The pros and cons of precious metals IRAs
Retirement sounds fantastic doesn’t it? Even the word itself conjures up pictures of endless foreign holidays, days spent on the golf course, buying that house on the beach that you always dreamt of.
The reality for millions of retirees is somewhat different.
Endless bills to pay, never quite enough of anything, struggling to keep your head above water and not being able to afford to go out for meals – let alone those endless foreign holidays …
There are a couple of factors that come into play to explain the difference between these two scenarios.
The first one of these is time.
Time is something that we all take for granted. We think that it will always be there for us to enjoy. We put off many of the things that we should be concerned about doing today. Not just the small things either. Saving for retirement is one of those things that, far too often, gets put at the bottom of the to-do list because it seems so far away and remote.
This chart may change your mind …
It assumes – what is (at the moment) a very optimistic scenario – a return of 6% interest. The chart shows that even if you were lucky enough to get such a return – if you leave it too long to start saving, the money you have to pay in to get to your $1 million target increases year-on-year. It soon reaches the point where you need to put so much money aside that it becomes almost impossible to to reach your goal.
$1 million sounds like an awful lot of money, even today – but people are living longer. According to data compiled by the Social Security Administration:
- A man reaching age 65 today can expect to live, on average, until age 84.3
- A woman turning age 65 today can expect to live, on average, until age 86.6
And those are just averages. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.
Just absorb that for a minute while we run something else past you.
Why would you actually need anything like $1 million? Surely nobody needs that much money?
Let’s look a little more closely at how this works …
If you retired at age 60 – or even 65 – you would have at least 20 years of retirement to fund.
Assuming you reached your million dollars, this would mean that you would have to earn at least 3% interest to get an annual sum of $30,000 without hitting any of the capital sum – or going out to work.
$30,000 is the kind of money that the US Treasury believes to be an average sum for an American family to get by on reasonably comfortably.
The average interest rate on a normal savings account, at the time of writing, is hovering at around 1% or less. This is a direct quote from a current bank account advert:
“XYZ Bank’s High Yield Savings Account offers an impressive 1.15% APY. There is no minimum balance required to open an account, though you will have to keep at least a $30 balance to avoid a $5 monthly maintenance fee.”
XYZ Bank are saying here that 1.15% APY is “impressive.” So impressive, your million dollars would bring you an annual $11,500 in income! Could you live on $11,500? Exactly.
Obviously, if you then started eating into your capital to make up the shortfall you would get even less in income.
It gets worse though …
Over the course of your 20 years of retirement, inflation would eat away at the value of that $11,500. For example, if you retired in 1997 and took $11,500 each year – and did nothing to counter the effects of inflation – that $11,500 is, today, worth $7,528.08.
But, here is the real kicker – your $1,000,000 in 1997 – would be worth just $654,615.74 today!
Those are not made up figures, those are based on genuine consumer price index statistics.
Unless you have some means of preserving the value of your money – or being able to add to the capital sum – you are in trouble.
If you really want to scare yourself, you can go onto this site, and play around with the figures to see how you would fare, here is the link, https://westegg.com/inflation/.
Precious metals, gold in particular. have performed well against other assets. The chart above compares gold with such other assets at inflation rates between 8% and 0% percent relative to the US dollar. As you can see – gold easily beat the other assets – in fact as inflation increased gold performed even better than it did at lower inflation rates.
Why gold or silver in an IRA?
Add all of the above up, and you have to come to the conclusion that in order to retire comfortably you have to:
- Accurately calculate the amount of money that you will need for the lifestyle that you want
- Start saving early
- Save enough to reach your goal
- Take inflationary effects into account
- Make sure that any investment gives high returns
With precious metals it is possible to tick all these boxes.
We are not suggesting for one second that you pile all of your money into gold and silver. Far from it. Diversification is the key to long-term financial survival. All markets move in cycles. These cycles run on different timeframes and there will be periods where one investment is at a high point in its cycle at the same time as another is at its low point.
In a world diversify portfolio the one cancels the other and lessens the risk of losing the value of your investment.
No investment in the world is fully secure. World markets are volatile and subject to many variables – war, natural disasters, recessions, financial problems, social disturbances, fashion, habits, technological innovation, and commercial disruption – to name but a few.
This is why it is so important to have a mix of investments and these must include precious metals.
Precious metals in an IRA are particularly attractive. One of the major reasons for this is the tax break that you get for investing in gold or silver IRA in the first place. Any upfront charges that you are likely to pay in terms of commissions, storage charges and insurances will be outweighed by the gain made on the tax saving. All the details are available here https://www.irs.gov/.
This means that it is almost a zero-sum investment. The outlay is is more than made up for by the government pitching in to help with the investment. In most cases the tax break will be greater than the initial costs.
Another major draw to taking out your own precious metal IRA is that of control.
With most investments which are intended for pensions, the funds are looked after for the client by “investment managers.” These managers administer the day-to-day funding of the particular pension plan that the client participates in. This administration ranges from collecting the contributions and making sure that they are funded into the correct accounts, buying stocks, bonds, ETFs or whatever financial vehicle is applicable, sending periodic reports of progress, and managing the exit strategy and payout of the investment.
This, of course, does not come for free. Management charges for these types of services range from 1% to 4% or even more for funds which are not discretionary, and need a lot of hands-on management and direction. This is particularly true of the funds of “high net worth individuals” whose wealth allows them to live in several countries and invest globally.
4%, compounded annually, when investment returns are as low as they are at the moment, coupled with inflation, means that you are at the least standing still, and at worst going backwards by relinquishing control of your assets to a third-party.
Gold – the long term view
Because your IRA is a long-term investment it is well worth having a look at the long-term prospects for gold in broad strokes.
The price of the dollar has a massive impact on the price of gold. The normal pattern is that a lower dollar leads to a higher gold price and a higher dollar leads to a lower gold price. Over the past 15 months the dollar index has fallen to its lowest in over a year.
Continuing budget deficits, which are increasing, combined with record national debt – reflected in treasury bonds – mean that debt is increasing, whilst the economy remains obstinately stagnant. Short of a major incentive to reverse this trend it seems that gold is trending up, whilst the dollar is trending lower, for the foreseeable future.
President Trump’s infrastructure plans, taking the troops back into Afghanistan, strengthening the war on terror, homeland security and border controls all cost money. With growth stagnant the tax take is lower and the only recourse the government has is to print more money. This is likely to happen and should be very good for the gold price.
We touched on inflation and the way in which gold protected the value of your money above. Just to reiterate – gold comes into its own in terms of higher inflation – it is the only liquid asset which has proven time and time again that it can keep up with real inflation.
The oil price has started to creep up again from its recent lows and this equates to higher inflation globally. Most price indexes have oil as one of the main indicators. If the oil price rises rapidly inflation indexes will jump.
Interest rates follow the dollar closely. With the dollar drifting downwards, seemingly by the day, interest rates are creeping lower too. Because of this, savers and investors are looking for alternatives to cash. Low interest rates are good for gold because the demand for precious metals increases as they are seen as a good option for higher growth.
Because of the high debt situation coupled with the interest rates – bonds are also looking shaky. Losses on them have begun since 2016. This is in stark contrast to the previous 35 years. When the interest rate hit 0% and rates started to rise the previous gains in the bond price started to become losses. This situation is not confined to United States. Worldwide, bonds are becoming a liability, rather than an asset.
Common sense says that the markets are currently overvalued and that the stock prices in no way reflect the true value of the assets. The stock market has been forming a top for some time and the correction is thought to be imminent by most yardsticks. Should the market crash – just fall significantly – this will push the gold price higher. Depending on the size of the fall we could see prices at record levels.
Global tension and uncertainty add to this mix. The world is in a dangerous place – US problems with North Korea looming, tensions over the South China Seas and the Spratly Islands, troops renewing ground offensives in Afghanistan, Europe getting jittery over the implications of Brexit and the ongoing situation in Venezuela – one of the world’s major oil producers. Again – all of this is good news for the gold price as people seek a safe haven investment to ride out any storms.
Precious metals are not something that are widely owned. It is thought that between 3% and 9% of the American population own some form of precious metal. This is unlikely to be in large quantities in most cases. Any increase in the price of gold will be helped by this rarity value and lack of supply.
Gold is relatively cheap for Asian and European buyers because of the decline in the value of the dollar in which gold is priced. Central banks have started to increase their gold purchases, anticipating long-term problems as a result of any financial crisis looming. This to will push the price up.
Last, but not least, miners have been cutting back on production waiting for the market to pick up and increase their profitability over cost. As the price rises, the profits made increase, and this gives them the incentive to mine more gold. Until that point – and there is an obvious time lag there – scarcity of supply will work in gold’s favour.
In conclusion, gold is the only asset which does not devalue with inflation – it actually increases. This, coupled with all the reasons above, make gold something that really needs to be considered – and soon – if you are to safeguard your assets.