HOW DO YOU RETIRE WHEN WE’RE LIVING LONGER AND SAVING LESS THAN EVER?

February 7, 2007
By seadmin

Part 2 of Getting Everything You Want From All That You’ve Got
Click Here to Read Part 1

By Josh Lewis, the "Making Money" Mortgage Expert

An article I came across this week noted that scientists now believe that someone currently in his or her 50s will someday become the first person to live to the ripe old age of 150. This longevity may seem like a radical concept since living to 100 is a rarity today but it is undeniable that Americans are living longer than ever. In fact, the average life span has increased nearly eight years since 1970, and science and medicine continue improving at a staggering rate. Once we accept that it is likely that we will live longer than we planned, the next question we must answer is: How can we afford to live that long?

This is a critical question, since the era of the defined benefit pension plan is over. Very few people enjoy the certainty of a fixed retirement income. Those that do must worry when they read articles in the business pages about the many plans that have gone bankrupt. They also may fret about unions negotiating away their benefits. Social Security income isn’t even a certainty anymore. At the end of the day, we must come to grips with the fact that we will live longer than we ever anticipated and we alone will bear the responsibility of supporting ourselves throughout retirement.

Sadly, the average 50-year-old in the United States has built a retirement nest egg of only $75,000. Expert opinions vary on how much a 50-year-old should have accumulated but everyone agrees that $75,000 is not nearly enough. Doug Fabian’s rule of thumb states that you should have $500,000 at age 50. With the huge gap between what we as Americans need to retire comfortably and what we are saving, you would expect boomers to be saving at a rapid rate hoping to get back on track. To the contrary, the government reported last week that the U.S. savings rate has fallen to the lowest levels since the Great Depression — a negative 1.2%. Yes, Americans actually are spending more money than they make, despite the fact that they are woefully unprepared for retirement.

This view isn’t meant to paint a picture of doom and gloom without showing you that there is a way out. There is an asset that most Americans are building that can be used to close the savings gap between where they are and where they need to be. This asset is home equity. Thanks to the real estate boom, a home is the one asset that Americans have in greater amounts than ever before. Let’s look at an example of someone who did not accumulate enough liquid assets to support a desired lifestyle but how that person’s home equity can be repositioned to meet living expenses.

This client, who we will call John Smith for the purposes of our discussion, actually did fairly well during the asset accumulation phase of his life. He built a nest egg that topped more than $700,000. In addition, he owns two residences free and clear. Unfortunately, Mr. Smith did not have a sell strategy in place during the stock market "tech wreck" and he incurred a significant reduction in his investable assets. Once the market and everyday living costs had taken their toll, the portfolio value was down to $335,000 in just under 10 years. After meeting with Doug and measuring the gap between where Mr. Smith was and where he needed to be, they determined that the portfolio needed to produce an additional $500 in monthly income to meet John’s budget needs.

The only question to answer was the source of the $500 per month. Fortunately, while equities were crashing, John’s home equity was soaring. That home equity became an untapped asset. Our calculations determined that borrowing $150,000 of equity with an interest-only loan required a payment of $812.50. That same $150,000 invested in a trend-following system with a sell discipline (a la the Fabian system) will produce $1,250 per month of income with a 10% return. The difference between the mortgage payment and the income earned amounts to $437.50 per month. When you factor in the reduction in income taxes from the interest deduction, you will gain an additional $162.50 per month to bring the total to $600 per month in additional income that is available to spend.

If you have any questions about mortgages, contact Josh Lewis by phone at 888.944.5674 ext. 1 or by email at Josh@JoshLewis.net.

If you want to learn more about using your assets to maximize your golden years, I invite you to join Doug and me March 3 at the Orange County Hilton in Anaheim, Calif.

In our new three-hour seminar, How to Achieve the Retirement of Your Dreams: Getting All That You Want From Everything You Have, we will go deep into these topics and uncover the mistakes boomers make when planning for retirement. We also will examine how the wealthy manage their home equity to safely and to predictably grow their assets. In addition, we will provide you with an understanding of changes in the U.S. financial system and how those changes will impact your retirement. Register online today or by phone at 800.391.1118 ext. 280.

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