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Asset Mix
I can clearly remember the conversation I had with my wife, Bonni, on the porch of our home. It was late summer, warm, and yes, we were all kicked back with a bourbon and ice tea. And we were talking about the equity that we have in our home. Only because the market area we live in has become incredibly desirable and values have resembled the stock market as of late. Even with the mortgage, we supposed we had almost $150,000 in equity. With another bathroom, the value may very well jump $50,000! And we couldn't help but wonder if this was part of our retirement. Should we calculate the current market value, take away the current mortgage, and consider the resulting figure as earnings toward our retirement?
Realistically, no. Why not? you might ask.
Even with the current value of the house being somewhat inflated, and despite any improvements we've made, the market can show a lot of downward motion. That $150k I'm thinking I have in the place, could really fall to $90,000 in as little time as it took to go up. And it wouldn't matter what we thought the house was worth, if for some unseen reason, money became very expensive (i.e. higher mortgage interest rates), the house would be saleable only to those who could really afford it. Not just those who would qualify.
You have to live somewhere. Which means that to realize this true equity, you would have to sell and move elsewhere. Most people trade down, which has been a serious topic also between the two of us. We can't see a house that we raised four kids in being very economical for two old retired folks. This is not the only option. The other is a reverse mortgage, and really should be carefully considered. Not so much for BCD readers per se, but for our aging parents. A reverse mortgage can add a substantial amount to the income of the homeowner. (I'll either save that for when I'm writing the RetiredBlueCollarDollar.com, or I'll include it in an upcoming series on funding your parents.) In any case, your mortgage is a liability and should be taken into consideration whenever you are doing retirement math.
We've mentioned it before at the BCD, but it bears mentioning again. The subject is bonds. Bonds are one of the most conservative forms of investment that one can make. But do you know how much of what you own is bonds? You may have a balanced mutual fund that contains itself from over aggressiveness by holding a certain portion of what it owns in bonds. Maybe you have a pension. These are conservative investment vehicles that want a guaranteed rate of return, so they can, in turn guarantee you a rate of pay. So they also invest in bonds. Some kinds of cash building insurances also invest in bonds. And the biggest investor of them all: Social Security. If you've determined how much risk you can tolerate, and you've tried to balance yourself between stocks and bonds, you may have to reconsider where all the your additional investment dollars are going. Maybe you can stand to increase your exposure to the volatility of the stock market without necessarily sacrificing any additional risk. Just a thought.
And this little tidbit comes mainly as a way of reminding you that you are not missing what everyone says you are. The average median household with stocks (and this is outside of mutual funds, and 401k's and stock options owned at work) in the country is zero. The stock market is not for everyone, and everyone isn't in it. I work with two hundred and some odd people in my building alone, and I can count on one hand the investors in the market. And of those, I know of only two active ones. And one of those was inspired by the other. In my workplace, that is only 1% of workforce in the market. It is not necessarily for the middle class, who bleed money from every direction. Instead, you should continue to buy down your debt. And when that is gone, start buying into your 401k, open an IRA, save for your retirement. Until then, the talking heads on CNBC are both entertaining and informative, but are not much more than that. Stay the course folks.
And on one final note... I saw Warren Buffet on C-span last evening. He was talking to a group of Nebraska high school students. He said three things of interest to us as struggling Blue Collar workers. He still lives in the same house that he bought forty years ago. Its modest and comfortable and he likes it. And although the billionaire could easily afford more, he said he didn't like all the extras that come with opulence (upkeep, security, worry). He also said, more than once, to never carry a debt tied to a credit card (And this is a man who owns a controlling interest in a major credit card company!). You may not ever make a billion, but you sure as heck won't make it owing on your credit cards. He told these kids, answering a question about post college debt, that they should make it their single goal after graduating to pay it off. Within five years. And while he was on the subject of debt, he emphasized that while big colleges with fancy credentials were nice, they were horribly overpriced. He said that state run colleges are always cheaper but offer just as good an educational value as your Ivy League schools. To paraphrase, you don't get rich as you head into debt. Look for ways to live within your means and find comfort there. Simple is good.
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