Random Musings On Investing In Stocks vs. Real Estate

I was checking out my various IRAs the other day and was struck by how much better I feel about my self-directed IRA than I do my traditional (stock-based) IRAs. Most people’s retirement savings are invested in the stock market (including the majority of mine). But when I compare that with my self-directed IRA which is investing in hard money lending, I can’t help but notice how differently I feel about them.

Yes, stocks historically have risen over the long term. I know this. But I also am acutely aware that I have no control over the prices of the stocks I hold. About the only control I have is which stocks to buy and whether or not to reinvest any dividends they might pay.  So each month, I check the value of my stock portfolio and I’m fairly detached from the experience. Stocks went up in value? Yay. But I know they could drop again tomorrow. Gains are transitory, at least in my mind. As the adage says, you’ve never made (or lost) money until you sell.

But with my hard-money lending IRA, I get a check each month for a couple hundred dollars. That’s real money I see coming in each month. It can’t be taken away again by a news report of a product recall, class action lawsuit, or some other random event outside my control. It’s cash in hand. Now the possibility exists that my loan might be defaulted on, but with the loan-to-value limits I use for my lending criteria, I know even if that happens, I’m still pretty well protected.

I know there is no such thing in investing as a sure thing or a guaranteed return, but the returns my HML-based IRA are generating feel much more real to me than my stock-based returns.

Self-Directed Roth IRA

Does anyone have any experience working with a self-directed IRA (Roth or otherwise)? I'm looking to head down this route and I have questions about the day-to-day operations - does it need a custodian (other than me), does the custodian write the checks and sign contracts, etc.

I've heard about using self-directed IRAs for several years, mostly about how they can be used for investing in real estate. I was always intrigued by this, but never really was in a position to set one up. A couple of changes going into effect in 2010 have made now seem like a good time to get going with this. In 2010, the income limits for who could convert a traditional IRA to a Roth IRA are going away. Additionally, if you convert in 2010, you can spread the taxes you'll need to pay over 2 years*. When I was laid off of my job over a year ago, I took my 401(k) and converted it into a rollover IRA. With the stock market down, now is good time to convert since I will have a lower amount I'll have to pay taxes on. (I should note that the current law applies to traditional IRAs converted to a Roth IRA. It's unclear if the IRS will decide that the law also applies to rollover IRAs converted to Roths. After talking to my CPA, I've decided that to be safe, I'll convert my rollover IRA to a traditional IRA and then convert it to a Roth.)

My point for doing this is to use the self-directed IRA funds to make hard money loans, which I have been doing for the last couple of years, earning between 10% and 12%. Getting that return tax free would be very nice.


* If you declare the conversion in 2010, you'll have to pay taxes on the converted amount in 2010. But if you don't, you must declare one half of the contributions in each of 2011 and 2012. What I will do in those years is calculate how much I will owe in taxes and simply adjust my W-4 withholding at my day job to spread the tax burden out over the entire year. Of course, it's likely that tax rates in 2011 and 2012 will be higher than 2010, but of course, that's anyone's guess. Lots can happen between now and then and I'm a fan of delaying paying taxes as long as you can.

At Last! A Realistic Retirement Outlook From Major Media

My monthly Schwab statements include a financial newsletter. I usually toss these in the trash after scanning them because, quite frankly, they don't have much information that I don't already know. However, the April issue pleasantly surprised me. Although it still doesn't have much info that is new to me, it does feature an article that caught my eye titled "Five Retirement Myths To Ignore." What struck me was that this is the first article I've seen from a major financial source or major media source that states what I feel to be the major problems with current retirement advice. It's about time someone started telling it like it is. Below are their five myths. They commented on each one in the article, but I'll just give you my comments.

1. You'll only need 70% to 80% of your pre-retirement income. Health care expenses are going through the roof and, once retired, it's a good bet you will no longer be covered by employer health insurance. This alone is enough reason to ignore this advice. If you plan to travel more or buy nicer things, you'll definitely need more than 80% of your old income. Personally, I want my standard of living to rise when I retire, not stay the same or go down, so I plan to make more during retirement.
   
2. You'll be in a lower tax bracket. Federal deficits are going through the roof. At some point, taxes will have to be raised. And remember that withdrawals from traditional IRAs and 401(k)s are taxed as ordinary income - the most heavily taxed income there is. Thank goodness for the Roth IRA!
   
3. You'll keep working. Who thinks this? Retirement means you are no longer working!
4. The stock market will save you. By the time you retire, you will not have a long enough time horizon to ride out market fluctuations.
5. There's always Social Security. Haha!! Yeah, right!