Planning for retirement is a daunting task for anyone. The fear of not having enough to live on after you have left the nine-to-five is a big motivator for starting to save early in your career. But it’s also one reason investors are turning to alternative investments in pursuit of higher, sustainable long-term returns in a world of low interest rates. These assets include private equity, hedge funds, managed futures, real estate, commodities, metals and collectibles, to name a few. (See: IRA Assets and Alternative Investments.)
A report by PricewaterhouseCoopers has predicted a big shift towards these investments going forward: “Between 2015 and 2020, alternative assets are expected to grow to $13.6 trillion in our base case scenario and to $15.3 trillion in our high case scenario.” The report goes on to say that global pension fund assets will reach $56.6 trillion by 2020, “with alternative assets expected to play a considerably larger role in their asset allocation mix.”
Here are our top picks for alternative investments for retirement, in case you want to jump on the bandwagon.
Bitcoin, the virtual currency, is emerging as a new asset class that’s fast becoming mainstream, even gaining acceptance by regulators. Investing into Bitcoins for retirement is now possible via a self-directed IRA. This qualified individual retirement account is currently the only U.S.-based fund approved by the IRS that allows investors to keep the digital currency in their retirement portfolios.
The process of adding Bitcoins to your self-directed IRA (SIDRA) is simple and fast. First, you open a SIDRA through a secure e-sign application; next, the new account is funded via a rollover or transfer. Finally, you need to complete a Bitcoin allocation order. The account requires a minimum deposit of $5,000 and only charges a small upfront fee with no recurring annual charges.
The regulations and rules for the Bitcoin IRA are the same as for standard self-directed IRAs (all IRAS, in fact), which means no access to your money until you’re 59½ (or pay a penalty for early withdrawal). While individuals can simply own Bitcoins as well, Bitcoin IRA provides a structured way to do so with the benefits of tax-advantaged retirement saving and without the hassle of safekeeping. (For more, read: How to Add Bitcoins to Your Retirement Account.)
Investors who want to diversify, generate returns and hedge against inflation often turn to real estate. Individuals can park money in a good commercial or residential property and benefit from rental income while the value of the property appreciates over time.
You can also hold real estate through a real estate investment trust (REIT) or in a self-directed real estate IRA. While real estate has its shortcomings, a Morgan Stanley survey of millionaires finds that it is still the most traditional and popular alternative asset class. (Learn more from: Simple Ways to Invest in Real Estate.)
Peer-to-peer or social lending works in a way that is advantageous to both borrowers, who get loans at interest rates lower than banks, and lenders, who can earn higher rates of return than bank deposits provide.
It’s a customized process that has recently become very popular. One of its disadvantages, given the absence of an authorized body to manage the transactions, is the risk of default. But that can be somewhat minimized by choosing more than one peer-to-peer platform from which to lend out money. These include Lending Club, Prosper, Upstart, Funding Circle, Peerform, Pave, Daric, BorrowersFirst and SoFi. (See also: The 7 Best Peer-to-Peer Lending Websites.)
Private placement represents a way of raising capital through an unregistered securities offering. “Private and public companies engage in private placements to raise funds from investors. Hedge funds and other private funds also engage in private placements,” notes a U.S. Securities and Exchange Commission (SEC) bulletin.
While private placement is usually offered to institutional and accredited investors, individuals (nonaccredited) can invest in private placements (in LLCs, partnerships, small businesses, land trusts and more) by means of a self-directed IRA. Although these investments can be rewarding, there is also a high degree of risk. Consult a financial advisor on the best course of action for you and be sure to refer to the SEC’s Regulation D when reviewing this form of investment. (See: How does private placement affect share price?)
One of the few tangible liquid assets, gold has traditionally played the role of an effective inflation hedge. While over the years its correlation with stock prices has risen (hence it’s not the best way to diversify), it remains a darling in times of crisis. You can hold gold as bars, coins or jewelry, of course, but there are more innovative ways to invest, including gold exchange-traded funds, gold mutual funds investing in companies involved in gold mining, and gold futures and options.
There is also the self-directed IRA route – either gold on its own, or along with other precious metals, such as platinum and silver. Overall, irrespective of the form, an allocation of 5% to10% towards gold is considered ideal for an investor’s portfolio. (For additional insights, check out: Gold in an IRA: What You Need to Know and What Moves Gold Prices?)
The Bottom Line
Alternative or nontraditional investments have advantages over traditional assets like stocks and bonds, including high income levels, diversification, risk substitution and a hedge against downside. One way to invest in these assets is via a self-directed IRA through custodians and trustees (see: Self-Directed IRA: Rules and Regulations).
Or, given the limits on total IRA contributions, you might consider investing in these assets directly, as a long-term regular investment. Given that some alternative assets are still maturing, a smart course might be to combine one or more of them with traditional investments for a balanced retirement portfolio.