How the Top 1% Build Their Wealth

We all want to get the most out of our retirement planning. Our hope is to direct our savings and investments into profitable ventures that set us up for a comfortable retirement. We can learn a few tips by taking a look at how the top 1% build wealth when deciding how to invest our self-directed IRAs.

You may think that the kind of wealth we’re talking about is unattainable. However, Money Magazine breaksProfessional man crunches numbers at his desk it down fairly simply in this article, where they cited a report by U.S. Trust, based on a survey taken of some pretty wealthy investors with a minimum of $3M in holdings. The report is called Insights on Wealth and Worth, and they found that “58% of the wealthy individuals surveyed said they came from a middle-class background, and 19% grew up poor. And when asked how their wealth was accumulated, respondents estimated that they acquired just 10% on average through inheritance, while 52% came from earned income and 32% from investments. (The remaining 6% was from unspecified other sources. Vegas? The lottery?)”

Proper Savings and Investing Strategies Help Build Wealth

The survey results above indicate that we can all build wealth using proper savings and investment strategies. (Although, to be clear, these strategies probably shouldn’t include Vegas or the lotto!) Investing early and enjoying the benefits of compounding interest is a tried-and-true method of retirement planning. And according to that survey, that’s also how most of the respondents earned their own high net worth. Interestingly enough, well over half of the 650+ surveyed responded they did incredibly well with the traditional stock and bond investments. Only 11% listed investing in alternative assets, “including hedge funds, private equity, timberland, and art.” For those of you interested in self-directing your retirement plans—any of those alternatives (except art) are permissible in these plans.

It’s worth noting that the Money Magazine article seems to strongly support sticking to the most traditional, long-term assets, like stocks and bonds, and even suggests that diversity in more sophisticated and expensive investments can “de-worse-ify” (their words, not ours!) your portfolio. The author didn’t appear to be against alternative assets in particular—and we agree that you definitely should not sock all your money into a single investment or two. Also, you absolutely don’t have to go the sophisticated route if you’re not qualified for that, either. However, alternative assets—like real estate (timberland?), hedge fund options, precious metals, private lending opportunities, and so much more are available in self-directed IRAs and can also present the potential to build wealth over time in your portfolio. As these accounts become more widely known and used, the retirement planning industry is seeing an upswing in self-directed plan usage.

How Many Retirement Savers Use Self-Directed IRAs?

According to recent reports, $146 billion of the $7.3 trillion (roughly 2%) of American retirement funds are in self-directed IRAs. The Investment Company Institute reports a 21% increase in self-directed plan usage over the past three years. That number is expected to continue rising. That means more people are taking control of their own retirement funds and investing decisions and investing in alternative assets. And, that’s a perfect lead-in to two of the favored investments the elite top 1%  use to build income, which (drumroll!) are also permissible in self-directed IRAs.

Investing strategies used by the top 1% to build wealth

One way the top 1% build wealth is by investing in businesses. In fact, according to this article on ZeroHedge—business equity is one of the primary assets owned by the revered one percenters. Additionally, the article states, “It’s also worth noting that the wealthiest 10% own over 90% of the securities and stocks, 84% of trusts (essentially tax havens) and almost 80% of non-home real estate (i.e. second homes and income-generating properties).”

Now, you cannot invest in a second home for yourself with IRA funds. But you can invest in other income-generating properties, along with securities, stocks, LLCs, trusts—and much more.

Let’s explore two popular investments favored by the wealthiest investors—business equity and income-producing property. These are popular assets in self-directed IRAs.

Investing in Business Equity

Self-directed plans may own businesses or shares in businesses, start-ups, corporations, etc., to build tax-sheltered income for retirement. You will not have to come out of pocket to manage and grow this business investment. Actually, you can’t use personal funds to facilitate anything your IRA owns. All income and expenses derived by that investment flow directly into and out of the IRA/retirement plan. And those gains provide more capital for you to reinvest.

Investing in Income-Producing Property

Investing in real estate that can be improved and sold for a higher value is one example of income-producing property. And, if the top 1% can do it, so can you! You may not have the big bank they do, but smaller rehab-and-flip projects may be within your reach. Additionally, commercial and residential rentals (single or multi-family dwellings), and even foreign vacation homes fit the bill here. The key is to invest smartly and  thoroughly research investments. Additionally, understand the expenses involved above and beyond the purchase of your initial investment.

The Take-Away on How the Top 1% Build Wealth

No matter how you choose to invest your retirement funds, know that there is always risk. Even the top 1% build wealth by investing with the understanding of risks. But a successful endeavor can potentially help you grow substantial retirement income.

If your investments are fruitful, you’ll gain more and more capital over time inside your retirement plan to continue reinvesting. This provides the chance for you to continue building wealth in your account—the same way it works for the wealthiest investors!

If you want to learn more, contact Advanta IRA today.

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About Scott Maurer

Scott Maurer, Vice President of Sales for Advanta IRA, is a recognized expert in the field of self-directed IRAs. With a law degree from the University of Florida and as a designated Certified IRA Services Professional (CISP), Scott’s keen understanding of rules and regulations fuels his passion to educate others on the power of investing in alternative assets using self-directed IRAs. Scott is a frequent guest on retirement and investing webinars and podcasts, and he has shown thousands of individuals how to achieve financial freedom by teaching them how to use their retirement funds to invest in private placements, real estate, private lending, and more. Throughout his two decades in the industry, he has watched numerous unique investments unfold, giving him great perspective of what is possible when people take control of their retirement funds and investing decisions.