I recently saw a billboard advertising new homes from $1299/ month. The emphasis on the monthly payment instead of the price struck me as odd at first. However, this likely illustrates the primary factor that folks pay attention to in the home buying decision making process.
Planning for retirement, or more accurately planning for retirement income is closely related to buying a home. In both instances two of the main variables, market values, and interest rates are outside your control.
Understanding the Market
If you are in the market for a new home today, prices have increased quite a bit in recent years while mortgage rates are extremely low. Much the same equation for retirement. Market values have increased and rates have declined to the point where they are below inflation in most instances.
Of course, the impact of this intersection of interest rates and market values has a different impact when planning for a stream of sustainable retirement income. Low interest rates translate into low returns for fixed income investments. This places more demand for returns on the stock side of diversified portfolios.
The amount of retirement income that an investor can generate from fixed income investments is a fraction of what was available even a few years ago. The same accumulation amount essentially provides less actual income.
The emphasis of home buyers only focusing on the payment instead of the actual price is similar to retirees focusing only on accumulated wealth without regard for the income this accumulation will reasonably produce.
Buying a house is something most people only do a few times in their lifetime. Planning for retirement is even rarer since this is done just once.
A Sustainable Lifestyle
I recently participated in a webinar featuring Professor Robert Merton from M.I.T. Professor Merton observed that the emphasis on wealth accumulation for retirement instead of retirement income generation is misplaced.
Of course, saving for retirement some years in advance is necessary and worthy. The problem, as Dr. Merton pointed out, is that it’s difficult to know the accumulation needed until you are very close to retirement. This creates a planning conundrum that exists not only in the U.S. (where savings rates are relatively low), but also in countries like Singapore where savings rates are extremely high.
The ability to sustain your pre-retirement lifestyle throughout potentially many years of retirement, (the average retirement time frame currently stretches to more than 21 years), with all the twists and turns is a daunting challenge. Because of increases in living costs, solving this dilemma is never a “set it and forget it” task.
Regardless of how you consider this problem, there are really only four possible solutions: You can work longer; you can save more; you can take more investment risk, or you can spend less.
Each of these solutions has positives and negatives. While there is a general trend for many investors to work beyond age 65, the overall average retirement age in the U.S. is still around age 63 and hasn’t changed much in decades.
Fuzzy Your Focus
The key to saving more is to “fuzzy your focus” so that you are saving for nothing specific. The reason for this mental sleight of hand is because most of us have a difficult time saving for a future that we don’t fully comprehend today.
Taking on additional investment risk has to be done with a clear eye on the reality and a commitment to stay in your seat during inevitable bumps in the road.
No one wants to spend less but often there’s a mismatch between financial resources and goals. If that’s the case, reality will eventually win out.
When you buy a house, you need to consider more than just the monthly payment. When you engage in retirement planning, you should broaden your focus beyond just the amount you have accumulated. Start there. Ready for a real conversation?