Alternative investments are getting a lot of hype, but once retirement comes into the conversation, it’s a bit of a gray area. Can you afford to take on a perceived riskier investment? Will it impact your personal retirement goals?
Let’s take a closer look at alternative investments, the state of your retirement income plan, and why building a goal-based retirement plan with a trusted financial advisor is essential for your financial future.
Review your retirement income plan
There is no one-size-fits-all approach to retirement. Your retirement goals and dreams will differ from those of your peers, which means your plan for retirement income will also vary.
Your retirement income plan must factor in your savings, expenses, health, goals, etc. It should account for:
- Day-to-day expenses: This includes healthcare, rent or mortgage, housing, food, utilities, and taxes.
- An emergency fund: Every retirement income plan needs to account for emergencies. Retirees should have 3-6 months of total living expenses saved in case of a major health event or other emergency.
- Guaranteed income: Retirees should account for Social Security, income annuities, and pensions (if applicable).
- Flexibility: Life can throw curveballs at any time, so it’s important that your retirement income plan can be adjusted just in case your goals need to change.
- Your long-term goals: Do you want to travel throughout retirement? Or perhaps start up a new hobby like pottery making or crafting? You’ll want to account for those expenses.
Before you decide if alternative investments are right for your retirement plan, you must ensure that your retirement income plan is locked and loaded and that your goals are clear.
A quick review of alternative investments
Unlike traditional investments like stocks and bonds, alternative investments are more flexible. Real estate, hedge funds, private equity, commodities, promissory notes, and collectibles are all different types of alternative investments. Remember that box of baseball cards you have gathering dust in your basement? You may have a very valuable asset on your hands!
However, because alternative investments fall outside the traditional investment format, they tend to be more complex. While investors should complete their due diligence and research on all investment options, it’s particularly important with alternatives. They also are not regulated by the SEC and are illiquid by nature, so it’s important to only invest in alternatives that are price transparent.
Why you should consider alternative investments for your retirement plan
Alternative investments are a limited part of the market and are not linked to the stock market, so the impact of market volatility is generally lower, and investors have an opportunity to earn higher returns. There are 4 key reasons why retirees invest in alternative assets:
- Potential for high returns
- Opportunity to invest in your passion
- Portfolio diversification
- Strengthen your legacy
So, how much should you allocate to alternative investments? There’s no black-and-white answer. The amount you should allocate to alternatives is 100% dependent on your investing goals, current savings, retirement plan, liquidity, and risk tolerance.
Diversify your self-directed IRA with alternative investments
A self-directed IRA allows you to diversify your account with a mix of traditional and alternative options. There is a lot of confusion around self-directed IRAs—which we clear up here in this blog—but they can be an excellent opportunity for retirees who want more investment options.
With self-directed IRAs, you can invest in alternatives like private equity, precious metals, real estate, and private lending agreements.
Creating a goal-focused retirement plan
You’re more likely to live out the retirement of your dreams if you set retirement goals early and have a plan to achieve them. The most effective way to create a goal-focused retirement plan is to work with a trusted advisor that understands your goals, values, and risk tolerance so together, you can build a plan for how you want to live out your golden years. So we brought in Thiel Ruperto of Stronghold Wealth Partners, to shed some light on how retirees can prepare their investments and finances for retirement.
Before implementing a flawless retirement plan, you need to have an introductory conversation with your advisor. Thiel’s process is simple yet extensive:
“Everyone has different expectations and goals for retirement and how they want to build their nest egg. With these beginning conversations, I want to get into someone’s world and uncover what they really want and need. Because, as we all know, wants and needs are very different. I start by asking what retirement looks like for them. Is it monetary-focused? Happiness focused? Retirement isn’t based on age; it’s based on money.”
During these early conversations, people often don’t have cohesive goals or don’t have any goals in mind at all. Retirement goals are different at 30 years old versus 50 years old. They should consider your anticipated lifestyle, risk tolerance, sources of income, and long-term expenses.
“We’ve fallen into a trap that we’re all ‘finance experts’ with ’google’ degrees. Google has helpful generic information, but it can’t tailor a plan perfectly to your needs. An advisor helps you plan for your future by creating a one-of-a-kind retirement plan.”
So you know you should consult a financial advisor to create a goal-based retirement plan, but how do you find the right financial advisor? Thiel has some tips:
- Do extensive due diligence
- Get referrals and follow up
- Understand what kinds of investments they use for clients
- Know how they get paid
- Learn how they helped their current clients succeed
“Most importantly, make sure your advisor sets clear expectations and doesn’t make promises that are impossible to keep. Education is also vital. You want to fully understand the pros and cons of every investment. Education is the key to providing relief from the nerves of alternative investments. People fear what they don’t understand.”
Prepare for a dream retirement
So, are alternative investments the best fit for your retirement plan? Alternatives can be great paired with traditional investments—it doesn’t have to be one or the other. Having a combination of both will be the most effective route.