Risk Assessment for Retirement Planning: What to Know

As you approach retirement, there are a variety of important considerations to keep in mind, not just whether or not to take up pickleball. One of the biggest worries for many retirees is ensuring their funds last throughout their retirement. To help achieve financial stability in retirement, it's important to understand and prepare for a range of risk factors, including inflation, market fluctuations, lifespan, spending habits, and health. This can be achieved through a comprehensive risk assessment.

By taking a closer look at each of these risk factors, you can better understand their potential impact on your retirement funds and create a more secure financial plan for your golden years.

Risk Factors of Retirement

Longevity, or living a longer lifespan, can have a significant impact on retirement planning. As life expectancies continue to increase, the likelihood of outliving one's retirement savings becomes a growing concern. This means that individuals must plan for a potentially longer period of time in which they will need to have a steady source of income.

To prepare for a longer lifespan, retirees should consider strategies such as delaying the age at which they start drawing Social Security, which can increase their monthly payments. Additionally, investing in a lifetime income annuity can provide a guaranteed source of income for the future.

It's important for retirees to factor in the possibility of a longer lifespan when planning for retirement, as it can have a major impact on the sustainability of their financial security in their later years.

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Market Volatility and Market Risk are two key factors that can greatly impact your retirement funds. Market volatility refers to the fluctuations and instability of the financial market, and market risk is the chance that your investments will lose value. Market risk is a common concern among retirees, as they have limited time to make up for any losses.

For instance, if the stock market experiences a downturn, your portfolio value could decrease, leaving you with less money for retirement. Market volatility can also make it difficult to determine when to invest, when to sell, and when to take distributions. This uncertainty can lead to fear and indecision, and may cause you to miss out on growth opportunities.

Additionally, market risk can also impact your investment strategy, as you may need to reduce your exposure to equities as you approach retirement. This can limit your potential for growth, but can also reduce your market risk, allowing you to preserve your retirement savings.

Overall, market volatility and market risk are critical considerations for retirees, and it's important to have a solid understanding of how they may impact your retirement funds. This can help you make informed investment decisions and ensure that your retirement is secure and comfortable.

Inflation is one of the most significant risk factors associated with retirement. Inflation refers to the general rise in prices over time, which can erode the purchasing power of your savings and retirement funds. This means that your hard-earned money may not be able to buy as much in the future as it can today. Over time, the cost of living, including housing, healthcare, and food expenses, can increase, leaving retirees struggling to make ends meet.

Retirees are particularly vulnerable to inflation, as they rely on fixed sources of income, such as pensions or Social Security, which may not keep pace with rising costs. This is why it's crucial to factor in inflation when planning for retirement. To mitigate the effects of inflation, some retirees choose to invest in assets that have the potential to grow with inflation, such as stocks, real estate, and commodities.

Others may choose to use a combination of both fixed and growth investments to balance their portfolios and reduce market risk. It's also important to plan for unexpected expenses, such as medical costs, which can rise rapidly with inflation. By considering the effects of inflation on your retirement plans, you can ensure that your nest egg will last throughout your Golden Years.

Overspending is a common risk factor that can greatly affect retirement funds. It is important to create a budget and stick to it, especially during retirement when there is no steady source of income. Overspending can quickly drain retirement savings and leave individuals struggling to make ends meet. It is important to have a clear understanding of monthly expenses and make adjustments where necessary to ensure that retirement funds last throughout their lifetime.

It's also a good idea to prioritize essential expenses such as healthcare and housing, and reduce spending on non-essential items such as dining out, entertainment, and travel. By staying disciplined with spending and making adjustments as needed, individuals can mitigate the risk of overspending and ensure a stable financial future during retirement.

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Healthcare Expenses can have a significant impact on retirement, especially as people age and require more medical care. The cost of healthcare is constantly rising and it can be difficult to predict exactly how much you may need to set aside for medical expenses in retirement.

Some people may have chronic health conditions that require ongoing treatment, while others may require more significant medical care in the form of hospital stays or surgeries. Additionally, long-term care expenses, such as nursing homes or assisted living facilities, can also be a major drain on retirement savings.

To mitigate the impact of healthcare expenses on your retirement, it's important to plan ahead and prepare for the unexpected. This may involve setting aside money in a dedicated healthcare account or investing in a long-term care insurance policy.

You should also take an honest look at your own health history and consider factors such as your lifestyle, genetics, and overall health, to better estimate your healthcare expenses in retirement. Additionally, it's important to stay informed about changes in the healthcare industry and be proactive in managing your healthcare expenses as you age.

Making Preparations

Proactive preparation for the potential risks of retirement can help you strive for a more secure financial future. Consulting with financial advisors or estate planners may provide you with expert insight and personalized strategies to potentially manage these risks and attempt to safeguard your retirement savings.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

The Estate Tax Exemption has Been Raised for 2023

The IRS has recently announced that the 2023 Estate Tax Exemption will be $12.92 million, which represents a significant increase from the 2022 amount of $11.7 million. This exemption represents the amount of a decedent’s estate (including previously taxable gifts) that is exempt from estate tax. The increased exemption is $860,000 more than the 2022 amount and is the result of the rising high interest rates reflected in the rapid growth of the consumer price index.

The estate tax is a federal tax that is imposed on the transfer of assets of a deceased person to his or her beneficiaries. The estate tax is generally imposed on the fair market value of the assets that are transferred, minus any debts or liabilities of the decedent. However, with the increased exemption, more people will be able to pass on their assets to their loved ones without having to pay estate taxes on them.

The increased exemption is a result of the American Taxpayer Relief Act of 2012, which established a formula for adjusting the estate tax exemption for inflation. This means that the exemption amount is adjusted annually to reflect changes in the consumer price index. The 2023 exemption amount is the highest it has ever been, and it is likely to continue to increase in the coming years.

It's important to note that this increase in the estate tax exemption does not mean that estate taxes are eliminated entirely. Estates that exceed the exemption amount will still be subject to estate tax. It's also important to consult with a tax professional or attorney to understand how this change may affect your specific situation.

The 2023 estate tax exemption of $12.92 million presents an opportunity for married couples to protect up to $25.84 million from estate taxes through coordinated estate planning. This is because the estate tax exemption is unified with the federal gift tax exemption, meaning that by utilizing the exemption through lifetime gifting, the amount of exemption available at death is reduced. It's worth noting that the highest estate or gift tax rate remains at 40% for the next year.

Gifting Opportunities to Defer Taxes

The increased estate tax exemption for 2023 presents additional opportunities for gifting. The annual gift tax exclusion amount for 2023 is $17,000 per donee, an increase from the 2022 amount of $16,000. This means that taxpayers can gift up to $17,000 to each individual recipient without having to pay gift taxes or use any of their lifetime gift tax exemption. This tax exclusion applies to present interest gifts, which are gifts that the donee can enjoy immediately, such as cash or similar property, or gifts made to certain trusts.

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For gifts made to non-US citizen spouses, taxpayers can gift up to $175,000 in 2023 before utilizing their Estate Tax Exemption. It's important to note that while gifts to US citizen spouses are unlimited, gifts to non-citizen spouses are not. The non-citizen spouse annual exclusion is a separate limit and it's not part of the general $17,000 per donee exclusion.

In addition to the annual gift tax exclusion, the increased estate tax exemption also provides an opportunity for taxpayers who have previously used all of their available exemption through lifetime gifting to give an additional $860,000 next year without incurring gift taxes. This can be a useful strategy for reducing the size of one's estate and potentially avoiding or minimizing estate taxes.

For married couples, the increased exemption means that they can give a combined $1.72 million without paying gift taxes. This is because the estate tax exemption is unified with the federal gift tax exemption, meaning that the total exemption for both individuals can be used for either estate or gift taxes.

The Future Exemption Amount

The estate tax exemption has been adjusted for inflation and updated annually since 2012, with a base set at $5 million. This base was doubled in 2017 and is effective for tax years 2018 through 2025. After 2025, the base will revert back to the original $5 million.

Given this, it is important to consider utilizing the larger exemption amount through estate planning before 2026. This could potentially help minimize or avoid estate taxes on the transfer of assets to beneficiaries.

Gift Tax Exclusion

The IRS has recently announced that the annual gift tax exclusion amount for 2023 will be $17,000 per donee, an increase from the 2022 amount of $16,000. This means that taxpayers can gift up to $17,000 to each individual recipient without having to pay gift taxes or use any of their lifetime gift tax exemption.

This tax exclusion applies to present interest gifts, which are gifts that the donee can enjoy immediately, such as cash or similar property, or gifts made to certain trusts. This is an opportunity for taxpayers to reduce the size of their estate and potentially avoid or minimize estate taxes.

For gifts to non-US citizen spouses, taxpayers can gift up to $175,000 in 2023 before utilizing their Estate Tax Exemption. It's important to note that while gifts to US citizen spouses are unlimited, gifts to non-citizen spouses are not. The non-citizen spouse annual exclusion is a separate limit and it's not part of the general $17,000 per donee exclusion.

It's important to consult with a tax professional or attorney to understand how these changes may affect your specific situation and to explore all the opportunities to reduce the size of your estate and minimize the taxes that may be due.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

How Investing In Real Estate May Protect You From Inflation

All of the major business news channels have recently used the word "inflation" in their headlines to describe the gradual rise in the price of goods and services over time. Everyone was mainly concerned with talking about how abruptly and finally the United States' record low inflation rate was ending. Food prices were the highest they had ever been, used car prices were setting records, lumber costs were soaring, and it appeared that gasoline prices would continue to rise.

It is no longer a secret that the price of necessities like food and shelter is rising, even though the precise cause of price hikes is still up for debate. While it is still true that we have experienced a fortunate and extended period of low inflation, it seems like all good things do, in fact, come to an end, and currently is essentially the end of inflation's record lows. Inflation is currently having an impact on the life and work of the average American.

For financial backers, high inflation prices have the consequence that it may affect the value of a potential source of revenue in the future. As a result, investors must produce returns that are greater than the rate of price inflation. This means that financial backers should be prepared to adjust their venture strategies going forward and carefully plan to support against inflation now more than ever.

In this essay, we will define inflation, discuss how it affects financial backers, and promote one main idea: that sound money management may be the best defense against both inflation and the lack of buying power that results from it.

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Inflation: What is it?

After some time, inflation is the gradual increase in labor and product costs. The Consumer Price Index, which is based on a registry of frequently purchased products and services, is used to estimate it. The United States' central bank is in charge of establishing monetary policy, and inflation is frequently one of its main concerns.

The Federal Reserve saves the ability to respond when price inflation extends over or below this reach, but generally works to control inflation to a defined aim (about 2-3% annually).

According to the most recent report from the U.S. Department of Labor Statistics, the Consumer Price Index (CPI), a measure of inflation, rose by 5% over the course of the previous year alone. The most notable increase started in 2008, ironically the last time the country experienced a financial disaster.

How is inflation going to hurt financial investors?

Since financial backers must generate returns that outpace economic inflation, inflation can be harmful to their investments.

To reach this important conclusion even more forcefully, a model can be used.

If inflation is running at 3% per year and a financial backer puts her money in a currency market account that offers a reasonable rate of income at 2% per year, she will actually lose 1% of her purchasing power annually compared to inflation. Long-term, the financial backer's funds may buy less because labor and product costs have increased more quickly than her speculative returns.

Financial backers can think about looking for inflation fences or resource classes that are ideally located with the potential to perform well in times like these to avoid a situation like this.

Financial planning that emphasizes real estate may be the hedge you need to protect yourself from inflation.

Why is real estate considered to be a reliable inflation hedge?

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There are several causes. Insofar as one is concerned, one could examine how inflation affects obligation. After some time, the rising cost of a home reduces the credit to the amount of any mortgage debt, functioning as a kind of cyclical markdown. As a result, even while the property's value rises, your fixed-rate contract installments stay the same.

Due to the fact that rising home prices typically result in multifamily housing networks, inflation may also benefit investors who make money from investment properties, particularly those who own property in those locations. If a land investor can modify the terms of their lease while keeping their mortgage the same, this creates the opportunity for increased financial flexibility.

Finally, as property valuations tend to continue on a steady vertical arc over time, land may be a good hedge against inflation. The bulk of the homes that fell to their lowest prices when the real estate bubble broke in 2008 did so in less than ten years. Additionally, land speculation can produce predicted recurrent income for financial supporters and can keep pace with or even outpace inflation in terms of value.

We should now focus on a few techniques frequently employed to try to fence land enterprises against inflation because the evidence seems to favor land and because it is a resource class that has generally held its own when faced with rising inflation rates.

How could using real estate as a hedge possibly be possible?

Investing in a multifamily property may be one of the most revolutionary ways to use land to protect against inflation. Residents of certain types of properties, such as commercial buildings (such retail sites), are required to sign long-term business leases. The majority of multifamily housing only renews rents once a year for each occupant. The more frequently you are given adequate opportunities to change the lease, the more units the building has. The same holds true for self-capacity.

Multifamily structures, such as apartment buildings, are a special resource class in that they are frequently continually in demand, especially as accommodation expenses soar. Additionally, there is a limited supply of buildings or new improvement projects due to recent increases in labor and material costs, which might lead to an increase in rental rates and property estimates. Together, these two factors equal a property that might not be vacant for prolonged periods of time and different opportunities to renew or start leases at prices that reflect changes in the market.

Another thing to take into account is that cost repayments, another rent component, are another way that land money management may be able to keep up with inflation. No matter the type of building structure, leases transmit some of a property's ongoing operating costs to its tenants. Landowners or building owners can surely be partially protected against the increase in utility and support costs due to inflation.

At that moment, it is obvious that investing in land, particularly in multifamily housing units, may be a good way for our ongoing business sector to protect itself from inflation. Effective money management is frequently considered a technique to protect reserve monies in a volatile and inflationary economy.

The motivation for financial backers' hasty landing in the midst of financial weakness is extremely clear. No matter what, a place to stay will always be needed, and hence likely in demand. A long-term investment in a speculation property may be a safe way to turn a passing interest into something more substantial in the near future.

However, investors can look at land trusts (REITs), intuitional land assets, and Delaware Statutory Trusts if they are unable to own and manage the venture property themselves or simply don't want to (DSTs). It is entirely up to each individual to decide how to manage their finances with regard to their land; this is and should be a personal financial decision. In any event, it might be worth your time and effort to educate yourself on all of your options before making a decision. You might also consult a learning experience expert like the team at Perch Wealth.

Why is investing in a DST a potentially lucrative land venture option?

Investing in a Delaware Statutory Trust, or DST, may be an extremely enticing land investment option if your major worry is to hunt for wealth protection during an inflationary financial moment. A DST is a typically complex arrangement for people who want to invest some resources in land.

A DST is a mechanism for financial supporters to own land with the potential to obtain recurring, automated income and have no management responsibility. Most investors rarely think about whether they want active or passive management of domain property, and as a result, they frequently find themselves in situations they don't feel qualified for, aren't very interested in, or aren't currently benefitting from as they would like. A DST investment is a fantastic prelude to a potential ongoing source of income and accumulation of unrelated riches for a first-time or relatively new financial supporter.

There are two crucial methods via which one can invest in a DST. The first is by making a quick financial guess. If you're new to land effective money management, for instance, and you merely need to lock down your opportunity, you can aim to invest $50,000 in a DST in order to gain momentum in the land industry. The second method involves a 1031 Exchange.

Many investors are completely unaware that they can use a 1031 Exchange to fund a DST, despite the fact that there are many potential benefits to doing so. By completing a 1031 Exchange, you can potentially increase the current housing market level and separate your assets into multiple DSTs that are geologically shifted and in certain resource classes, helping to moderate and potentially limiting the overall risk to your capital. If you're interested in learning more about 1031 Exchanges, DSTs, or other types of optional land speculation schemes, contact a financial professional at Perch Wealth right away.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

Understanding the Holding Period of a "Like-Kind" Exchange

There are strict timeframes that every investor must adhere to successfully complete a 1031 exchange. However, investors commonly ask, is there a certain amount of time that a property must be held to qualify for an exchange? While the IRS has not explicitly identified a holding period, a few considerations may offer insight.

The 1031 Holding Period

The holding period is how long an investor holds their property. As mentioned, Internal Revenue Code (IRC) Section 1031 does not define how long a holding period must be. Rather, it comes down to the intent of the investor.

The IRS explains: “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”

“Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality.

“Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building. However, real property in the United States is not like-kind to real property outside the United States.”

Understanding Intent

Section 1031 is designed to enable investors who have held their property for an extended period of time – specifically, those who held the property for income-producing purposes – to trade into another property that would serve the same purpose.

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However, not all real estate qualifies because not all is held for the same purpose. The most common example to look at is a primary residence. Since a primary home is not “held for productive use in a trade or business or for investment,” it does not qualify for an exchange. On the other hand, apartment buildings, offices and medical complexes, retail centers and single-tenant assets generally qualify since they are held as an investment.

Developers also face challenges when trying to complete a 1031 exchange. Since a property must be held for investment purposes, buying land, building a property, and selling for a profit often disqualifies the transaction from a 1031 exchange. In this scenario, the property was held to resell for profit, not for investment.

However, investors should consider holding the property for at least one year, if not two, if they are uncertain the property will satisfy Section 1031.

While the IRS has never stated that there is a minimum hold period, there have been situations in which the IRS did not permit an exchange because the owner’s intent was unclear.

Investors uncertain about whether they qualify may generally want to adhere to the two-year recommendation. However, as always, speak to your tax professional to get their professional advice about your particular situation. 

The two-year holding period was mentioned by the IRS in 1984 in Private Letter Ruling 8429039. The letter was written in response to an investor who wanted to trade his property via an exchange. The property in discussion was used as the investor’s primary residence until 1981. In 1983, the investor rented the property out. When pursuing a 1031 exchange in 1984, the investor requested a 1031 exchange; the IRS approved, stating that holding rental property for a minimum of 2 years is sufficient to meet the holding period test prescribed by Section 1031. However, a private letter ruling only applies to this particular case and is therefore only considered to be a general guideline for 1031 exchanges.

The one-year holding consideration, on the other hand, was introduced in 1989 when congress proposed a 1-year holding period for a property to qualify for a 1031 exchange. However, this proposal was never integrated into the Tax Code and is therefore not a requirement. Instead, tax advisors have referenced this proposal when determining if a property could qualify under Section 1031.

Another consideration for the one-year holding period is that by holding the property for at least 12 months, the investment will be reflected as an investment property on one’s taxes for two filing years.

These considerations, however, are just that – considerations. Historically, the IRS has made decisions regarding like-kind exchanges that do not align with these proposals. For example, in 1953, in the case Allegheny County Auto Mart v. C.I.R., the court permitted an investor to complete a 1031 exchange after holding property for only five days, whereas in other cases, such as one in 1967 in Klarkowski v. Commissioner, an investor was disqualified even after a six-year holding period.

Does a vacation home qualify?

While most commonly 1031 exchanges are discussed amongst commercial investors, those holding property as a vacation home can typically sell it and purchase a new property via a 1031 exchange. However, the vacation home must have tenants, and the property must be treated in a business-like manner. Furthermore, if the vacation home is acquired as the replacement property, the property must continue to be used for investment purposes. Generally, the home cannot be converted to a primary residence within five years following the exchange.

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Other Important Timelines in a 1031 Exchange

To qualify for a like-kind exchange, investors must understand and adhere to the timelines outlined in Section 1031.

Once a property is listed, there is no guideline on how long an investor has to sell the asset. They can sell it on or off-market and market it for one day or five years. In fact, they can list the asset and then change their mind. Up until the property is sold, any gains are unrealized. It is not until the property actually closes that a timeline kicks off, and the investor could be responsible for paying taxes on the realized gains.

When the initial property – or relinquished property – closes, an investor has 45 days to identify their replacement property and 180 days to close. The 180 days also commence from the closing date of the relinquished property. With few exceptions, any exchange that does not meet these deadlines results in all gains being taxable.

Speak to a Qualified Professional

Many 1031 exchanges look different, and for those considering selling their real estate and purchasing a new property via a 1031 exchange, speaking with a qualified professional is highly recommended. Not only can they offer insight on the possible exchange, but 1031 experts can also introduce investors to alternative 1031 exchange investment solutions that may otherwise be overlooked.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

Where Do I Consider Investing My Money Today?

Today’s market offers investors a plethora of investment opportunities across numerous industries. While having multiple options can help improve an individual’s investment strategy, they can also cause uncertainty, raising questions about which investment suits the person’s financial objectives. To help provide direction on which investment is right for you, we will outline the basic elements of today’s most desired investments and briefly review the pros and cons of each one.

For this article, we will divide the information into two sections. First, we will look at more traditional investment options, such as investing in stocks or bonds. Next, we will review alternative investments. Although less known among today’s investors, alternative options offer potential perks that many traditional investments lack.

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Traditional Investment Options

Historically, investors have relied upon a 60/40 portfolio composition to help them achieve their long-term financial dreams, such as building a nest egg for retirement, repaying a mortgage early, or paying educational expenses for their children. According to this model, an investor’s portfolio should consist of roughly 60 percent stocks and 40 percent bonds. This model historically tended to deliver investors stable growth and income to help them meet their financial goals.

Stocks, or equities, are securities that represent fractional ownership in a corporation. Investors buy stocks and rely upon the corporation’s growth to increase their wealth over time. Additionally, stocks may offer investors dividends – or payments to shareholders – for passive income. On the other hand, bonds are debt securities offered by a corporation or government entity looking to raise capital. Unlike stocks, bonds do not give investors ownership rights, but rather they represent a loan. The most significant difference between stocks and bonds is how they generate profit: stocks must appreciate in value and be sold later on the stock market, while most bonds pay fixed interest over time.

While stocks offer investors the potential for higher returns than bonds, bonds are generally considered a less risky investment. As a result, many investors turn to investment funds, such as mutual funds, exchange-traded funds, or closed-end funds, to diversify their portfolios while maintaining a 60/40 composition. These investment funds pull together capital from multiple investors, which is then invested into a portfolio of stocks and bonds. Investment funds offer investors the potential to mitigate risk through a more balanced portfolio.

A Change in the Portfolio Model

Due to ongoing volatility in the stock and bond market, rising prices for commodities, and high equity valuations, the traditional 60/40 portfolio model is no longer serving investors to the same degree it once did. As a result, many financial experts are now recommending that investors diversify their portfolios with 40 percent alternative investments to help potentially improve their financial position. 

Alternative Investments

While numerous types of alternative investments exist, we will focus on alternative real estate investments due to the benefits they can possibly offer investors in today’s market. 

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Why real estate?

Real estate has long been one of the most sought-after opportunities for investors. As a limited commodity, real estate has historically afforded investors the potential for long-term security, great returns, passive income, tax advantages, and a hedge against inflation. However, real estate investments also come with certain disadvantages. Getting started in real estate investing typically requires an extensive amount of capital and strong financials for those who are leveraging debt. Furthermore, real estate generally requires active participation – investors are required to manage their assets to ensure optimal performance.

Therefore, alternative investments in real estate have started growing in popularity among the investment community. While they can often offer similar advantages to real estate investing, they deliver a passive opportunity, meaning they have zero management responsibility. Here are a few options for investors seeking alternative real estate investments.

Real Estate Investment Trusts

A real estate investment trust (REIT) is a company that owns and typically operates income-producing real estate or related assets. REITs incorporate all asset types, including multi-family, retail, senior living, self-storage, hospitality, student housing, office, and industrial properties, to name a few. Unlike other real estate investments, REITs generally purchase or develop real estate for a long-term hold.

Investors rely on a REIT professional’s understanding of the real estate market to diversify and stabilize their portfolios. Many REITs are publicly traded, meaning that all investors, including unaccredited investors with limited capital, can invest in them.

While publicly-traded REITs deliver many advantages associated with traditional real estate investing – such as income potential, diversification, and possible inflation protection – they also come with some distinct disadvantages. For example, REITs often experience slow growth. Because REITs must pay out at least 90 percent of their profits in dividends, new acquisitions and developments are limited. To determine the strength of an investment, potential investors should conduct due diligence – with the help of an expert – on the REIT prior to purchasing shares.

Delaware Statutory Trusts

A Delaware Statutory Trust (DST) is a legally recognized real estate investment trust where investors purchase an ownership interest, or fractional ownership, in a real estate asset or real estate portfolio. DSTs are commonly relied upon by 1031 exchange buyers since they qualify as a like-kind property per the Internal Revenue Service (IRS).

In addition to providing investors passive income potential through a management-free investment, DSTs enable investors to invest in institutional quality assets to which they would not otherwise have access. These assets may be able to deliver higher returns and longer-term stability. Furthermore, the debt structures of DSTs are attractive to many investors. People who invest in DSTs have limited liability equal to their investments; however, they are able to take advantage of the often attractive financing obtained by the sponsor companies. Unfortunately, only accredited investors can invest in DSTs.

Opportunity Zones

Opportunity zones (OZs), defined by the IRS, are “an economic development tool that allows people to invest in distressed areas in the United States. This incentive's purpose is to spur economic growth and job creation in low-income communities while providing tax benefits to investors.” OZs were introduced under the Tax Cuts and Jobs Act of 2017, and investors interested in investing in an OZ must do so through a qualified opportunity fund (QOF).

QOFs can be a superb option for investors due to their tax benefits, which depend on the length of time an investor holds a QOF investment. We have previously explained these benefits, which we refer to as OZ triple-layer tax incentives. Here’s a snapshot of the tax benefits a QOF offers an investor:

While opportunity zones are considered a risky investment, given their purpose, they can potentially deliver investors higher returns when compared to other alternative real estate investment options.

Interval Funds

An additional alternative investment option worth mentioning are interval funds. These funds are not limited to real estate but instead can be used to invest in many securities, including real estate. Similar to previously mentioned funds, interval funds pull shareholder capital together to invest in different securities. However, they offer a lower degree of liquidity. Instead of being able to trade shares daily, investors are typically limited to selling their shares at stated intervals (i.e., quarterly, semi-annually, or annually). The benefit of interval funds is the flexibility they offer the funds – they allow the fund to execute longer-term strategies, creating the potential for a more stable investment. As a result, interval funds tend to deliver higher returns and a more diversified opportunity.

Now, where do I invest my money today?

While the above information offers a snapshot into the pros and cons of various investment options, you should consider additional aspects. Rather than immediately trying to identify which option is best for you, the key takeaway here is to understand that today’s market offers an array of investment options that were previously unknown to many. Investors can diversify beyond stocks and bonds, which can possibly provide them with higher returns while seeking to mitigate risk. To develop an investment portfolio that meets your financial goals, we advise you to speak with a financial professional at Perch Wealth.

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General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

•          There is no guarantee that any strategy will be successful or achieve investment objectives;

•          Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;

•          Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;

•          Potential for foreclosure – All financed real estate investments have potential for foreclosure;

•          Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.

•          Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;

•          Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits