When you open an individual retirement account, more commonly known as an IRA, you need to choose a custodian to hold the account and its underlying assets. Two choices you have for custodians include banks and brokerage firms. It may seem like it doesn’t matter which custodian you choose but in fact, choosing the wrong custodian could mean the difference between having an IRA that lasts throughout your retirement and one that’s depleted before you’re ready.
The Restrictions of a Bank IRA
If your bank doesn’t offer extended brokerage services then you may not be able to invest your IRA contributions in stocks, exchange traded funds, or other market instruments. Instead, you may be limited to bank CDs, money market funds and savings accounts.
While it might seem safer to get a bank IRA and put your contributions into fixed investments, this may actually be a far riskier move than you’d expect. If you rely on a variety of fixed products in your IRA rather than a truly diversified mix of assets then you are likely to have a very low return that doesn’t keep up with inflation or taxes, much less grow to enough that you can support yourself through retirement. (See our other VLOG called “Inflation’s Devastating Effect on Returns”)
A general rule of thumb to help retirees preserve their savings while still using it for postretirement income is to take 4 percent withdrawals per year. With a truly diversified and well-managed IRA, this will often mean leaving your principal completely untouched and simply living off of the growth of your assets. But in a bank IRA where CDs rarely earn more than 1.5 percent and money markets don’t generally exceed 1 percent, even using the conservative 4 percent rule means you’ll be withdrawing from principal each year, leaving you less money to grow and forcing you to quickly deplete your savings.
Retirement planning is a complex task requiring in-depth information about your goals, objectives, risk tolerance, and time frame. It’s a personalized process that requires a tailored approach to account design. At Kramer Wealth Managers, we’re here to help get you on the right path to help you feel comfortable about securing your retirement for the rest of your life. Contact us today to make an appointment.
*Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. This material is intended for informational purposes only and is not intended to be a substitute for specific individualized individualized investment planning advice.
