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Fund Your Retirement Until It Hurts

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04-13-2009

 
Adviser Soapbox

Hugh Bromma, Entrust Group, 04.09.09, 12:45 PM EDT

The financial carnage of the past year has made all but the most intrepid among us fearful of just opening our retirement statements, to say nothing of contributing to our retirement accounts for fiscal 2008. Now, hold your nose if you must, but understand, if you ever hope to retire, it is imperative that you set aside money each year to provide for your later years.

Entrepreneurs and small-business owners are generally more accustomed to financial ups and downs than the rest of us, but even many of them have been shaken by the recession that spans the entire developed world. Still, I encourage and even implore them to continue to set aside a percentage of their income for retirement purposes.

No less a financial genius than Warren Buffet has opined on how curious it is that people want to buy assets when they're going up and run from them when they are declining in value, while those same people would storm their favorite store if they heard it was selling attractive merchandise at 70% off. That unfortunate quirk of human nature could dissuade entrepreneurs and others from contributing before the April 15 deadline. But that would be a terrible mistake.

Unless you believe the events of the past year herald the end of capitalism and civilization as we have known it for the past millennium, you need to regroup and continue to invest in a variety of assets. For all the small-business owners who put too much of their retirement money into stocks and bonds, there's a lesson to be learned--diversify.

Certain hard assets have maintained their values much better than stocks and bonds. This doesn't mean that you should take all of your retirement assets and use them to buy gold and platinum bars, but almost all financial advisers would suggest a long-term retirement portfolio should have a combination of soft and hard assets.

Since entrepreneurs and small-business owners are a mostly optimistic lot--if they weren't, they wouldn't have the fortitude to strike out on their own--I'm confident that they will see that many assets are now erroneously priced and offer wonderful investment potential.

One of the best ways to capitalize on these mispriced assets is by utilizing a self-directed retirement account. Self-directed IRAs and 401(k)s provides extensive latitude in taking advantage of not only declining equities, but also private placements, real estate, mortgage notes, leases and a number of other cash-flowing assets. As real estate and equity markets correct, the advantage of diversification in a self-directed account is clear.

For example, homes where the asking price was $900,000 in Sanibel, Fla., sold in March 2009 for $250,000. Atlanta properties selling for $60,000 early last year are now selling for $25,000. In both cases, these properties should provide positive cash flow as far as the eye can see.

In addition, many of our self-directed IRA owners and 401(k) participants have made loans to other investors to acquire such properties, with returns of 8% and more, secured by the real property.

The past year has been very unsettling for nearly everyone, but that doesn't mean we can, or should, lose sight of our long-term financial goals. And even if you're uncertain about where to put your retirement money for fiscal year 2008, set it aside in a qualified retirement plan before April 15, so you can invest it and reap the benefits for years to come.

Hubert Bromma is CEO of the Entrust Group and author of How to Invest in Real Estate and Pay Little or No Taxes. He is also the author of How to Invest in Real Estate with Your IRA & 401(k) and Pay Little or No Taxes, published by McGraw-Hill.