Beating Broke

Personal Finance from the Broke Perspective

The Lending Club IRA : Peer-to-Peer Enters the Retirement Realm

By 8 Comments

You already know that I like Lending Club as an investment vehicle.  The returns are good (or great, depending on your default rate), and I like the idea that my money isn’t going to line the pockets of some corporation, but is being used to help someone who needs a loan get a better rate than they might get at a financial institution or through credit card usage.

Recently, Lending Club started offering IRA accounts to the lenders.  My first thought, was something along the lines of “that sounds kinda cool”.  But, then I got to thinking about it.  Many of us struggle to put money away for our retirements.  Do we really want what little money we have put away in an investment that carries as much risk as Lending Club notes carry?  I like risky investments, but even I don’t think I’d want all of my retirement money in these notes.

One use that could redeem it is using it as a supplemental IRA.  If you’ve already got a 401(k) and an IRA that you use to invest in more traditional, lower risk, investments, you could use a Lending Club IRA as a way to diversify further and add a little more risk to your portfolio.  That would also allow for keeping a higher percentage of your 401(k) and standard IRA in investments that are a little less risky.  Of course, that would also mean balancing your investment portfolio over several accounts.

I tried to figure out some of the finer details of the Lending Club IRA through their site, but either it isn’t all that clear, or I’m just a bit dense.  😉  So, I emailed them to get a few questions answered.  Here’s what I found out.  The accounts are administered through a company called Self Directed IRAs.  I’m not all that familiar with what a self directed IRA is, but it basically looks like an IRA account that you can use to invest in just about anything.  They offer several different IRA “types”, so it will depend on which the LC IRA falls under to determine what other investments you can add to your account besides the LC notes.  It doesn’t seem out of the question to assume that you would be able to invest in stocks and such as well.  (I’ve replied to the email I got to try and determine this for sure)  Based on what I was seeing on the administrators website, it was looking like the account might be pretty heavy in fees.  The email from Lending Club managed to answer that question as well.

There are no fees associated with a Lending Club IRA with a balance of at least $5,000 in the first year (you have all year to reach this), or $10,000 in the second year and beyond.

If you don’t meet those requirements, the account carries a $100 annual fee.  Pretty hefty if you don’t meet the requirements.  There’s two ways to look at that, however.  If you’re IRA is large enough, it shouldn’t be a problem to keep $10,000 in Lending Club notes and still keep your risk diversification.  If you’re IRA is smaller though, you’d be automatically raising the risk of the account my meeting the requirements.

Anyway you look at it, I don’t think it will be the most popular IRA account around.  But, it’s nice that they offer it for those of their customers who want a tax sheltered way to take advantage of peer-to-peer investing.  You can read more over on their site: Lending Club IRA.

What are your thoughts on the Lending Club IRA?  Too risky for retirement funds?  Good as a part of the retirement portfolio?

Are You Suffering from Optimistic Financial Denial?

By 9 Comments

Some people suffer from a certain form of optimistic financial denial.  They look at part of someone else’s circumstances and use that to justify their own way of life, without considering the entire picture.  Take, for example, a relative I have that I will call Stacey (not her real name).  Stacey is nearing retirement, and she doesn’t have quite as much socked away for retirement as she would like because finances were very tight when she was young and she and her husband just didn’t have the extra to put away.  Her husband died young, and she entered the full-time work force in her early 40s, which is when she began putting away for retirement in earnest.

denialStacey isn’t one to worry.  She tells herself that she should be able to get by just fine with the money she will have in retirement and uses the rationale first, that you never know how long you will live, and second, that her parents did just fine on a limited retirement.  She is firm about retiring at 62 and cannot be persuaded otherwise; she is not interested in working part-time early in her retirement.

Regarding Stacey’s first point, it is true that you never know how long you will live.  I have, unfortunately, known plenty of people who retired and died within a year or two.  Others died before they were even able to retire.  However, Stacey’s parents lived to be 88 and 90, respectively, so if she takes care of herself, there is a good chance she will live well into old age.

Second, her parents did retire on a relatively small retirement savings, but they made some serious adjustments to their lifestyle.  Here are some of the smart financial moves they made to make sure their retirement nest egg stretched:

  • they immediately sold their paid for house, freeing themselves from the expense of upkeep, property taxes, and heating and cooling a large home
  • they took some of the money from the house to buy a fifth wheel trailer, and they lived there during the summer months on their children’s property
  • they took some of the money and bought a trailer in a retirement trailer park in Florida.  They were then only responsible for monthly trailer park fees and heating and cooling
  • they took the rest of the money and invested it
  • they only went out to eat occasionally, usually when their children were visiting them in Florida
  • they sent each of their 38 grandchild a crisp dollar bill for their birthday and at Christmas

On the other hand, here is where Stacey is:

  • she still owes $70,000 on her 1,600 square foot home
  • she has no immediate plans to sell, which means she is paying thousands of dollars a year on property tax, maintenance, and heating and cooling costs
  • she goes out to eat several times a week and plans to continue doing so when she retires as that is her main way to socialize
  • she only has 3 grand-kids, but she spends $100 to $125 per child per year for Christmas and birthday presents
  • she would like to travel, including traveling internationally, when she retires

While Stacey is right that her parents did not have a large, comfortable retirement, she is only looking at part of their financial picture.  Her parents were willing to make significant changes to downsize their expenses so they could live comfortably on the retirement they did have.  In fact, when her last parent died at 90, there was still enough left over to give a small inheritance to each of their 9 children.  To have a comfortable retirement of her own, Stacey should also downsize her lifestyle.  It is the only way to make the money stretch as her parents did.

When it comes to your own retirement, or financial planning in general, it does little good to compare your finances to others.  Ultimately, it can lead to a form of optimistic denial that can lead to considerable financial stress in the future.

Do you know anyone who suffers from financial optimistic denial? 

photo credit: robynejay

Early Retirement Extreme

By 13 Comments

Early Retirement Extreme

By: Jacob Lund Fisker

When many of us think of retirement, we think of some far off time in our future when we’ve saved enough money and reached an age where the government will allow us to withdraw our money without significant penalties.  When Jacob Lund Fisker thinks about retirement, he’s thinking about the here and now.  You see, Jacob retired when he was 33.  How?  By following  the principles that he outlines in the book.

What this book has done for me is to turn much of what I thought about personal finance on it’s head.  At this point, I can’t say whether I will attempt to try and join the ERE army or not, but I can guarantee you that I will be looking at things from a different point of view from here on out.

The book itself is dense.  Dense in that it’s packed full of information.  There’s no way that one read through will be enough.  You’ve either got to read it several times, or supplement that first reading with plenty of reading of Jacob’s blog.  It reads (the book, not the blog) much like a textbook does.  It’s even segmented into sections the way a textbook would be.  Luckily, it’s not all facts and figures and there’s a bit of discernible humanity in there as well.  Jacob lays out how he managed to retire at 33 by some extreme saving.  Then he goes into how he lives off of less than $10,000 a year that he draws from his investments and a few odd jobs (that he enjoys) during the year.

By no means is the Early Retirement Extreme going to be for everyone.  It’s a hard read.  But, it is well worth the read.  It’s the “thinking man”s personal finance book.  It’s not chock full of anecdotal evidence, but raw hard facts and numbers.  It will change the way you think about personal finance, and life in general.

You can buy it directly from the Printer or from Amazon(click the picture)