Thanks for the Questions!
Last week I invited you to send me questions on investment issues. I was somewhat doubtful
about
whether anybody was paying attention, so I was pleasantly surprised by the number of
questions
submitted, even after discounting the ones from my mother (yes Mom, I agree that the price
of
gasoline on the West Coast is outrageous, and no, I won't forget to send a card to Aunt
Rose on
her birthday).
One good question I received is one that often confuses homeowners who are planning their
retirement. Here it is:
When setting up my retirement plan and determining how I should invest my money,
should I include the value of my home or should I exclude it? If I include it, should I
include all of the value, or just the amount of the equity? I have $100,000 of equity in
my
house, plus money in stocks, money market funds, etc. -- it matters quite a bit if I were
to
include or exclude the real estate value in my calculations.
My answer: yes, it does matter quite a bit. And the answer is that you should NOT include
the value
of your house in planning your retirement.
The reason is that in most cases the vast majority of the money, if not all of it, is
unavailable for other
purposes. After you retire, you still have to live somewhere, and most people choose to
remain in
their houses. If you keep your house, all of that equity is still tied up.
Smaller is Not Necessarily Less Expensive
Yes, many people talk about moving into a smaller house, because they will need less space
once
their children move away. That's the theory. But in reality, few people downgrade their
living
quarters.
My former neighbors are a good example. They retired five years ago but stayed in the same
house
in Chicago that they had owned for 15 years. Just this year, they decided to relocate to
Tucson,
and, yes, their new house is 30% smaller. But because of all the amenities, the location,
and moving
and real estate transaction expenses, they are actually investing more money into the new
residence.
(By the way, one of the advantages for them of moving cross-country is that this has
finally forced
the youngest child to move out -- these days adult children often look at the rent-free
option of
staying with mom and dad as a "retirement benefit" that enables them to save
money.)
Owning a house does have some benefit through the retirement years. Even though you will
likely
not use the equity for other purposes, if the mortgage is fully paid by the time you reach
retirement,
you can subtract the mortgage payment from the income you will need for living expenses.
So if
your monthly mortgage payment is $1,000 now, but you pay the mortgage off before you
retire,
your annual living expenses in retirement will be $12,000 less than they are now. Of
course, you will
still need to pay taxes and insurance.
What About My Beanie Baby Collection?
This leads to another question I often get - what types of more esoteric
"investments" should be
included in a retirement plan? Specifically, should things like art, coin and stamp
collections, or
jewelry, be counted?
In almost all cases I recommend that no assets outside of traditional securities and
mutual funds be
put into the retirement plan, for the same reasons that a house should not be included.
Those Beanie
Babies and baseball cards you own may be rare, but rarer still is the retiree who can
transfer them
into a meaningful portion of his or her retirement income.
Yes, we do hear tales of the person who discovered a true masterpiece hanging in her
living room
and became rich as a result, but your chances of hitting it rich are much better if you
buy a dozen
lotto tickets. Actually, come to think of it, most of the people who tell me that the
purchase of
jewelry or art should be treated as an investment are jewelers and art gallery owners.
Of course, as consumers we are more than willing to think of a large purchase as an
investment,
because it helps us justify the expenditure. But it is unwise to count such a purchase as
part of a
retirement plan, because the result is that you run the risk of falling short of your
goals.
So if your spouse reminds you that your 10th anniversary is coming up (you know, the
"diamond"
anniversary) or starts talking about investing in rapidly appreciating "Mark McGwire
rookie cards,"
bring out this article. It may not do any good, but at least you'll go down fighting.
Of course, knowing that my wife reads this column, I would be remiss if I didn't point out
the
long-term investment viability of state-of-the-art gas grills … like the kind I saw
at the hardware
store last week.  Lummer's Logic Archives
Scott L. Lummer, Ph.D., CFA, 401k Forum's Chief Investment
Officer, is a recognized expert in the investment field. He has conducted extensive
research on asset allocation, international investing, risk management, mutual fund
analysis, ethics and valuation, and is a co-author of The Pension Investment Handbook.
|
