When you are young, in your 20s or even 30s, retirement seems too distant an event into the future. The very idea of growing old and retiring doesn’t really sink in, let alone save or plan for one! Most of us think that we have all the time in the world for that.
Unlike previous generations, today’s young workforce has a tougher task at hand. With longer life expectancy comes the additional problems of making the retirement savings last longer and accumulating sufficient finances to deal with the extra medical emergencies.
It’s true that when you are young and carefree, time is on your side. However, it will make a world of difference to your retirement days if you start planning early. And, that too in the right stocks and investments.
This leads us to a slew of questions. How can you have the retirement life you wish for? How much is enough? What are the right investment choices for retirement planning? Is gold a good choice for retirement?
Investing in gold for retirement
The aura surrounding gold is hard to ignore. Long-term performance-wise, it is one of the best holdings to have in any portfolio. Its pros far outweigh the cons. Investment advisors recommend the inclusion of the precious metal among financial holdings for many reasons.
4 Reasons Why include gold for retirement?
1. Safe haven
The money in your retirement account is supposed to accumulate and build up into a sufficiently large fund for you to enjoy in your retirement years. Most financial advisors recommend investors to opt for a balanced portfolio, combining high-risk assets with low-risk ones and including holdings from diverse categories such as paper investments and physical ones.
Among the physical assets, gold is one of the safe choices among investments in the long run. Gold as an asset in the physical form is long regarded as a symbol of wealth and prosperity. At the same time, gold is a highly liquid asset known for being a safe haven investment.
Gold as an asset comes with unique characteristics that set it apart from paper holdings like stocks and mutual funds. When stock markets take a tumble or the economy is stumbling, the price of gold goes up. For this reason, the precious metal is regarded as a hedge against economic and political uncertainties.
2. Exceptional historical performance
Until 1971, the major global currencies including the U.S. Dollar and British Pound were ‘pegged’ to gold at $35 per ounce, with the United States assuring redemption of dollar for gold. Dwindling gold reserves forced the United States to abandon the ‘Gold Standard’ and do away with the fixed exchange rate. After ‘Nixon Shock’, the price of gold has been free-floating.
In January 2001, the spot price of gold was $264. A decade later in January 2011, it rose to $ 1374, an increase of 420%. In August 2020, at the height of the COVID-19 pandemic, the gold rates went past the magical figure of $ 2,000. Now, it has stabilized in the regions of $ 1,880. Each global crisis propels the gold rates to never-before-seen heights.
In 2020 alone, the gold gained close to 25%, spurred by the panic created by the pandemic. Most analysts expect gold to continue the golden run for the next decade, though some naysayers expect the demand for the yellow metal to come down and gold prices to lose momentum in the post-pandemic world.
3. Hedge against inflation
Gold is considered an inflationary hedge as it is dollar-denominated. That means, gold is traded globally using the U.S. Dollar as the benchmark pricing tool. As the value of the dollar erodes, the prices of commodities go up including that for gold. During inflationary times, the value of gold already in possession also increases, leaving the precious metal investor unaffected.
In its April 2020 report, the World Gold Council reiterates the role of gold as a hedge during the financial crisis of 2008, the European sovereign debt crisis in the last decade, the stock market pullback of 2018, and the pandemic-induced panic of 2020. The report continues to assert that when compared to other financial holdings, gold entails no credit or default risks and is buoyed by high inflation.
“Gold stands out as a key portfolio component when identifying a long-term portfolio diversifier. Historically, gold has shown that it acts as an effective hedge and a useful part of the larger [risk] picture,” the Council report states.
4. Does the balancing act
Correlation between various financial assets is key to balancing a portfolio. In other words, when all the holdings react similarly to events in the financial world, they are said to have a positive correlation. This is not good from an investor’s point of view.
Economic and political uncertainties can hurt the holdings and erode their value. If all assets react in the same way, the worth of the entire portfolio is b0und to collapse. However, when at least some holdings perform well during turbulent times, the overall damage to the value of the collection of holdings would be minimal.
Gold is an asset that has zero or at times a negative correlation with other assets such as stocks, bonds, and mutual funds. In simple words, this means that when the economy is going through a bad patch and most of the financial holdings are performing below par, gold stands out with its sterling performance.
Because gold has proved time and again to do well during troubled times. The simple reason being investors consider gold to be a safe investment and turn to gold when things start going downhill.
This doesn’t mean that gold doesn’t perform well in good times. Due to its unique behavior in good as well as bad times, gold is regarded as a ‘must-have’ in any portfolio to balance the risk and to temper its volatility.
Upshots of gold as an investment
The price of gold has witnessed short-term fluctuations, but its popularity is based on its consistent performance in the long run. In the last two decades, the gold price rose by almost 550% and in the last decade alone, it surged by 63%. Few financial holdings can compete with gold in this regard.
Despite all the hype about gold, the fact remains that its price is volatile, especially for shorter periods. Before jumping on the gold bandwagon, investors need to be aware of the pitfalls of investing in gold.
1. No earnings
Even as gold is your best friend in times of trouble, it doesn’t bring in any returns unlike paper investments like mutual funds, stocks, and bonds. No earnings from interest or dividends. The only returns you can get from a gold asset is the profit you make when you sell it. Until then, it is a dormant investment. A point to remember when investing in gold is to buy it cheap and sell it when the prices are high to make the most of its profit-making potential.
Gold prices have skyrocketed in short periods at times. In the same token, it has crashed as well. The volatility of gold rates can be unsettling for many investors who are expecting smooth sailing. The massive ups and downs in the bullion market can prove too much for these investors. To profit from gold as an investment, you need to time your purchase and sale. And, this requires regular monitoring of the spot price of gold.
3. Storage expenses
When investing in physical gold, investors need to take into account their safe storage. While physical gold can offer the maximum benefits from gold as an investment, it also entails expenses on a safe deposit box or depository in addition to the premium paid for insuring it against theft or loss. However, by investing in paper gold, these extra expenses can be avoided but the returns may be moderate.
4. Other options
Gold is considered a good inflationary hedge. Even while this is true, there are other financial assets designed specifically as a hedge against inflation such as Treasury Inflation-Protected Security (TIPS).
Investors need to sort out their priorities and weigh the pros and cons of choices available to them before taking the plunge.
How to invest in gold for retirement?
Gold as an investment comes in many forms to suit the needs of the investor. The simplest and straightforward way to take full advantage of the investment potential of the precious metal is to buy gold in its physical form – bullion coins and bars. Along with the advantages, this may pose some disadvantages like extra expenses to keep it safe. This may prompt many investors to look out for easier options.
Investing in the stocks of gold mining companies is an indirect way to exploit the benefits. In similar lines, investors may also consider gold-related mutual funds and gold ETFs. For an investor, investing in gold or gold-related holdings without losing out on the tax benefits offered by retirement plans, Precious Metals Individual Retirement Account would be a perfect choice.
Let us explore each of these in detail.
Gold-related paper investments
Aptly named paper gold, these are gold-related holdings that mirror the price of gold without being actually gold. Investors have a wide range of financial assets to choose from in this category.
The stocks of companies that are involved in the mining and refining of gold are directly influenced by the rise and fall of its prices. Another choice is to invest in gold-based Exchange Traded Funds (ETFs). Each share of an ETF represents a specific quantity of gold such as one gram or one-tenth of an ounce.
Investors can further reduce the risk by investing in mutual funds that invest in gold stocks or ETFs. The more adventurous investors may consider gold Futures Contracts or Options. Both require huge capital and carry higher risk. Hence suitable for experienced investors with sufficient resources.
Investing in gold in the paper format can help avoid the hassles and expenses associated with physical gold. It can also cushion the losses when the prices are not favorable, as the gold price is only one of the factors affecting their value. However, by the same token, the profit margins are also lower for paper gold.
Gold Individual Retirement Account (Gold IRA)
A Precious Metals IRA is a self-directed retirement plan allowing account owners more freedom with investment choices including physical gold. Typical retirement plans like 401k don’t offer account owners any say in the investment choices, while traditional IRAs do not allow investment in precious metals.
The Precious Metals IRA is specially designed for investors who want to invest in select precious metals without losing out on the advantages of a retirement plan. This account allows investment in select metals (gold, silver, platinum, and palladium) using tax-deferred retirement savings. Internal Revenue Service also has eliminated tax from capital gains for a Gold IRA.
The Internal Revenue Code Section 408 lists the rules and regulations for a Gold IRA. This includes minimum purity of the metal, management of the account, purchase, and storage of the gold bullion. The IRS insists that at no time the bullion will be in possession of the account owner.
Despite the limitations, a Gold IRA offers an excellent opportunity to invest in physical gold without entailing taxes.
Gold may be purchased in the form of jewelry or bullion coins and bars, though investing in gold jewelry is not profitable because of its substantial markup. Bullion bars and coins are made for the sole purpose of investment, though older and rarer gold coins are of interest to numismatic enthusiasts. Both gold coins and bars are made in a wide range of sizes for the convenience of buyers.
Bullion coins are issued by governments and gold companies typically in fractions of one troy ounce or multiples of one gram. American Eagle, Canadian Maple Leaf, South African Krugerrand, and American Buffalo are some of the most popular coins.
Bullion bars are made specifically for ease of storage and with less emphasis on appearance or artistic value. The popular bullion bars are from Credit Suisse, John Matthey, Valcambi, and Engelhard.
Bullion bars come with a lower premium compared to coins and hence more profitable. Both bars and coins come with guarantees of their purity ranging from 90% to 99.99%.
How to buy gold with your 401k retirement savings?
Retirement plans like 401k do not allow investment choices to account owners, let alone in physical bullion. The only way to use the finances in your 401k to buy gold bullion bars or coins is to open a Precious Metals IRA or specifically a Gold IRA.
The IRS has stipulated that a Gold IRA needs to be managed by a custodian company. To open a Gold IRA, you need to approach an IRA custodian or company. Once the account is set up, the next step is to transfer money from your existing 401k. You may either use a direct transfer or an indirect rollover. Learn more about gold IRA rollover.
A direct transfer involves placing a request with the 401k fund manager for the transfer of money to the newly set up Gold IRA. This is done on an account-to-account basis. A direct transfer is non-taxable and there is no limit on the number of transfers.
An indirect rollover requires the account owner to request for disbursement from 401k, depositing the disbursement check in your own account, issuing a check to the Gold IRA, and depositing it. An indirect transfer is non-taxable if the entire exercise is done within 60 days. If not, it will be treated as a disbursement and taxed. An account owner is allowed one indirect rollover in 12 months.
Once the money is in place, the next step is to find a gold dealer to buy gold bullion. The payment for the purchase is arranged by the custodian and the bullion is directly transferred to the pre-arranged depository. The bullion stays in the depository until it is sold or taken out as disbursement.
Any financial asset comes with both advantages and disadvantages. Gold has proved its mettle as a safe haven throughout history. In case you find investing in physical gold is too expensive and bothersome, you may opt to buy paper gold. Or else, you may take advantage of the tax breaks offered by a Gold IRA. If you consider gold as a safe bet amidst the uncertainties in the world or want to profit from the runaway gold rates, you just need to pick one of the options. With gold, there is little chance of things going awry.