Utilizing a Self-Directed IRA: A Case Study in Investing Outside of Wall Street- Part 1, by J.J.

Cast your bread upon the waters, for you will find it after many days. Give a portion to seven, or even to eight, for you know not what disaster may happen on earth. Ecclesiastes 11:1-2 ASV

Author’s Note

Please note that this is only an example of my utilization of a Self Directed IRA, albeit in a minimal manner, to diversify investments into hard assets. This is not meant to give investment advice to anyone, and your decision to pursue this option should be done with careful scrutiny of the IRS rules governing this type of IRA. Very careful consideration should be given in regard to prohibited investments, prohibited transactions, and prohibited parties defined by the IRS code. Not adhering to these can be disastrous to your investment goals.

A Little Background

Having spent 25 years in corporate Fortune 500 America, my wife and I were looking forward to a transition into a much less frantic “retirement job”. Aiming down the road 3-5 years, our timeline came early when I found myself “RIFed” out of a job at age 55. Having lived a fairly conservative lifestyle, my wife and I were, for the most part, prepared for a reduction in family income. However, further adjustments to our budget and planning were still necessary. Several years previous, my wife and I had attended Dave Ramsey’s “Financial Peace University” at our church. We had offered it to all our kids and decided we would attend with them as well. Ramsey’s direction on debt, saving, and investing is almost unique these days, and it’s certainly counter to today’s culture of spend, spend, spend. What a blessing Dave’s program has been for the entire family!

Planning a Retirement Job

I had been planning a “retirement job” in real estate sales and farm management, specializing in investment grade farmland and recreational properties in the Midwest. We had purchased farmland over the years, managing them for both sustainable income and recreational enjoyment. I’ve established thousands of acres of tall grass prairie, many, many wetland projects, and several fishing ponds on both our own land and others, as both a hobby and to supplement our income. Managing timber tracts for income, long-term improvement, and quality whitetail habitat was also something in which we were not only successful but found great satisfaction. (This is a fairly easy accomplishment in Iowa and Illinois. God provides the genetics and the groceries, and if given time, 170” plus whitetail bucks are the result.)

God’s Early Push

I had actually passed the real estate exam and obtained my license a year prior to my early departure from the hamster wheel, but I was not engaged in the business. God’s early push into this endeavor ahead of our timeline has been a huge blessing. Looking back, I chuckle at the perfection of His timing

Wall Street As Usual

Upon separation from the company in 2014, my 401k, managed by Vanguard, became a Roll Over IRA, which I also kept under Vanguard’s umbrella. Barrack Obama was in the White House and into his second term, the U.S. government was 18 trillion in debt, the Social Security Trust Fund was projected to “go negative” within 15 years, and unfunded liabilities of both the state and federal governments were still barely acknowledged by anyone. My IRA had only recently recovered to the level it had been prior to the 2008 financial collapse caused by the bursting of the housing bubble.

The Federal Reserve had added three trillion dollars, soon to be four trillion, to their balance sheet, and the next bubble, even bigger than the last, was certainly on the way. The timeline to the bursting of the bubble, of course, is to be determined, but this time isn’t something to be squandered.

A Successful Friend With No Money Invested in the Stock Market

At dinner with some good friends one night, the conversation turned to the economy, and of course, the stock market. I was amazed to learn this gentleman, both well off and successful by any standard, had absolutely no money invested in the stock market.

Self employed in manufacturing, he had decided after 2008 that there had to be a safer way to accumulate wealth than to rely on a market that subjected itself to the emotional impetus and “bubble” binges of Wall Street. He had instead elected to move all his IRA investments into a self-directed IRA with a local bank as the qualified trustee, or custodian. Then he directed the bank to purchase hard asset investments. In his case, these hard asset investment are farmland and multifamily apartment complexes. He utilizes a property manger for the apartments.

However, he manages the farms himself, which is appropriate under the IRS code as long as he receives no compensation for his managerial duties. His holdings were generating over $500k in passive income every year. And while they were not immune from the ups and downs in the economy, they were hard assets that he could drive by, check on, and were much less likely to decrease in value to any extent the stock market would in a retraction.

Rental Property and Farmland Investment

In all reality, in a recession, rental rates on rental property tend to improve as underwater home owners flee their high mortgages in search of lower cost living. Farmland has always been an excellent long-term investment and has been shown to rival the stock market over time in total return.

Both are also exceptional hedges against the event of high inflation, a probability when the Fed’s “monetary easing“ money creation is finally released outside the banking system and Wall Street. Even now, in the summer of 2018, company valuations have been pushed to absurdity by the influx of money from the Fed and other Central Banks.

The Government’s Need

We talked more about the “trap” of the customary way we invest for retirement and how the government’s need for us to need it keeps us voting for more perks from whichever political party promises to meet our most recent needs. Our conversation included discussion about the need for the government to pursue both a fiat currency and inflation (way beyond the fictitious government statistics reported). We talked of the destruction of the middle class by the Federal Reserve and these policies, the intention of politicians to create divisiveness in order is obscure the fact that the fight isn’t really between the left and the right but truly between the ruling class of politicians and their cronies, and the rest of us.

The bankruptcy of Social Security and Medicare held some of our attention as we speculated on where the politicians would turn next in their insatiable need for more taxpayer revenue.

We returned out discussion again to the ability to invest outside of the norm– the norm that has baited many, many U.S. citizens to not only rely on a Social Security promise that cannot be kept but also a gamble on Wall Street where the insiders win and the rest of us are just along for the ride– all with our own savings that are dictated how and when they can be used, and as a class, the “low-hanging fruit”. This is the fruit that will certainly be in the cross hairs of additional taxation.

A Different Way To Invest Blew Me Away

Needless to say, my friend’s revelation of a different way to invest IRA investments blew me away. The very next day, I went to work to preserve my own portfolio, and by doing so, hopefully my financial independence, as well.

The Steps I Took

Like so many, the steps I took are as follows. (While I am much more comfortable with the diversification of investments I now have, I am still pursuing additional changes and opportunities.)

Baby Steps Across the Floor

My first step was reviewing my current IRA holdings, as well as investments outside my retirement accounts. I tend to view things as a whole vs. IRA funds only and those assets outside qualified account, such as our home, farm, regular savings, et cetera. I had invested according to Dave Ramsey’s approach, putting 25% into each of four types of index or mutual funds– growth, growth and income, aggressive growth, and international. If you’re familiar with Dave Ramsey’s financial management program, he uses a series of “Baby Steps” to get out of debt, saving for emergencies, and growing your wealth by “living like non-other so you can give like non-other.”

I’m guessing Dave uses the “baby step” analogy because big steps create both intimidation and inertia. I like to think of Bill Murray’s character in the movie What About Bob? ^[1], where Murray portrays Bob Wiley– a guy paralyzed by his own anxieties. He uses Dr. Marvin’s (Richard Dryfuss) breakthrough psychiatric treatment “Baby Steps” to finally live a real life.

In addition to Ramsey’s investment direction, I had some cash that was not invested, as well as some money in a mining index fund. Outside the IRA, our assets were comprised mostly of farmland and our home, as well as a cabin on a lake, all fairly illiquid.

Tomorrow, I will continue to describe my steps toward a self-directed IRA for investing outside of Wall Street to achieve greater safety and diversification.

See Also:

• Utilizing a Self-Directed IRA: A Case Study in Investing Outside of Wall Street- Part 2, by J.J. ^[2] (Active on 8/15/18)

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