The joy of entrepreneurship…
Many investors in the US are discovering that their plans for a carefree retirement are in jeopardy due to lack of funds. Creative investors are seeking more profitable solutions to their retirement plan investments. As more and more investors are learning, traditional financial advisers generally direct investors to traditional investments only. For investors used to having access to a wide variety of investments, the world of retirement investing seems very limited. Limited, that is, until they discover the Self-Directed IRA. Self-Directed IRAs reopen the door to the investment world that creative non-traditional investors know so well.
Let’s follow the steps of one such investor. Joe, 54, married, two kids, one dog, is a successful business owner and practiced investor. A few years ago, Joe had it all planned out. He was going to retire at 60 and move to New Syrmna, FL.
Joe’s retirement plan was doing well. It was invested in a variety of successful funds and stocks. Joe anticipated sitting back and waiting for the monthly automatic deposit to show up in his account. That vision changed over the course of a few months as his safe, secure paper investments lost over 35% of their value. One morning, Joe realized that he needed to pay more attention. After studying, researching and spending hours communing with the Wall Street Journal, Joe realized that he just wasn’t comfortable with stocks. Feeling his retirement dream slipping away, Joe turned to the bottle.
Fortunately, Joe only had a few bottles. Mainly he talked to his friends at his neighborhood bar. One of them, after listening to Joe’s story, introduced him to self-directed IRAs. Joe listened intently as his friend described the investments allowed in truly self-directed accounts. Joe realized that he had been hunting for investments in the wrong field, a field where he felt lost and uncomfortable. Reenergized, Joe headed home with new hope.
Joe took an inventory of his investing and other skills. His professional career as a restaurant equipment dealer had introduced him to a wide number of restaurant professionals. He also knew that he had a good eye for people and was usually good at identifying those with talent.
Knowing that his retirement plan could invest in almost any asset, including a business, Joe began to think about how he could use the skills and connections that he had to help his IRA grow through investing in a business. Joe, at the same time, took advantage of classes offered by his local Entrust Group office on how self-directed IRAs function. At the conclusion of the class, Joe began the process of opening a self-directed IRA and moving his retirement funds into it. During the class, Joe learned that although his knowledge and connections could benefit his plan, his labor and assets couldn’t. Joe also kept his eyes open for businesses and opportunities as he met with clients for his job. Within a few months, one of Joe’s clients mentioned a local bar which was for sale. Joe did a little investigating. He certainly heard opportunity knocking. Not for himself, but for his IRA. Joe discovered that buying and owning a bar involved quite a bit of paperwork, particularly regarding the liquor license. Joe decided it would better for his IRA if it had a partner, ideally one familiar with the whole process. Joe found that the current bar owner didn’t really want to sell, but had to due to an unrelated financial difficulty. Joe realized that he might have found the perfect partner. Joe negotiated with the seller for Joe’s IRA to purchase 85% of the bar, which was actually a corporation known as “The Corner Bar”. The 15% left with the old owner was sufficient to keep the local licensing folks happy, but gave Joe’s IRA control of the operations. The purchase included some terms which made the old owner happy with his minority position.
Joe’s IRA invested $225,000 and as a shareholder, it controlled significant decision-making power. All the decisions Joe’s IRA made were actually made by Joe and executed through the IRA, so although Joe couldn’t wipe down the bar himself, he could use his eye for talent to hire expert bartenders to do the wiping. Joe’s IRA also provided funds to the corporation to do some upgrades in the bar and make some other improvements that Joe thought would make the bar more profitable. When Joe calculated the return on his IRA’s investment, he realized that after taxes, the investment was likely to return about 15% or around $35,000 per year. Joe decided to delay his retirement by two more years, giving him 8 years to accumulate earnings. He estimated that the cash from the bar investment will provide his IRA around $280,000 over the next 8 years, plus earnings on those funds. Joe expected the investment to be worth around $400,000 in 8 years.
Joe is dreaming of the beach again. But wait. The bar is producing earnings, which Joe’s IRA will have more money to invest. Hey buddy, have you heard of any good investment opportunities?