiced confidence in a comfortable retirement dropped to 13%, the lowest in 16 years of surveys.  72% of people plan to work after retirement, which is essentially not retiring.  32% think Social Security will save them.

Scary.

We don't need a survey to tell us that the stock market, along with the value of most Americans' 401(k)s, has dropped like the New Year's Eve ball in Times Square. We know this.  We also know that many employers are no longer matching 401(k) funds, further devaluing a 401(k) and demotivating the 401(k) holder.  We can safely assume that the federal government is not prepared to support us in retirement.  None of this is new information, but nothing seems to change.

Entrust New Direction, of course, has a horse in the retirement investment race.  We want more people to open self-directed IRAs for many reasons, obvious and not.  But if millions of Americans are not financially ready for retirement, all the rest of us will be adversely affected as well, whether by higher taxes or stress on the public safety net or some as-yet-unknown factor.   So it's in your best interest and mine that as many Americans as possible are financially comfortable in retirement. 

Now to motivate these millions of un-confident eventual retirees.  Is fear the best motivator?  This is, of course, a nebulous question. 

If the fear is immediately apparent (a drooling bear moving rapidly toward you), it's the best motivator.  But how many of us think about retirement savings while working full-time or overtime, raising a family, practicing hobbies, enjoying friends - basically, while living a full life?  If the fear of a destitute retirement doesn't spur you every day/week/month to save and plan, then it's not the best motivator.

Most people fear the unknown.  EBRI reports that 44% don't know how much they'll need for retirement.  Not very confident numbers.  The numbers indicate, however, that ignorance may not be bliss.  If we Americans don't know how much to save and we don't have confidence in the amount we're saving, we must not fear the unknown, or we must not be adequately motivated by that fear.

We may be motivated by a different kind of fear.  From a different point of view, the unknown may be contributing to our collective dilemma.  Most people don't know about self-directed retirement accounts, and many of those who do know about it think they won't be able to successfully grow their retirement account on their own.  They may not know what to invest in, or how to do so.

We talked about the fear of retiring without sufficient funds.  This is a distant fear, certainly not viceral, not real to most of us.  What is real to most of us is the fear of losing our money.  What is real is watching the numbers fall every quarter, knowing that money you earned and saved is now gone, due to some individual or some company's bad decisions or bad luck.

But, as we've heard over and over during this recession, people with 401(k)s don't look at their statement.  They're too scared to see more losses.  But if they're not looking at their statements, they won't close their 401(k) and start investing in a Roth, they won't even shift to a safer less-volatile sanctioned and commissioned investment. They're paralyzed.

Many financial "experts" talk about waiting out the storm.  They say that the stock market will come back within a decade or two.  Maybe so.  No one really knows.  Even if the stock market does come back, there is no guarantee we won't go through a similar recession again. 

If you're reading this, you likely already hold a self-directed IRA or you are considering one.  Maybe you were able to shake off the retirement paralysis, look at your statement, and do something to change the status quo.  Good for you. 

Now for your sake and mine, spread the word.  Tell your story, I'll tell mine, and maybe together we can shake enough Americans out of their retirement investment paralysis so they can start controlling their own destiny. Maybe together we can inspire people to look at their 401(k) statements and stop the bleeding.

Nebula photo courtesy of koolkao. 

Bear photo courtesy of 顔なし.

Locavore, the Oxford American Dictionary word of the year, 2007, and now in Webster's Dictionary, is defined as "one who eats foods grown locally whenever possible."  You, dear self-directed IRA holder, could become a locavestor, i.e. "one who invests retirement funds locally whenever possible".

Of course, a locavore's ideal location is amongst agriculture, while the locavestor would have more options in an urban evironment, but even New York City has farmer's markets, and even Idaho has investment opportunities.

Some ideas for locavesting:

1) Loan money locally                                                                           Your IRA can lend money to your church, your kid's soccer coach, your next-door neighbor.  Many people are paying 15-30% or more for credit card debt.  Your IRA could swoop in, earn 10% interest and save someone you know thousands of dollars.  Don't know anyone in need?  You could put an ad in the local paper.  Plus, the money your lender saves will likely be spent locally, further strengthening your town or city.

2) Buy shares in a local private company.                                                            

While this may not be the best time to start a company, many people who were laid off are doing just that.  They need start-up cash, and your IRA could contribute now, and look forward to a bug payout later.   There are likely local established companies which aren't ready to go public, and they may be looking for a cash infusion to help them along until the economy steadies.  Your IRA could buy into the next Microsoft or McDonald's, before they grow gargantuan. 

3) Buy a foreclosed home in your neighborhood.

Your IRA can vastly improve the neighborhood if you buy a foreclosed home and rent it.  Your IRA gets fat with rental income, and the neighborhood's home values improve.  Or if you don't want to deal with renters, your IRA could buy and hold the home, until the local real estate market improves. 

4)Buy the farm.                                                                                       To combine the best of eating and investing locally, you could find a small agricultural operation and your IRA could become a partner.  Not only could your IRA grow like the rutabagas, your retirement investment could contribute to the health of your community, literally.

If you see my new bumper sticker: "Think Globally, Invest Locally", please wave.  I'll wave back.