This is the third article in my Core Four series. The goal of this series is to give you context for my point of view regarding financial independence and to clarify my overall investment philosophy. I want you to know how I’m thinking about basic financial literacy and the need to build wealth, as well as the mechanics of how I make money, keep money and grow it.
My friend April and I share a common occupational history in that we are both refugees from the American healthcare system, now turned active investors. (I know we both miss helping patients but we do not miss the hassles of managed care and insurance companies). She has a great way of organizing her thinking around income and wealth. She describes her “buckets” of money as Now Money and Later Money. I also add Legacy Money for myself (more on that in Article #4). Although I won’t be addressing the Legacy Money bucket of my portfolio in this article, know that I am also including provisions for my descendants and will elaborate on that in the future.
Now Money is just what it sounds like; monthly income I receive from investments in lending/debt and also rental payment from my tenants. This is my family’s regular ebb and flow with which we pay for insurance, groceries, pre-school fees, gasoline etc. Do you remember when I previously asked you to determine what your “freedom number” is? This is the essence of Financial Freedom—when your monthly Now Money income is enough to pay your monthly expenses, you are free from having to work. Of course, exactly how you do this differs with the current market cycle and what your specific goals are, not to mention your tax situation. (I’ll elaborate on how I crafted my own portfolio and why in my next article).
Now Money is the secret to your freedom, sooner rather than later, but it’s only part of the picture. Later Money is necessary because we all have other financial goals, dreams as well as obligations in our future. As an example, my Later Money bucket includes travel and educational costs for my children and also retirement for both myself and my wife.
Now Money pays for your life today but as women, we live longer and use more health care dollars in retirement, have earned less over our careers and are typically under invested—we will need more in our Later Money bucket! Trying to anticipate future financial needs around health care is nearly impossible but doing so is absolutely necessary. To that end, I also include things like increased health insurance premiums, long-term or memory care costs, additional supportive care to remain at home etc. This is not an exhaustive list by any measure but I offer it as an example of the items I’m considering for my Later Money bucket.
So what’s actually in my Later Money bucket? For the most part, these are investments which either increase in value over time (real estate appreciation, for example) or are simply longterm “cash-hold” investments. These “cash-hold” assets are used as wealth storage vehicles. I don’t rely on them to increase in value but I do expect them to hold their value and in many cases, they also throw off monthly income. However, the single most exciting aspect of the Later Money bucket is that it’s in a self-directed Roth IRA account. All my profits are tax free! Never heard of this? Let me explain…
Wall Street would have you believe that the only way to invest your IRA or 401k retirement dollars is in the stock market, ETFs, Bonds, Mutual Funds—of course they do, because that’s how they profit off you. All those fees add up and at the end of a year or your career—you will have paid a substantial percentage of your retirement money to them. I reject this model because it really only serves the brokerage, not you. I think it’s better to control your own accounts, make your own investment decisions and enjoy a superior Return on Investment (ROI). I do all this and more for my own retirement accounts. I use “Self Directed” Roth IRA accounts, which are housed with a third-party custodian in accordance with IRS rules and regulations. This custodian merely processes paperwork for me, funds investments at my direction from my accounts and receives the profits on my behalf as well. And of course, they provide the required paperwork to me and the IRS as needed.
As I’ve said before, I’m not a CPA, attorney or financial planner—the ideas and strategies I share with you work for me and my family. You should use these articles as a jumping off point to further discussions with your own team of professionals. Keep something in mind though; consider how your financial professionals are being paid by you. If they benefit from your maintaining a Wall Street-based, status quo investment portfolio, you may need to upgrade. (I tell newer investors all the time; align yourself with financial professionals that also invest in the same types of assets that you do).
Now you know that since we are talking about IRS regulations, there are some details to know up front but the short story is this, you can invest in virtually anything. (There are some prohibited investments like “collectibles”, so follow up for your own for clarity). If you want to have some fun, call Vanguard or Schwab, whomever and ask them if you have a “self directed account”. They’ll reassure you that you can choose whatever you want to invest in….as long as it’s under their control, using their platform and their management.
Here’s a more extreme strategy but completely plausible; in my self-directed retirement account, I can own a house! That’s right, the name on the Deed/Title is my IRA account, the house is rented out, and those monthly rents are deposited directly into my retirement account every month. (With a good property management firm in place, you’ll never get late night phone calls about trash, toilets, termites or tenants).
Within my self-directed retirement account, I can also buy and hold a Mortgage Note and “become the bank,” with a borrower paying monthly mortgage payments directly to my retirement account every month. Similarly, I can also be a Private Money Lender to other investors for either short or longterm projects. These investments have collateral (unlike you stock market account), and the hard asset can be real estate (my preference). Another huge advantage of Private Money Lending is that the collateral used (real estate) is typically worth 30-40% more than the amount I’ve loaned. And in the spirit of diversification, you can also hold precious metals like Gold, Silver, Platinum or Copper in your self-directed accounts as well.
One of the best things about a self-directed retirement account is making it a “Roth” account by paying tax on your income now, for the use of your money in retirement, tax free!
At this point, most folks will say “but I won’t be able to take the tax deduction!” You’re right, because you’ll fund your Roth account with after-tax dollars. But ask yourself this: do you think taxes are going to be higher or lower in the future? What’s more, if you’re beginning to invest for yourself in Main Street, it’s likely you will not be in that “smaller tax bracket” the financial planners forecast for you. I am not planning to be poor in my retirement, are you?
So you see, my Later Money bucket includes these types of investments that contribute to my retirement account over time and are not needed for my Now Money needs.
In the meantime, educate yourself about self directed retirement accounts and convince yourself that they are both legal (I get asked that a lot, lol!)—and superior in terms of increased control (you decide on your own strategy), increased security (real estate and related financing provides hard-asset collateral) and decreased fees.
As always, if you’d like to ask questions or get some clarity don’t hesitate to reach out to me on the website—I love talking shop!
Hope this helps-