Preparing for retirement is not just a matter of accumulating savings, but also of organizing them in a way that reduces risk and increases the prospects of return.
In this context, Individual Retirement Accounts (IRAs) play a crucial role for Americans seeking to diversify their portfolios.
Diversification: A key principle for successful retirement planning
Diversification is a golden rule when it comes to saving and investing. It involves spreading your money across different asset classes, including Equities, Bonds, Cash and Commodities, so as not to depend on a single source of performance.
As part of retirement planning, an IRA offers an advantageous structure for putting this principle into practice. Unlike a simple Securities account, it offers tax benefits and access to a wide range of investments.
Beyond Social Security
For many Americans, Social Security is the cornerstone of retirement. But it is often not enough to maintain the same standard of living after retirement.
Future income from Social Security must therefore be supplemented by private savings.
IRAs are an effective way of building up these savings, as they enable long-term savings to be accumulated in a favorable tax environment.
How IRAs expand your investment options
An IRA can accommodate a variety of asset types, from US Equities to Bonds, Index Funds, ETFs and even, in some cases, Real Estate or Commodities such as Gold. This flexibility makes it an ideal tool for building a balanced portfolio.
- Equities boost long-term growth.
- Bonds provide stability and reduce volatility.
- Diversified Funds or ETFs facilitate exposure to broad swathes of the market with a single instrument.
Thanks to this variety, investors can tailor their retirement planning to their age, risk appetite and long-term objectives.
Protection against uncertainty
Retirement takes place over a period of several decades, marked by economic cycles, financial crises and demographic changes.
Having a diversified IRA means limiting exposure to a single type of asset, and therefore reducing the risks associated with market fluctuations.
This protection is all the more important as life expectancy lengthens, and retirees need to ensure that they have sufficient resources for sometimes twenty or thirty years without professional income.
A pillar of retirement planning
Individual Retirement Accounts (IRAs) are not a substitute for Social Security, but they are an indispensable lever for strengthening and diversifying savings.
By offering a wide range of investment options, they enable you to build a portfolio tailored to each profile and objective.
Used properly, they give savers the means to secure their financial future and face retirement with greater serenity.
IRAs FAQs
An IRA (Individual Retirement Account) allows you to make tax-deferred investments to save money and provide financial security when you retire. There are different types of IRAs, the most common being a traditional one – in which contributions may be tax-deductible – and a Roth IRA, a personal savings plan where contributions are not tax deductible but earnings and withdrawals may be tax-free. When you add money to your IRA, this can be invested in a wide range of financial products, usually a portfolio based on bonds, stocks and mutual funds.
Yes. For conventional IRAs, one can get exposure to Gold by investing in Gold-focused securities, such as ETFs. In the case of a self-directed IRA (SDIRA), which offers the possibility of investing in alternative assets, Gold and precious metals are available. In such cases, the investment is based on holding physical Gold (or any other precious metals like Silver, Platinum or Palladium). When investing in a Gold IRA, you don’t keep the physical metal, but a custodian entity does.
They are different products, both designed to help individuals save for retirement. The 401(k) is sponsored by employers and is built by deducting contributions directly from the paycheck, which are usually matched by the employer. Decisions on investment are very limited. An IRA, meanwhile, is a plan that an individual opens with a financial institution and offers more investment options. Both systems are quite similar in terms of taxation as contributions are either made pre-tax or are tax-deductible. You don’t have to choose one or the other: even if you have a 401(k) plan, you may be able to put extra money aside in an IRA
The US Internal Revenue Service (IRS) doesn’t specifically give any requirements regarding minimum contributions to start and deposit in an IRA (it does, however, for conversions and withdrawals). Still, some brokers may require a minimum amount depending on the funds you would like to invest in. On the other hand, the IRS establishes a maximum amount that an individual can contribute to their IRA each year.
Investment volatility is an inherent risk to any portfolio, including an IRA. The more traditional IRAs – based on a portfolio made of stocks, bonds, or mutual funds – is subject to market fluctuations and can lead to potential losses over time. Having said that, IRAs are long-term investments (even over decades), and markets tend to rise beyond short-term corrections. Still, every investor should consider their risk tolerance and choose a portfolio that suits it. Stocks tend to be more volatile than bonds, and assets available in certain self-directed IRAs, such as precious metals or cryptocurrencies, can face extremely high volatility. Diversifying your IRA investments across asset classes, sectors and geographic regions is one way to protect it against market fluctuations that could threaten its health.