Dear Rick:
Last winter I wrote you about an inheritance I received. At the time, you gave me some advice as to what to do with the money. Basically, it was to pay off my charge card debt and some college loans I had taken out for my children. All said and done, I was left with about $100,000 and I wasn’t sure what to do with it. You had recommended I save it for my retirement which is about 15 years down the road. I left the money in the bank, basically getting no return, because I’m still not sure what I want to do with it. I’m debating between using the money to buy a house up north, or to put into my retirement. That is where I’d like your assistance. My situation is that it currently costs my wife and me about $8,000 a month to live. When I retire in 15 years and receive my Social Security, between my wife and me, we’ll receive about $5,000. In addition, we have about $35,000 in 401(k) plans and about another $20,000 in the bank. I figure by adding to our 401(k)s for the next 15 years, we should be in pretty good shape for retirement. What do you think?

Greg

Dear Greg:
Unfortunately, I have to disagree with you because I don’t think that just by continuing to add to your 401(k) Plan you’ll be in good shape for retirement. The first thing to keep in mind is that 15 years down the road your cost of living will be significantly higher than it is today. In fact, as I always tell people in retirement, you must plan to have a rising income throughout your lifetime. Remember, when you retire you can easily live another 30 years in retirement and once again, during that 30 years, your cost of living will be significantly higher.

One of the mistakes many people make with regard to retirement is assuming that once they retire their cost of living will go down; that is not the case. In fact, it is more likely that your cost of living will go up in retirement versus going down. After all, when most people retire they have good health and want to take advantage of it. In other words, they’re not just staying home; they’re out and about, and ultimately that gets expensive. Therefore, it is always important when you talk about retirement to factor into the equation the need to have a rising income for the rest of your life.

In the case at hand I cannot stress enough how strongly I recommend that the $100,000 be invested for retirement. With the money in the 401(k) plan, even if you continue to add to it and if we have an incredibly good market, it is not going to grow enough to protect you in retirement. Therefore, the money should be invested for your retirement.

I know what many people are thinking, and that is that if you buy a home up north it is an investment that potentially could appreciate in value and be sold to provide additional resources in retirement. Theoretically, that would be correct; however, I have yet to see where someone has made money by owning a vacation home up north. By the time you factor in the cost of maintaining the property and the cost of repairs and improvements, the return on the investment is not so great.

I am not saying that people shouldn’t buy second homes up north. What I am saying is that they shouldn’t buy it for investment purposes, but rather, they should buy it to increase the quality of their life. However, I do believe that before someone buys a second home, they should make sure they’re well on the way to saving for their retirement. After all, if you don’t have resources in retirement, it will significantly lower the quality of your life. I tell young people all the time the day they start working is the day they begin saving for retirement. That is how important I believe saving for retirement is.

What I would also like to add is that even with the $100,000 invested for retirement, I still believe that 15 years down the road you may be short in what you truly need to retire. Therefore, in addition to investing the money for retirement, I would also look for ways to reduce your cost of living. In fact, something I generally recommend most people do is to always monitor their expenses and look for ways to be more efficient. There are certain costs there’s nothing we can do about. However, there are a lot of costs we do control and that we can reduce or eliminate.

I’ve been a believer that it is important to monitor our costs, and that is why I strongly recommend that everyone do, at least twice a year, a cash-flow statement. A cash-flow statement is nothing more than keeping track of what comes into the family and what goes out. It’s generally easier to know what comes in, but it is what goes out that is more difficult. By doing a cash-flow statement at least twice a year, you’re going to be more in tune with your cost of living, and the more in tune you are with your cost of living, the more efficient you’ll be with your resources.

Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com