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Can the Self-Directed IRA Help Alleviate America’s Retirement Crisis?

Isaac Nuriani    |
Sep 9, 2022
  • America’s retirement crisis is getting worse
  • Greater individual control over retirement assets could help
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It’s been a tough year for retirement savers.

The highest inflation in decades already had been forcing Americans to suspend retirement plan contributions so they could keep up with soaring prices at grocery stores, gas stations and basically anywhere that anything is sold.[1]

Then came March and the kickoff to the Federal Reserve’s effort to rein in that inflation with higher interest rates. The increased economic volatility resulting from a highly combustible mixture of persistently high inflation and rapidly rising interest rates wiped trillions of dollars from America’s retirement plans in the relative blink of an eye. According to Alicia Munnell of Boston College’s Center for Retirement Research, roughly $3.4 trillion evaporated from IRAs and 401(k)s in the first half of this year.[2]

But as bad as this is, it doesn’t represent near the bulk of the retirement crisis that’s been discussed for years.

In a nutshell, the retirement crisis is the difference between what Americans have saved for retirement and what retirement will cost them. Munnell estimates the total retirement-savings shortfall among U.S. households right now to be slightly north of $7 trillion.[3]

“Approximately half of Americans are at risk of not being able to maintain their pre-retirement standard of living after they stop working,” said Angie Chen, a research economist at the Center for Retirement Research.[4]

And that almost sounds too optimistic, considering that Americans between the ages of 55 and 64 have median savings of just $134,000.[5]

Without any meaningful solutions, it’s hard to imagine the problem not growing considerably worse in the years to come. Two years ago, Americans aged 65 and older made up roughly 17% of the total population. By 2030, that percentage is projected to be around 21%.[6]

None of this even considers Social Security, which remains on a collision course with depletion. Social Security’s Old-Age and Survivors Insurance Trust Fund is on track to be empty in just 12 years. Unless something is done to meaningfully shore up the program, only 77% of scheduled benefits will be payable from that point forward.[7] But as the number of Americans aged 65 and older continues to increase and adds further strain to a Social Security system that’s becoming increasingly unreliable, it’s difficult to imagine in what way Social Security would ever be part of the retirement crisis solution.

So, then, how is the retirement crisis to be solved?

A comprehensive answer to that question would fall well outside of the scope of this article space. At this point, I think some of the solutions likely will have to come in the form of changes at the level of public policy. But others may be as simple as encouraging retirement savers to take advantage of tools that can help them maximize their own financial holdings.

One example of such a tool is the self-directed IRA. Self-directed IRAs enable retirement savers to own fundamentally uncorrelated, physical assets such as precious metals in an effort to effectively hedge and diversify – and therefore maximize – their nest eggs.

Let me be clear: I’m not suggesting that self-directed IRAs are the single solution to America’s retirement crisis. Quite honestly, that would be a silly thing to say.

Still, given both the enormity and compelling nature of the retirement crisis, it makes sense that Americans’ financial circumstances would be improved by having greater control over the destiny of their retirement savings. And the retirement account that gives savers the greatest degree of flexibility and control is the self-directed IRA.

Let’s learn more about it.

The Self-Directed IRA: A Brief Overview

It may seem as though self-directed IRAs are some sort of exotic, out-of-left-field account option. Hardly. Self-directed IRAs are, first and foremost, IRAs. They’re subject to the same rules and regulations as the IRAs opened at banks and other financial institutions.

In terms of basic form and structure, there is no difference between self-directed IRAs and the IRA you would open at a bank or other financial institution. But as I said earlier, self-directed IRAs allow the owners to purchase IRA-eligible physical assets such as gold and silver, whereas IRAs opened at banks and brokerages do not. What makes that possible – and why you can’t purchase physical assets in more typical IRAs – is that it takes a specially qualified custodian to handle the IRS-mandated IRA administration and recordkeeping responsibilities on behalf of physical assets.

See, the IRAs and 401(k)s with which you likely are most familiar are under the purview of custodians, trustees and/or plan administrators that deal exclusively in the realm of mainstream “paper” assets. Providing custody and recordkeeping services for physical assets involves a different set of tasks and requires a custodian uniquely qualified to perform them. This would be the self-directed IRA custodian.

I mentioned that the principal benefit of opening a self-directed IRA is to gain access on a tax-advantaged basis to IRA-eligible physical assets. Some of the most popular such assets owned in self-directed IRAs are physical gold and silver.

In fact, physical precious metals are so popular as self-directed IRA assets that when a retirement saver opens a self-directed IRA for the express purpose of buying gold or other precious metals, it generally is referred to from that point forward as a “gold IRA.”

But what might the actual benefits of owning physical precious metals in an IRA be? Could owning metals as part of one’s savings regime really make a beneficial impact on one’s personal retirement outlook?

Let’s see.

Gold Has Appreciated More Than 500% Since the Beginning of the Millennium

You likely know that metals have a long-established reputation as safe-haven assets. Given this, it might be worth reviewing how metals performed during what certainly could be argued are the two global biggest financial crises of the 21st century: the 2008 financial crisis and what the International Monetary Fund referred to as the “Great Lockdown” – the fallout in 2020 from pandemic-related restrictions.[8]

Although 2008 is the year typically attributed to the financial crisis, ramifications from the event played out for years. As they did, gold and silver strengthened. From December 2007 – the official start of the crisis-triggered U.S. recession – to December 2011, gold appreciated roughly 115% and silver appreciated 120%.[9]

I mentioned that 2020 was the year of the COVID-19 pandemic – as if you needed a reminder. The lockdowns were so widespread and so draconian that year they triggered the “worst economic downturn since the Great Depression,” according to the International Monetary Fund. [10] Sure enough, the U.S. unemployment rate in 2020 did, in fact, reach its highest level since the Depression.[11] And amid all of the economic upheaval in 2020, gold climbed roughly 27% and silver jumped more than 50% for the calendar year.[12]

There’s little dispute that metals posted solid performances during what arguably have been the two most severe economic crises of the 21st century. But let’s look at something else: The performance of gold over a much-longer period of time.

Historically, precious metals have not been lauded for their long-term capital-appreciation potential. That said, it’s worth noting just how well gold has performed throughout the current millennium.

From January 2001 through today, the price of gold has climbed roughly 530%.[13] And while there is no way of knowing if that performance will continue, it’s not inappropriate to acknowledge that gold also has demonstrated the potential to strengthen significantly over an extended timeframe, as well.

So, what am I saying? That a gold IRA actually could be the solution to the retirement crisis?

Umm…no.

Gaining More Control Over Your Savings Could Help Reduce Retirement-Crisis Exposure

At least not in the way an affirmative answer to that question would suggest. You’ll recall I said earlier that I didn’t view the self-directed IRA as a single solution to the retirement crisis in America. Saying so would be ridiculous, in my opinion.

However, given the complex and multifaceted makeup of the retirement crisis, I do believe numerous individual solutions will be required to solve the problem. As I said earlier, I suspect part of the answer will be found in the realm of public policy. Part of that may involve reframing how Social Security is viewed by the citizenry. Social Security consistently has been seen by retirees as the most important source of income, suggesting the time-honored message that the program never was meant to serve as one’s sole retirement benefit has done a poor job of getting through.[14] Finding a way to reshape that narrative once and for all could be helpful.

But as I’ve been saying, the eventual solution – assuming we find one – will be made up of multiple components that exist at multiple levels. That includes at the level of the individual retirement saver. Retirement savers may, in fact, find the long-term viability of their personal economic circumstances best-served by enjoying greater control over their accounts.

That greater control is not, by itself, the solution to the retirement crisis. But it could help to reduce the number of Americans at risk of falling through the financial cracks during their senior years. And if it does that, then I think it’s an option worthy of more consideration.

……..

[1] Jacqueline Sergeant, Financial Advisor, “Americans Slashing Retirement Savings As Prices Soar, Survey Says” (June 2, 2022, accessed 9/8/22).
[2] Alicia H. Munnell, MarketWatch.com, “The stock market decline is undercutting retirement saving” (June 21, 2022, accessed 9/8/22).
[3] Suzanne Woolley, Bloomberg.com, “America’s $7 Trillion Retirement Crisis Is Only Getting Worse” (August 16, 2022, accessed 9/8/22).
[4] Andrew Osterland, CNBC.com, “Are you saving enough for retirement? Odds are, probably not” (April 11, 2022, accessed 9/8/22).
[5] Ibid.
[6] United States Census Bureau, “2017 National Population Projections Tables: Main Series” (accessed 9/8/22).
[7] Social Security, “A Summary of the 2022 Annual Reports” (accessed 9/8/22).
[8] Gita Gopinath, IMFBlog, “The Great Lockdown: Worst Economic Downturn Since the Great Depression” (Apri, 14, 2020, accessed 9/8/22).
[9] National Bureau of Economic Research, “US Business Cycle Expansions and Contractions” (accessed 9/8/22); London Bullion Market Association, “LBMA Precious Metal Prices” (accessed 9/8/22).
[10] Gopinath, “The Great Lockdown.”
[11] Heather Long and Andrew Van Dam, Washington Post, “U.S. unemployment rate soars to 14.7 percent, the worst since the Depression era” (May 8, 2020, accessed 9/8/22).
[12] London Bullion Market Association, “LBMA Precious Metal Prices.”
[13] Ibid.
[14] Frank Newport, Gallup, “Social Security and American Public Opinion” (June 18, 2019, accessed 9/8/22).

 

 

 

 

 

 

 

 

 

 

 

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