June 23, 2009

Retirement Planning Gets Harder

Retirement planning sure has gotten a lot more difficult since the housing market and the stock market both went bust. Conventional wisdom used to be that, if you didn't save enough money and invest it well enough, your rising home equity would make up the difference for you - and possibly much, much more.

Obviously, that's changed rather dramatically.

I sometimes wonder what my old dentist thinks about real estate these days after reacting in shock when, about four years ago, the possibility was raised that home prices may not keep going up forever. The idea of home prices actually going down caused him to take a step back, drill still in hand, and after commenting, "My retirement is depending on it" when referring to his home equity, I said no more.

The crown turned out just fine.

According to this report at MarketWatch, an increasing number of Americans are now sufficiently past the shock phase in their reaction to what has transpired in the housing market in recent years that they're beginning to look at things with a clearer head.

This change in thinking splashes a good amount of cold water on what has been dogma at the National Association of Realtors - that homeownership is a way to build wealth.

Nearly half of American adults who participated in a recent survey said they no longer believe that homeownership is a realistic way to build wealth, the National Foundation for Credit Counseling reported on Monday.

The findings, from a recent survey of about 1,000 people, run counter to the long-held perception that a home should be part of a person's financial strategy, the NFCC said.

"It had been considered the cornerstone of wealth building," said Gail Cunningham, spokeswoman for the NFCC. Homeownership had been a significant tool that most people felt was necessary to prepare for retirement, she said in a phone interview.

Well, it's one thing to strive to own your home outright in order to reduce your living expenses and have a "home equity cushion" (gee - you don't hear that term much anymore) in case it's needed later in life.

That should be everyone's goal - a paid off house and zero debt make for a much more comfortable retirement regardless of one's income or spending level.

It's the people who extrapolated from rising home prices from 2002 to 2006 and were confounded as to how they were going to spend all that money that contributed greatly to the mess we are now working our way through.

Though it is going to be a long, painful adjustment, we'll all be much better off after we again start thinking about real estate as being a place to live rather than as an investment.

But, that takes away one important prop to the conventional wisdom that was late-1990s and early 2000s retirement planning.

What about the rest of it?

With more individuals allocating less money to "riskier" investments (given a more profound appreciation of said risk), and with housing now largely removed from the equation, it becomes even more improbable that things will work out well for aspiring retirees after the 2008 market meltdown.

And not only is this brave new world of retirement planning more difficult financially, but it's more difficult mentally and emotionally as well. This story at USA Today details how married couples are dealing with their new financial reality and planning for the long term.

If the economic downturn has forced you to rethink your plans for retirement, it's a good idea to discuss your concerns with your spouse or partner. Before you have this conversation though, you might want to clear the room of sharp objects. That way, nobody gets hurt.

In many households, it appears, retirement is an even more contentious topic than politics, religion or whose turn it is to walk the dog. A study by Fidelity Investments found that more than 80% of couples disagree about a major component of their retirement planning, such as the age at which they plan to retire, whether they'll work in retirement or where they'll live after they retire.

Fidelity found similar results when it conducted a couples survey in 2007, but now, the stakes are higher. Many couples in their 50s and 60s have seen their home equity evaporate and their savings diminished, forcing them to work longer or scale back plans.

At this point, particularly with the complications of paying for health care for existing conditions, more and more people seem to be resigning themselves to working until they drop dead, which, if you really like your job, isn't all that bad a plan.

Of course, if you don't like what you do or if they show you the door long before you were planning to leave, it's not a very good plan at all.

After the events of the last few years, there seem to be few certainties about retirement planning (or living in retirement for that matter) aside from the obvious one - things will probably never look quite so rosy as they did back in 2005.