I just got off the phone with a delightful lady, who has been assigned the impossible task of editing my blog. She’s now reviewing what I’ve done so far, and her preliminary opinion is that I’m not inarticulate. I’ll await her final call with as little anxiety as possible.
She did pose an excellent question about what I do.
She asked, and I’m paraphrasing here big time, “What about regular folk who are just plain afraid of taking that first step in investing in real estate for their retirement? The thought makes me more than a little nervous. Don’t most people fear their first foray into that world?”
Well, yes and no. Most have concluded on their own that the plan currently in place for retirement might be lacking in foresight. However, many think that if they just keep paying down their home loans, saving money in their 401K/IRA’s, and not living beyond their means, everything will work out. This is when they need a heavy dose of “I’ll never live that way” reality. The old ‘free & clear’ home plan is one of the most dangerous myths going today for Baby Boomers. It’s a prescription for a spirit crushing existence in what should be some of the best years of their lives.
Spirit crushing? If your kids live out of town, you can’t afford to visit them very often if at all without them paying your way. Trips to tropical islands sipping exotic drinks with umbrellas in them are not on your menu. Birthday and various holiday gifts – send a card because the money simply isn’t there. It’s Valentine’s Day and you want to take her to that ‘special’ place? You just don’t have an extra $100 for that. It gnaws at your spirit.
Many of us know retired folks living that life. It’s not a ‘lifestyle’ — it’s a life sentence.
I show investors three possibilities for their retirement lifestyle.
One is the status quo plan. They end up with $50-100k in their 401k, have a Social Security check for up to roughly $2k monthly, and if they can earn say 6% on their 100K, another $500 a month. Out of that princely sum they have to pay the home’s taxes and insurance, maintenance, water/sewer/gas/electric, health insurance, car insurance and maintenance etc. And we haven’t yet accounted for food, clothing, and all the other expenses needed to live a minimally OK lifestyle. This ‘plan’ will cause you to cannibalize your 401k money within the first 5-10 years of retirement. At that point you don’t even have the meager income with which you started. But hey, your house is free & clear – even if it is 50 years old.
The second is the Purposeful Plan. This Plan allows for growing your net worth with an eye on retirement income. It also factors in sheltering that income from the mean old tax man – and arranging for more than one ‘basket’ of tax sheltered or tax free monthly income. And a lot of it. Most folks can easily retire with an income of at least $50-100k annually, often more. And with this Plan you don’t have to sacrifice your current lifestyle to make it happen. You just have to do things on purpose. What a concept.
The third peek? Other than Aunt Winnie leaving you a couple million bucks, or winning the lottery, I don’t have a third peek. But they told me two didn’t sound as good as three…
Kaiser Sose says:
Any suggestions to how I can begin my purposeful plan when I believe real estate prices will decline approximately 20% to 30% in the next few years? Am I protected from declining prices?
December 8, 2006 — 5:22 pm
Jeff Brown says:
I think if you believe that, you shouldn’t even consider real estate.
Only in Never-Never Land is anyone ‘protected’ from declining prices.
On Wall Street they call that diversification. If one industry takes a hit, the others in which you invested go up. And what it does in fact is a solid job of limiting losses. It doesn’t do much for growth though.
I’d begin your Purposeful Plan by telling you to invest in what you know very well, and in what you believe has potential for growth.
December 8, 2006 — 5:33 pm
mike says:
The old ‘free & clear’ home plan is one of the most dangerous myths going today for Baby Boomers. It’s a prescription for a spirit crushing existence in what should be some of the best years of their lives.
Myth? Dangerous? I could not disagree more. A home with no mortgage payment is essential for a secure retirement and as source of emergency funds.
This ‘plan’ [paying off your house] will cause you to cannibalize your 401k money within the first 5-10 years of retirement.
If you have to cannibalize your 401(k) in 5-10 years to pay for your retirement, then you’re overextended, either from too many expenses, too little retirement money or both – and that’s a separate problem.
re: the “Purposeful Plan”
The alternative to paying off the house – which is where your Purposeful Plan appears to be heading, though you never actually say so – is to treat the house as a consistent source of income via periodic refinancing.
If/when a real emergency arises – not an “I need $5,000 for my winter vacation” emergency – and you need that equity – for an operation, drugs, private medical care, a friend or relative in dire straits, because the roof blew off and it’s not covered – that money is gone. You spent it.
If I’ve misconstrued your Purposeful Plan, please elaborate; you left many details unspecified.
ps: If you’re looking for Option #3, I’d suggest this advice to clients for the next few years:
1. Cut discretionary spending to the bone
2. Pay down consumer credit, esp. credit cards and personal loans
3. Start saving as much as possible
4. Get that FICO score as high as possible
5. Brace for a recession in 2007
6. Wait for the RE mkt to bottom in 18-24 mos (then)
7. Buy yourself a nice home at a good price with a 20% down payment and a conforming mortgage
And, then, from that point on:
8. Live within your means
December 8, 2006 — 6:12 pm
Jeff Brown says:
Mike – The point of a free/clear home isn’t bad in and of itself. But if they have Social Security and a few hundred monthly from their retirement fund, please tell me what kind of a life they’re living?
Dismissing their need to cannibalize their 401K by calling it a ‘separate problem’ doesn’t solve the bigger problem of relying on their free and clear home as the foundation of a solid after-work life. It’s part of the problem, not separate. It was part of their plan, Mike.
And this plan is leaving thousands of Baby Boomers in situations requiring their families to become their safety net.
Most of your eight points are well made, and should be put into practice.
“Saving as much as possible?” That’s why Grandpa is stuck in his free and clear home. Saving hasn’t worked since employers began the transition away from pensions and towards 401k’s and IRA’s. Instead of receiving SS checks along with pensions, they’re now stuck with way less, and no way to improve their lot.
We could be headed for a recession next year, I don’t know. You apparently think it’s a done deal. My crystal ball is cracked.
I also don’t know when the RE market bottoms out. That’s usually a date arrived at through hindsight.
If I’ve misconstrued your Purposeful Plan, please elaborate; you left many details unspecified.
First, I think we just have an honest disagreement here.
My Plan essentially works from this assumption:
My clients opt for investing now so that down the road they’ll have generated significant income for retirement. They reason they’d rather owe a bunch of money on their investments with a six figure income than owe nothing on their home, have no investments, and live on their savings and Social Security.
This choice hasn’t been difficult for them so far.
December 8, 2006 — 7:26 pm
mike says:
My Plan essentially works from this assumption:
My clients opt for investing now so that down the road they’ll have generated significant income for retirement.
I’m with you 100%, so far.
They reason they’d rather owe a bunch of money on their investments with a six figure income than owe nothing on their home, have no investments, and live on their savings and Social Security.
Jeff, you present a false dichotomy.
There are many other choices than just those two, and owing a bunch of money on an asset – I assume you’re referring to real estate, but you’re still being intentionally vague – increases the risk that you will lose that asset.
How about this choice: “Invest now so that down the road you’ll have generated significant income for retirement and set a payment schedule to own your home free and clear by the time you retire.”
Why not present that advice to clients? That would isolate them in downturns from one of the greatest losses they may ever face – the loss of their home.
December 8, 2006 — 10:36 pm
mike says:
“Saving as much as possible?” That’s why Grandpa is stuck in his free and clear home. Saving hasn’t worked since employers began the transition away from pensions and towards 401k’s and IRA’s. Instead of receiving SS checks along with pensions, they’re now stuck with way less, and no way to improve their lot.
I’m sorry, maybe I wasn’t clear … Step 3, Start saving as much as possible, was for the down payment in Step 7, not a retirement strategy.
December 8, 2006 — 10:45 pm
Jeff Brown says:
Mike – You make excellent points, and it’s obvious we come from different schools. In the end though, honorable men can disagree honorably, and I think we have.
I’ll take the blame for misunderstanding the savings thing.
I’ve never been intentionally vague, though sometimes I try to be short rather than long. Debt to you is the root of all evil. I was raised in that school.
Your way will work for folks who adopt that way early in life. Otherwise they’re playing a game of catch-up they most likely cannot win.
I have many clients who are now living in their homes making six figures yearly while retired, and it’s all either tax sheltered or tax free income.
I guess the real question for you and I Mike, is – is the cat skinned or not? I think we both can say yes. And I do agree with you there are more than just our two approaches. Many more.
But there’s was no intentional vagueness on my part. I specifically meant debt on investment real estate. If one of my clients has a problem and loses half their retirement income they’ll still be ahead of those folks with only the free and clear home plus their meager income.
I know your way would have them invested for many years yielding a retirement income in addition to the no debt home. And that’s a solid position. They won’t be enjoying the life of a six figure tax free income though – at least for most of them.
It was never my intention to offer a ‘false dichotomy’. I was merely comparing just our two approaches. Sorry for not being more clear.
I wish you well.
December 8, 2006 — 11:05 pm
mike says:
I specifically meant debt on investment real estate. If one of my clients has a problem and loses half their retirement income they’ll still be ahead of those folks with only the free and clear home plus their meager income.
If your client needs that lost income to service the “bunch of debt” they’re carrying on their home per your advice, then they’re not ahead. They’ve lost 50% of their income and they’re going to lose 100% of their home.
Debt is risk. Debt is always risk. And more debt is always more risk; this fundamental economic fact is immutable. Retirees need to limiting risk, not courting it.
We should probably agree to disagree.
Feel free to have the last word. And please accept my retraction of the “intentionally vague” claim.
December 9, 2006 — 8:11 pm
Jeff Brown says:
God bless you Mike.
December 9, 2006 — 8:43 pm
Kaiser Sose says:
I wonder how many of your clients will be upside-down in your purposeful plan if real estate falls 20% to 30%, which it could easily do. Those properties would have to have very good cash flow to carry through a trough in prices.
Real estate is a good investment, at reasonable prices, which doesn’t apply to the current market. I really hope you know what you are doing.
BTW, what liscensing do you have in order to promote your investment strategy? Series 6, 7, 63? Are you an RIA?
December 10, 2006 — 11:26 am
Jeff Brown says:
>BTW, what liscensing do you have in order to promote your investment strategy?
I’m a licensed real estate broker. When I think it’s appropriate for my cliients to benefit from other investment choice I bring in an experienced, licensed financial planner. When it comes to tax planning or liability protection I bring in a firm specializing in those disciplines. They are tax attorneys & CPA’s. We all work as a team.
>I wonder how many of your clients will be upside-down in your purposeful plan if real estate falls 20% to 30%, which it could easily do.
If I had your ability to see so clearly into the future my clients would be billionaires instead of millionaires.
December 10, 2006 — 11:59 am
Kaiser Sose says:
>If I had your ability to see so clearly into the future my clients would be billionaires instead of millionaires.
If you don’t employ some prudent risk management techniques with your client’s investments, they may go from being millionaires to bankruptcy.
December 10, 2006 — 5:08 pm
Joe says:
>If I had your ability to see so clearly into the
>future my clients would be billionaires instead of millionaires.
Except that he didn’t say that real estate was going to fall 20-30%, Jeff. He said that it could. And in this market, he’s right.
>If you don’t employ some prudent risk management
>techniques with your client’s investments, they may go
>from being millionaires to bankruptcy.
I agree wholeheartedly. Well said.
December 14, 2006 — 12:04 pm