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Retirement: A Different View It is the first part of October. The Halloween decorations are up, transforming the house into a festively scary place. I should be outside blowing leaves before the weather gets wet. My wife found me sitting at my desk preparing to do a piece on taxes. When she dropped an open copy of AARP, the magazine, on my desk suggesting I read a column Mr. Money, written by Ric Edelman of Edelman Financial Services, I was more than happy to oblige. I really don't like to write about taxes. Now I have to be frank with you. I tend to stay away from reading these types of columnists. They are all financial professionals who believe in what they do. I am sure Mr. Edelman is no different. He probably has little Edelmans running around at home to support. But the advice he doled out to Larry and Elaine in the November/December 2003 issue was a bit over the top. Setting the record straight seemed important. Not to say Ric's advice won't work out for this couple, it just didn't make any sense when I read it. Below is my rebuttal. The column evidently takes sample fifty-plus-ers and profiles their financial strengths and weaknesses. Sounds simple enough. This month's sample couple are Larry and Elaine Fargo. Laid bare for everyone to see, their finances are examined. This is where Mr. Edelman comes in. This is nice work if you can get it. This couple has about $90,000 in income, a home with $255,000 in equity, no debt and a live-in Mom. The mother evidently brings in a couple of hundred dollars and the two have haphazardly squirreled away $5,000 in some sort of Educational Savings Account. Ric gives them kudos for their lack of debt but slaps them about for their lack of savings. There are a lot of fifty something couples out there in similar situations and trying to see yourself in the article would be downright dangerous. The set-up fails to mention whether this couple with two young adopted girls had been married for very long. The way Mr. Edelman approaches them, we assume that these two have been married for quite some time, spending freely in a childless world. They probably took vacations, furnished their home, tweaking it and remodeling to suit their lifestyle. Or they were recently married, adopted two kids and live in one of the other's previous home, combining incomes only recently and doing so with no plan. It is hard to say, but I am willing to go with assumption number two. Ric's advice was what my wife was so irate with, so much so that she literally insisted that I also share her ire. I'll admit, that if this couple really were just starting out, with two kids, they have time and a healthy income on their side. Mr. Edelman first misstep was when he suggested that they take a hefty chunk of their equity and put it to various uses, none of which seemed to be very profitable. This financial planner thought that the couple should take a $100,000 of equity and divide it up accordingly: $30,000 in a rainy day fund, $30,000 into a 529 plan, and set $40,000 away for retirement. To further break down that last chunk of money he suggests that they each deposit $3,500 this year and immediately upon the change of the calendar year, they should deposit and additional #3,500. The balance, Mr. Edelman advises the couple should be placed in a balanced mutual fund. The "rainy day fund" is a good idea. But you shouldn't borrow money to do it. Think about it: you borrow at approximately 6% paying the fees associated with the loan. Then you put it away in an account that should be accessible but only for emergencies. That usually means a money market account. In California, their home state, some banks are paying a whopping 1.99% for a Money Market Account with a minimum $10,000 balance and a hefty 1.27% on a six month CD. This is according to BankRate.com. Deduct the taxes from even these minor interest payments and subtract inflation to come up with the real value of those dollars and poor old Larry and Elaine are actually losing money. And then we address what the couple felt in the article was a "pressing matter". I have always had a difficult time with 529 plans. I have an even more difficult time with fifty-plus-ers beginning one. I believe that they are only worthwhile after your retirement is fully funded. The couple adopted two young kids. A safe assumption is that these folks are not going to retire on time if they keep putting money away for a college education. My concern, not often held by the majority (or even the minority of financial planners) puts the children as the greater investment rather than the attempting to assuage the future value of higher education. Kids cost money. The house they live in costs money. Lessons and sports, clothes and camps, entertainment and vacations cost money. Those investments, while having a very real cost, tend to grow a much more rounded student. That student should understand the practical nature of life: "Life is what you bring to it". Larry and Elaine should be focusing their time and efforts on their retirement fund. That will give them peace of mind. Focusing on grants and scholarships and working at keeping the cost of college down, will give them peace of mind in a very real and tangible way. College is changing and risking valuable retirement savings, a skill Mr. Edelman doesn't quite stress enough. Ric has a plan for that sorry excuse for a retirement plan. He wants this couple to jump start their retirement. The article suggests that they do this by making a lump sum payment of $14,000 to an IRA without telling us how it is invested. The couple was supposed to put the remaining money in a taxable account. Once again I scratched my head at the logic. Once again, taxes, inflation and uncertain returns might eat away at those returns and don't forget to subtract the cost of the loan that went into that fund. Their previous mortgage payment each month was in the neighborhood of $400. Based on the numbers given in the article, the monthly income is roughly $7,500. This is an enormous chunk of change, you might say, and you would be right. In relation to their debt, which we are told is none, one would have to wonder what these two were purchasing. After the refinance, that mortgage is now over a thousand dollars a month. More importantly, this fifty year old couple now has a brand new mortgage with no real plan for continued saving. There are better ways to approach the solution without creating additional debt. Time is on their side. Elaine is a librarian. Time wise, she could probably do that sort of work well into her eighties. She might even find it keeping her sharp and vital. Larry probably can't wait to retire. He's a logging crew foreman. It sounds dangerous, probably too much so to continue into his seventies. I am sure Ric would agree that to snag the best financial deal for your kid's college, the amount of your debt will actually be helpful. Borrow the equity then if they haven't gotten scholarships and grants for excellence. Until then Larry and Elaine should save for themselves first. |