Self-Directed IRAs: Smarter Investment Decisions

Self-directed IRAs might work better than the traditional type of IRA if you're able to access the appropriate information and explanations that will help you make the smarter investment decisions

Next Generation Trust Company, a trust company specializing in custodial & administrative services for Self-Directed IRAs, was founded by/CEO of David.

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Generation Z (18-24 years old) and millennials (25-40) are not their parents or grandparents when it comes to saving for retirement. The emergence of DIY investing apps, retail trading, and the way personal banking has changed show how very different the younger generations are in handling their finances. There are websites for do-it-yourself investors as well as numerous articles for financial advisors on how to market to and talk with Gen Z and millennials.

These young people have grown up in the post-9/11 age (with its subsequent stock market downturn) and the Great Recession—not to mention, the market declines we've been experiencing since the pandemic. They are also digital babies who’ve grown up doing their research online, getting information about markets and investing from financial websites, robo-advisors and apps—not phone calls and meetings with financial advisors.

A 2021 survey by the National Association of Personal Financial Advisors found that:

  • Gen Z and millennial investors are more likely to take investment advice from a financial advisor than they are from social media.
  • YouTube, TikTok, Instagram and Facebook are some of the most common platforms for financial advice.
  • For Gen Z investors: YouTube 63%, TikTok 56%, Instagram 55%.
  • The most popular social network for millennials is YouTube; Facebook comes in second. Instagram is the third most popular social network among young investors.
  • Despite the fact that 56% and 65% of Gen Z and millennial respondents are already working with a financial advisor, 42% and 37% respectively said they could manage all their investments on their own.
  • When asked if a micro-investing app could help them retire, 61% of Gen Z and 68% of millennial respondents said yes.
  • For both demographic groups, 67% of them have acted on financial advice they found through social media.

This DIY trend is not limited to the United States. In the U.K., robo-advisor Nutmeg—acknowledging the increased accessibility of low-cost retail investment platforms—examined this trend since the start of the Covid-19 pandemic. In its survey of younger investors, 21% said they are much more likely to make and manage investments themselves since the pandemic started.

This is the self-directed retirement plan.

DIY investors can benefit from self-direction

The fact that younger investors are comfortable with online research and are willing to make their own investment decisions suggests that they would be interested in self-directed retirement plans. The market volatility of the past 22 years, combined with the steep declines and long hauls back up, could give Gen Zers and millennials an edge over the bear market through a self-directed retirement plan.

Three reasons why self-direction is a good investment choice for people who are already comfortable making their own investment decisions are: the ability to take advantage of investment opportunities "on the fly" in ways that traditional retirement plans cannot; the broad array of alternative assets investors can include in a self-directed IRA; and greater return, which can be achieved through control over investment choices and strategy.

A Natixis report on older millennials (at age 40) and their sentiments about investing and wealth building showed that:

  • Eighty-two percent consider investing to be a way of making an impact.
  • 63% of investors believe they have a responsibility to help fix societal issues through their investments.
  • When the market was volatile at the beginning of the pandemic, 27% of investors said they better understood their portfolio risk and another 29% realized how important it is to balance their portfolio.

Given younger generations' propensity to control their financial futures, self-directed retirement plans are an attractive alternative to working with advisors and brokers. As seen in Canada: Research firm Investor Economics reports that more than 2 million new self directed investment accounts were opened in 2020, compared to 846,000 opened in 2019. Further, a May 2021

When it comes to investing, self-direction is the ultimate DIY tool. With a Traditional or Roth IRA, SEP or SIMPLE IRA, and HSA or ESA, savvy Gen Z and millennial investors have plenty of opportunities to grow their retirement savings—and beat the bear market—on their terms.

This information is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.

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