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Do you continue to do what we know doesn’t work? January 18, 2008

Posted by shaferfinancial in Uncategorized.
Tags: , , , ,

I have been having some interesting discussions out in “blogville” on the issue of equity management and financial planning.  Bascially, there are many folks who not only defend the status quo advice but are unwilling to even consider alternative ways of thinking.  Now I am used to that when talking to some lay people about mortgages, investing, and wealth creation but what has struck me is the vehement unwillingness for so called “experts” to look at the actual results of the financial advice being given by these folks.  They have rules that seem to be set in stone no matter what data is given to them bringing into question those rules.

For the last two generations the mainstream financial advice goes something like this:

Debt is bad, so first you must lower your spending until you have removed all debt (except your mortgage).  Next you must take the difference between your new spending level and your income and pay down your mortgage and invest in mutual funds (preferably inside a tax-deferred vehicle).  This will allow you to retire with no mortgage and much invested $$ that you can live on.  From here the advice is really about how to increase your rate of return from mutual funds or maybe include an annuity or cash value life insurance.

Now this advice sounds great, especially when you show people that the stock market has returned 12% over the last 40 years, and how making monthly investments into your account can increase the value by dollar cost averaging, and how skipping that expensive cup of coffee every morning can turn you into a millionaire.  It is a great theory.  But this advise has been around long enough to measure its success.

Here is where the rubber meets the road.  Since we have all these folks who were given this advice, we should have lots of very successful retirees and near retirees who have no financial retirement worries, right?

The median (half above, half below) amount in retirement accounts for those 55-64 years of age is $88,000.  Wow, doesn’t seem like much does it.  Median total assets for this age group is $248,700.  80% of folks have less than $300,000 in total assets.  Much of the difference between total assets and amount in retirement accounts is in the form of home equity.  See those people were listening and paid off their mortgage before retirement.  Where is their million dollar retirement accounts financial planners like to talk about?

Here is some more data that is not talked about.  Average returns for individuals investing in mutual funds is 9-10% less than what the market has returned.  Maybe this explains the missing $912,000.  Well partially anyway!

Now a majority of current retirees have a defined benefit plan.  However only about 39% of those that retire this year have a defined benefit plan, instead they have to rely on social security and their 401K/IRA savings.  And the percentage of folks with a defined benefit plan goes down every year in the future.

Folks there is troubling brewing in retirement land.  Not that there isn’t already issues.  Living here in Florida we watch as many retirees see their retirement incomes eroded due to inflation and rising expenses for new needs like medicine.  Many of these folks live in mortgage free homes.  They are now falling for the newest scam….idea called reverse mortgages.  Some, the smart ones, are selling their homes to access the home equity and turn it into retirement income.  

This is the result of the financial advice given to this generation of folks. 

Yet, many, no most, of the “experts” are still giving the same advice.

Oh, I know they will say these folks just didn’t listen, or lacked discipline, or had some bad luck.  They will point out the rare success story, but the bottom line is the numbers don’t lie.

$88,000 in retirement funds! 


1. David Furgiuele - July 17, 2008

Hi David,

I just recently found your blog and I am enjoying it very much. I do have a question though.

What if a person doesn’t have a lot of equity in their home? What are your other avenues to building wealth? Or is it simply, build wealth through equity harvesting?



2. shaferfinancial - July 17, 2008

When asked, Why he robbed banks?, Willie Sutton replied, Because that is where the money is. That is the theory of Equity Management. Most people, if they have managed to accumulate wealth, do it in their homes. Equity management allows them to capitalize on what has been successful for them.

However, to really build wealth, one needs to put into place other strategies. First is to build up a decent credit score and to build reserves. Then you have options, like investing in real estate, or stocks. Wealth building plans are as individual as there are people, but they all have several charateristics; leverage, taking advantage of tax rules, and entrepreneurship.

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