|
One of the dreams we all have is being able to retire with dignity and comfort. One of the essentials for this to happen is to have our living expenses decline as we get older. The easiest way for this to happen is for us to control our personal debt.
The United States is seeing a shopping binge that has never been seen in the history of the world. We are concerned that this shopping spree may end with some very unhappy consequences. These unhappy outcomes will probably exist in the largest numbers for those who are highly leveraged in the homes they live in.
The Housing Bubble
We keep reading that there may be a housing bubble in our Country. There are parts of the country where there have been 10% increases in the value of real estate for the past several years. Just like the tech bubble at the end of the 90’s the housing bubble we are presently experiencing can’t continue. There has to be a time when housing prices adjust.
Twenty years ago, banks wouldn’t approve a mortgage loan if your housing cost was higher than twenty five percent of your disposable income. Today, we are seeing banks make loans on a regular basis with no money down or interest only payments and the housing cost consuming over fifty percent of the household income.
When there are significant amounts of loans made with the above conditions, it won’t take much for massive real estate defaults. High mortgage levels, interest only payments and a declining housing market could cause you to re-think your plans for retirement.
The Problem of High Mortgages
The problem with having high principal balances on your mortgage is that you will never be able to take the money you were paying and use it as a reduction in your lifestyle for retirement.
Let’s take a couple who are fifty years old. Five years ago, they purchased a new home that cost $400,000. They put down $100,000 and have a $300,000 mortgage at 6% over thirty years. The payments on this mortgage would be approximately $28,000 per year. If taxes, utilities and insurance cost another $15,000 we have annual housing costs of $42,000.
If our couple makes $100,000 per year, they are spending 42% of their available income on housing. To make things even worse, if income and social security taxes are 20% of their family income, they are actually spending over 50% of their disposable income on their housing costs.
The problem our couple has in retirement is they have to have saved approximately $750,000 just to pay for their housing since they will have a mortgage until they’re 80 years old. This need for extra savings could keep this couple from retiring when they want to.
A safe solution
When presented with this scenario, many of our Clients tell us that when it’s time for them to retire, they will just sell their home and move to a less expensive house or condo.
This is a possible solution for our couple, but what happens if the housing bubble breaks and home values decrease by 25%? Our couple now has no equity left in their home and can’t sell and move to a less expensive home. They no longer have any money left for a down payment on a new home.
We suggest that as you think about moving towards retirement, you also think about eliminating any debt you have on your home. It’s fun to think about all the things we can own with our home equity. Sometimes, deferring present gratification is a better option. We suggest that as you think about your present lifestyle, you also think about your future one in retirement.
If you are over forty five years old and are thinking about retirement, start thinking about how you can get your mortgage paid off before you stop working.
This can be done in many ways. Our favorite is by doubling up on your mortgage payments. Pay your first payment on the first of the month, and then send your bank another payment halfway through the month for the same as your mortgage payment.
Following this strategy can help you pay your home off quickly. This will allow you extra options when it comes time for retirement.
If you would like more information or support from our firm, please visit us online or e-mail us and your Stage 2 Associate will get back to you.
With Warm Regards,
Stage 2 Planning Partners
Josh Patrick © 2006
Securities and Investment Advisory Services are offered through Representatives of NFP Securities, Inc. a Broker/Dealer, Member NASD/SIPC and Federally Registered Investment Advisor 1250 Capital of Texas Highway, Bldg. 2 Suite 125 Austin, TX 78746 - 512-697-6000 Representatives listed on this website are currently registered to conduct securities business in the following states: AZ, CO, CT, FL, IL, IN, MA, MT, NC, NH, NY, PA, RI, VA, VT, WA Stage 2 Planning Partners is an affiliate of National Financial Partners Corp., the parent company of NFP Securities, Inc.
NFP Securities is not affiliated with Harris- Murray
|
