Personal Finance

The Common IRA Mistake That Could Sabotage Your Retirement Plans

John Seetoo

Published: December 4, 2024 9:14 am

Baby Boomers who learned about finance from the 1960s-1980s developed their notions about financial risk, stocks, and bonds during the past WWII era: The Eisenhower, Kennedy, Johnson, Nixon, Ford, Carter, and Regan years. During that era, the US, the only country to have not suffered from any battle or carnage on its soil, led the Marshall Plan to revive the economies of the rest of the modern world.  As a result, a great deal of faith was placed in US financial principles and guidelines. 

Grace and Frankie – Boomer Financial Thinking?

The popular series, Grace and Frankie, starred baby boomer icons Jane Fonda and Lily Tomlin as a pair of elderly women trying to navigate contemporary dating, entrepreneurship, and health issues. In season 6, Grace finds that her new husband, Nick (Peter Gallagher), who was arrested for embezzlement, hid $50,000 cash in a sofa mattress. Unfortunately, saving cash in a mattress is a holdover practice from unstable nations, when banking was unreliable, or from drug smugglers, who amass tons of cash and are constantly trying to launder it to avoid the authorities. 

IRA Mistake Akin to Cash in a Mattress

Nevertheless, stuffing cash money in a mattress doesn’t grow the money at all. Much like the Caribbean pirates who buried their treasure, none of it can be used to create more wealth if it’s hidden away, not generating more money. The priority placed on “safety” overrides any other risk concerns. Many of the financial management principles that had been established during the 20th century did not take into account geopolitical, technological, and financial climate changes that might render a number of those  precepts obsolete in the 21st century.  

Compared to how the gun has replaced the sword as a primary self-defense weapon in history, threats to financial health that no one envisioned during the 20th century have emerged in the last 3 decades. Some of these include:

• The debasement of the currency, reduces the buying power of the US dollar.
• A $36 trillion national debt has caused threats to the US Treasury Bond’s AAA rating.
• Hyperinflation caused by Congressional profligate spending.
• Potential insolvency of Social Security and Medicare.

Unfortunately, a very common mistake that many Baby Boomers make with their IRAs is nearly the equivalent of burying it or hiding it in a mattress – they have prioritized “safety” over all other perceived risks.  This mistake can cost millions of seniors dearly in their golden years. The mistake is being too conservative. 

In the past, people were advised to buy stocks for growth when young and gradually switch to safer bonds as they got older. The result is that far too many people have been sitting on Treasury bonds for too long, earning a measly 2-3% per year when simply staying in index funds over the same period would have been an average compound annual growth rate of nearly 11%. When factoring in the deleterious effects of double digit inflation, especially over the last 4 years, ultra-conservative IRA holdings probably lost a net – 5% or more each year during that period. This big bite into gains accumulated over long stretches of time in a mere few months may wreck many retirement plans’ timing, safety reserve capacity,y and a litany of other important features. 

Remedies to Consider

IRA accounts do not incur capital gains until withdrawal. Therefore, shifting out of some positions and into others do not trigger taxable events. For those who have discovered their error early enough to undertake remedial measures, here are some things to consider:

• Invest in consistent, relatively high-yield REIT stocks, if steady income is a strong concern. The yields can help to replace income lost from inflation and add to the overall  passive income stream.
• Index funds are available for conventional markets, particular sectors, like technology or biotech, commodities, and international stocks. Index funds offer sufficient diversification and risk mitigation to allay many fears about volatility.
• Precious Metals – 43 out of 50 states recognize physical gold and silver as legal tender. The prices of both gold and silver have soared over the past 12 months, and are a traditionally solid hedge against inflation.

This article is intended to be read solely for informational value. If any more in-depth information and advice is sought, a financial professional should be consulted.