What is the best IRA investment to make right now? Of course there is no single “one-size-fits-all” answer. It depends on your age, ability to withstand risk, financial goals and other considerations. Here’s an e-mail I received recently asking for some guidance on IRA investments:
I am age 59 and my combined retired fund is around $750,000. I have $400,000 sitting in cash and $90,000 in a stock account. My home is all paid for and I have a rental paid for as well. I have zero debt. Since interest rate is so low, I would like to get your advice on my retirement funds going forward.
Congratulations, Tommy. You’ve done a great job saving for your retirement and staying out of debt. It also sounds like you have plenty of income (from the rental), so the big question is what to do with the cash. (Since you’re not asking what to do with the rental, I’ll assume all is well on that front.)
You have three options:
a. Buy more real estate – you can even buy real estate in your IRA!
b. Invest in the market.
c. Keep the money in the bank.
All have pros and cons. I’ve written about these extensively in prior posts.
The most important thing for you to be clear on is your objectives. Are you looking for retirement income investments? Growth? A combination of the two? Sounds like you are pretty risk averse. I say this because you have so much in cash – and I assume a great deal of your $750,000 in retirement money is in cash too.
That said, you have to find a balance between your financial goals and your need for security. Over the long term, growth is attractive because you are young. Both real estate and/or the market can provide the potential for growth, but they also subject you to risk.
I don’t know how you feel about investments, but I can see that you would like to get some of that money growing. I know you’re not asking me to predict the future. I’m not going to try to convince you or anyone else that one particular investment is going to skyrocket over the next 12 months. I’ll leave that kind of talk to the shysters. You just have to accept the fact that if you want absolute certainty, you can have it, but you won’t get paid much. If you are willing to accept uncertainty, you might do very well, but you also may not.
My advice would be to consider a conservative approach to investing. You would invest the IRA in equity growth and income. Then consider putting the cash in the bank in real estate. I suggest you consider this path as long as it doesn’t keep you up at night.
Lessons for Other Pilgrims
I don’t know much about Tommy, but I just wanted to illustrate how important it is to first be clear on your objectives (and risk tolerance) before investing. I’m sure Tommy is very clear on both — otherwise he never would have been so successful.
When investors seek out investments that are “no-brainers,” they usually end up losing their shirts. There really is no free lunch. Returns and risks go hand in hand. It’s a law of nature that can’t be reversed. By the way, the same advice goes for you if you have a 401k or government savings plan. (If that describes you, please read Thrift Savings Plan Contribution Limits.)
What advice would you give Tommy?
Kevin Cimring says
Hi Neal, I think you’re spot on about first establishing objectives. Other important questions along these lines for Tommy: when does he expect to retire? How much monthly income is he looking for during his retirement years? This needs to be balanced with his risk profile. On the whole though, I agree that a more conservative approach would be the way to go for Tommy.
I like to be aggressive with the positions in my IRA. I figure that I can become more conservative as I get within 10 years of retirement.