Tell Me a Lie: Retirement Planning and the High Net Worth Boomer

You would like to think that we are all truthful. But that may not be the case. Are Baby Boomers, more specifically those considered high net worth, telling a story about their retirement that isn't quite truthful?

Oscar Wilde probably said it best: "What we have to do, what at any rate it is our duty to do, is to revive the old art of Lying.” Nowhere is this resurgence in the falsehood more prevalent than when we tell a surveyor about our finances. When they look extremely bleak, we tell them they look even worse. When they look okay, we tell them they are really good. It is in our natures to tell lies considering we do it when we smile.

Evidently, a group of wealthy Baby Boomers told a survey group from Bank of America/Merrill Lynch that their retirement not only looked promising but was much better than their parent's retirement was. This is pretty lofty talk from a group that just a couple of years ago was not one bit happy with where their portfolios had gone in the wake of the financial meltdown. Now, $250,000 in investable asets is enough to warrant such retirement superlatives as "freedom" and "relaxation".

What changed? True the markets recovered over the ensuing couple of years. But I doubt that this had anything to do with it. many of these folks, like all age and wealth groups did, panicked at the sudden rebalancing of their portfolios by market forces. Unaccustomed to an all-inclusive debacle, many moved into much more conservative type investments and in the process, created their own mini-bubble in the bond market.

The rest of us moved into target date funds, a sketchy hybrid of funds designed to rebalance our aggressive natures for us. If you are older, the fund you plopped the remaining balance of your 401(k) is close to your age - so you too may have benefited from the updraft of conservatively invested enthusiasm. I wrote about this relationship with the bond market a couple of days ago suggesting that if their isn't a bubble in the bond market, it is because it won't pop when it reaches the end of its run; it'll hiss itself into normalcy.

It may be that this group has a better restructuring plan in place or they are simply lying to themselves - and the surveyors. Consider this: $250,000 in investable assets was consider the borderline between the rest of us schmucks and the high-net worth individual. I'm sure that this number is not even close to the actual investable assets these people had. It is our carrot.

One thing that stands out with the group surveyed is the change in attitude about what retirement is. They mostly believe working in retirement is a way to stay physically and mentally engaged. And for many, it is. For those with less than $250,000 in investable assets, it often isn't the case.

But these high-net worth folks worry about the same things you do: the cost of health care, the cost of children still living at home and that there portfolios, no matter how well managed, might not be enough. So they smile when they say they have it better than their parents and do so while lying about how much better.

And these high-net worth folks are not short on advice, even if they didn't take their own. Get a financial adviser as early as possible, they suggest and of course start early. Good pieces of hindsight advice that they were told as they began their working careers - and didn't follow.

About this advice to use financial advisers earlier. Then there was a survey conducted in 2006, when things were going great: housing values were appreciating, the markets were humming along, and early retirement was well within reach or it was assumed to be. And the results show a complete turnaround in thinking from then to now.

Back then - keep in mind these were the good times - another survey was published: In it, the following: "According to a new MyWay Investment Advisors (MWIA - an independent financial planning and investment advisory firm) survey, 98% of respondents would change the way they work with their advisor with 43% saying they wanted to change the amount they paid for the financial advice and services. This compares to only 13% of advisors who would look to improve how they currently operate, including pricing for clients.. The survey focused on how individuals would like to be treated by their financial advisor or investment professional and how they would like to pay for those services.

"The survey targeted the individuals with annual incomes greater than $75,000 and $150,000 to $600,000 in invested assets, including 401Ks. A duplicate survey was sent to financial planners, investment managers, insurance sales people and other financial industry professionals to compare responses." Why has this advice changed? Pricing and the way pricing is structured has evolved. Yet the higher the net worth, no matter what you pay, you pay more than you should.

So which is the truth? Are they happy now or were they happy then? The most telling piece of info coming from that survey: "When it comes to financial advice, however, financial advisors isn't where most of those surveyed go for information. Only 27% utilize financial advisors while over half (56%) get advice from a friend, publications or on their own.

"Of those that have a financial advisor, only 18% are happy with him or her. a whopping 56% say they are dissatisfied and 23% still have not made a decision."

This means one thing. We can no longer look to those we consider net-worth wealthy for guidance in how to become net-worth wealthy ourselves. Retirement has become a reality and an illusion. It is something we want and fear, something we strive for and are repelled by, something that is both possible and impossible. Yes it is a conundrum.

But it is your puzzle to figure out. And the simplest way to do that is figure out if you are willing to live on less than you have now. You don't need a financial adviser to tell you that you probably haven't invested enough. You know that you are probably wrangling more debt that you would like. You know that your contribution to your 401(k) is les than it should be. And you know that your goals concerning retirement are lofty than they are on paper.

Your balance sheet needs to be revisited and often. You need to double your 401(k) contribution now, no matter what age you are. There are numerous, almost painless ways of doing this including channeling the tax relief on your Social Security payroll tax (2% for the next two years) or simply increasing your contribution by 1% for every month of the upcoming year. You have the pieces to solve this puzzle. It all depends on how much you want to lie. The rich can. So can you.

Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.com

Retirement Planning and Your House as Part of the Plan

I shudder when I read phrases like this: “counted on proceeds from the house sale to boost their retirement income” or “slumping real-estate market in Sarasota, Fla., has damped the longtime retirement dreams”. Both of these comments appeared in an article in yesterday’s Wall Street Journal. It is easy to envision whatever equity you have built up in your home as part of your retirement plan but at the same time, it is foolhardy to think that the roof over head has any economic impact, other than the pressure it puts on your retirement income.



How we view our balance sheet

In the book that this blog is based on, I discuss this phenomenon at length (chapter six, page 55). Few people realize that the equity built up in their home is not what it appears to be.

They think of it as profit. It is not. It doesn’t even qualify as a dividend. Once you purchase a home, you provide numerous years of upkeep, pay the taxes that increase exponentially as the years drift by and you remodel and improve the property. You do this in the hopes of creating a better selling price. But does it return what you assumed it would have had you invested the money elsewhere?

Yes and no. Yes because if the markets cooperate and the prices soar well beyond what, deep in your heart, you know is unreasonable, much like the market provided for us just last year, you perceive the net worth to be high. But the downside of that thinking is harsh. Your house is worth more because the market is up. But so to is everyone’s property. To replace your out-priced home, you will buy another out-priced home and when the markets settle down and prices adjust, you are left with a feeling of loss.

And no. Had you taken all of that cash you invested in making your home more live-able and hopefully more sale-able, and invested it, you would not be worrying today about whether you could retire early or, as some articles of late have wonder, if at all. Granted, this requires you to live as low as possible, put all of your excess cash into another market – securities – also fraught with ups and downs and which is now being referred to as the “lost investment decade”.



So where does that leave us. Focus on your home as a self-sustaining unit. Can you afford to live in the home you are currently in while maintaining it and paying for the taxes and insurance? If the answer is yes, move on to what you have as retirement income beyond those numbers. If the answer is no, consider finding some shelter that qualifies, a place that allows you to live economically. This will not necessarily be where you dream it might be.

If you are still working, look to creating a better nest, a place that is both comfortable and able to accommodate you in your retirement years. This will allow you to stop wondering about whether you can afford retirement allowing you to instead, focus on generating income for those years ahead. Once you remove the “profit” from selling your home and calculated the cost of staying right where you are, you can make a better estimation of what it will take to live in retirement.

If you are close to retirement as the linked article above suggests and your home’s value is revising your dreams, this is the market you hoped would never happen. But it has and coping is what we do best.

Your current home has a cost that is part of your liabilities. To turn it into an asset does not erase it from the liability side of the balance sheet. It simply shifts it to another location with new costs.

Focus on the things you can control. Investing in the stock market is not one of them unfortunately. But not investing is equally dangerous. The total value of your portfolio may be down but that will not be a forever event. The upside of working just a little longer than you had planned: the equities you are buying now are undervalued. This means buying more (shares in your mutual funds) for less and when the market finishes this correction, and it will, you will be far better off than you had imagined.