Monday, August 18, 2014

Tactics to “Go it Alone” in Retirement

A recent MSN Money article noted a Charles Schwab Corp. survey that reported, “Of those surveyed, 89 percent said they are relying on themselves for retirement funds once they stop working full time. Five percent said that they are relying on the government and 4 percent said that they are relying on a spouse. Sixty-one percent of respondents said that their 401(k) savings will be their only or largest source of retirement savings.”

It went on to say that, “The figures are based on an online survey of 1,004 workers, between the ages of 25 and 75, who contribute to their employer's 401(k) plans.”

As someone who is on the cusp of the Generation X/Y intersection, I find myself pondering how exactly my retirement will look in another 30 or so years.  The way the government is digging this country ever deeper into debt at an alarming rate, I have a feeling that I could largely be going my retirement alone.

Asset diversification
Many analysts and advisors advocate investing heavily in stocks, but I find that this is easy to do when you’re playing with someone else’s money.  While I have money in stock-related investments through my IRA, I also like things like cash, bonds, commodities, and tangible property.

Diversifying assets spread over a variety of types and risk levels can help balance out the unexpected such as housing market bubbles, tech market implosions, financial crises, and recessions, not that these things happen very often (note the sarcasm).  Spreading retirement savings over a variety of areas can minimize the risk that a major collapse in any one or two areas could completely destroy a retirement nest egg.

Reverse investing
Carrying debt into retirement can be an additional financial burden at a time when income may already be reduced.  By paying off debt and remaining debt-free as retirement nears, it’s just another way that I can cut costs and reduce my dependency upon outside sources of income.

Moving into retirement without a mortgage, without vehicle loans, without student loan debt (for us or the kids), and without other sources of consumer debt, we hope to limit the number of expenses that we will have during our golden years.  Not only will eliminating such debt now allow us to put more money toward retirement savings, but it reduces the amount we must pay in interest on such debt. 

According to an infographic on the average American’s interest payments on debt is $600,000 over the course of a lifetime.  This is why we’re looking to avoid the majority of this additional cost slowing us down on our path to retirement and making it hard to go it alone in old age.

Dividend reinvesting
I’m a big fan of dividends and reinvesting those dividends over time.  This is why I have my IRA funding a dividend reinvestment plan that spreads its investments over a variety of stocks -- both foreign and domestic -- bonds, and cash, and that pays a regular monthly dividend that generally yields in the six percent range annually.

In this way, I not only allow this aspect of my retirement to move with the stock market but dollar cost average with the monthly dividends being reinvested into the fund at various levels as the stock market rises and falls. 

The author is not a licensed financial professional.  The information provided in this article is for informational purposes only and does not constitute advice of any kind.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.

Rent vs. Buy: Taking a Mortgage out of the Equation

Sometimes we make the rent vs. buy decision harder than it needs to be.  We can get stuck on the question of mortgage costs, payment lengths, interest rates, and similar issues, but sometimes the question of whether to rent or buy doesn’t even have to hinge upon a mortgage at all.  Sure, a mortgage can certainly form the backbone of many of the rent vs. buy discussions; however, sometimes the debate can be solved more easily by taking this factor out of the equation.

15-year mortgage? 30-year mortgage? Does it even matter?
It might seem like a mortgage is the biggest decision in the rent vs. buy equation; and for some, it could be.  But it doesn’t always have to be.  For example, the first home we bought was almost as costly even without our mortgage as the apartment that we were renting.  Had we paid more attention to this, we might have avoided an expensive home purchase mistake without ever having to make a decision upon what sort of mortgage was best.

Regular home expenses can outpace rent
In the example of our first home, it was all the extras that really killed our budget.  We could easily have had the same or similar monthly payment (about $800) with a mortgage as we did with our regular rent, but there wasn’t much we could do about all the extras that came along with our home and that we didn’t have with our apartment. 

For example, here are some of the items for which we paid more at our home than our apartment and by how much each month:

  • Property taxes: $400/month
  • Repairs and maintenance: $200/month
  • Higher utilities: $125/month
  • Higher insurance: $25/month

At the time, we were paying $765 in rent each month.  This means that these additional amounts that we were paying to live in a home and that equated to about $750 a month more than what we’d pay for them as renters were almost as high as our rent itself before even factoring in the cost of our mortgage.

Appreciation, depreciation, inflation, and stagnation
Many people talk about a home as an investment.  They mention a home’s potential for appreciation, but seldom -- until we hit a period like the housing market collapse -- do we hear about home price depreciation or stagnation.  Of course how a home’s price changes throughout the years can be largely dependant upon location.

However, there are a few assumptions that I tend to make when considering these factors and that again, have nothing to do with a mortgage.  First off, as renters, we can pretty much assume that a landlord is going to bump up the rent a couple percentage points every couple of years to account for inflation.  I also tend to assume through our experience in the Chicagoland area, that whether or not property values are going up on a home, a municipality is likely to increase property taxes.  This increase in home carrying costs can negate that potential rise in rent.  It’s also likely that the costs of materials and/or labor to maintain a home, and things like utilities will also go up to account for inflation, while a home’s value could remain relatively stable or even decline.

Therefore, before only just considering mortgage rates, terms, lengths, and costs, consider thinking about other aspects of owning a home.  They may open your eyes to the true costs of home ownership more than a mortgage cost calculator ever could.


The author is not a licensed financial, mortgage or real estate professional.  The information provided in this article is for informational purposes only and does not constitute advice of any kind.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.