Real Estate Declines Could Spell Trouble For Boomers And Their Retirement Plans

Retirement Plans And Real Estate Declines by Ken Stone
DATE: 11/20/2007

Many baby boomers count their home equity as an asset and think it's a financial resource that will facilitate their retirement. The recent flattening, and in many markets decline, in real estate values in the United States is giving painful insight into a little known fact: Home equity is an asset only if it's not inside your home.

Many boomers have hundreds of thousands of dollars in home equity; most think this equity is the same as cash in the bank - a resource that will facilitate their retirement. In reality, two critical differences exist - cash in the bank is liquid and safe, while home equity is neither.

Recent changes in the real estate marketplace have forced retirees and pre-retirees alike to alter their plans in favor of a market recovery. Market conditions are amplifying the primary danger associated with counting on equity that is tied up in the home as a resource for retirement: it is not liquid.

These same market conditions have underscored the second significant risk to home equity: it is not safe. In the then-you-had-it now-you-don't world of home equity, it is clear home equity is not safe. A number of natural disasters around the country over the last four years have underscored this fact. Ask someone who lost their home in the recent San Diego fires if their insurance company is cutting them a check for their home equity and you'll get a sad and frustrated "No!"

Consider this: if you had all the money in the world, but no choice and control over it - would you be happy? Of course you wouldn't! You would feel very wealthy - but that feeling wouldn't translate in any meaningful way in your life. Home equity is the same. You feel wealthy but it doesn't translate in any meaningful way until you regain choice and control.

Fortunately a solution to these problems exists that will allow baby boomers to make an effective financial transition into retirement without worry. Think about your assets and debts the same way your bank does. You're paid to deposit money at the bank. Your bank lends this money to other folks at a higher rate. The difference between what they pay, and what they make - after expenses - is their income. This is called arbitrage.

Ordinary Americans have the same opportunity the banks have. We can borrow money against our residence. Even better, under certain circumstances it is tax deductible. Someone borrowing money at 6.5% in the 33% tax bracket is actually paying 4.355%. If they invest their home equity proceeds in an appropriate and suitable investment vehicle earning 4.355%, they have regained liquidity and safety. If they earn more, they have created a positive arbitrage. Either way they have regained choice and control over their home equity!

Start working on a solution to make your retirement plans bulletproof. Make effective, simple adjustments to your retirement strategies, then relax knowing you're on the path to the future you have always envisioned.