Blog | CB Investment Management

“When House Rich Is House Poor”

“Ironically, the reason that a house often becomes a decent investment in practice is not necessarily the house itself (a depreciating, non scarce asset), but rather the fiat currency short (mortgage) and the forced monthly savings rate (building equity) it comes with.”

Lyn Alden

 “A house is not a good long term investment just like a car is not a good long term investment. Both are consumption items that decay over time, need regular maintenance, and depreciate in value. Houses are actually worse considering they can’t be moved and are taxed annually.”

Joe Burnett

“Tens of millions of retirees are facing a retirement financing crisis”

Larry Kotlikoff

It is crucial that retirees think differently about wealth, and far beyond just asset value. Your lifetime discretionary spending ability sheds a new light on real wealth, which is your actual ability to spend throughout your retirement.

This is enormously important for retirees with substantial real estate. Real estate has been a huge winner in recent decades, driven substantially by the extraordinary policy measures taken by the Federal Reserve and the Treasury.

Retirees with substantial real estate need to consider whether those policies are likely to continue as stagflation grows and makes record low financing costs impossible. Furthermore, past policies have created massive asset price distortions. What kind of reversions to the mean are we likely to get?

Real Estate investors need to take on board many factors including the following:

  1. Stagflation is here. Interest rates will likely be higher on average going forward. Financing tailwinds may be gone.
  2. Housing affordability in the US is about the lowest since the 1980s.
  3. Median home prices are falling at a rate not seen since 1964.
  4. New single family homes listed for sale hits highest level since 2008.
  5. There is no housing shortage. Housing units per capita is hitting record highs.

In many cases, thinking differently about your real estate can save your retirement. Don’t miss Larry Kotlikoff’s example of how even retirees with a $4 million net wealth need to save their retirement by downsizing real estate.

As we have been signaling for months, Stagflation is here, according to data out this week. GDP came in 3 standard deviations below the mean estimate, and core PCE came in 2 standard deviations above the mean estimate. 

Further thoughts on Property as an investment

One of the key discoveries is that the math of retirement planning suggests that in many cases downsizing property is very helpful. Federal Reserve policies have been so durably stimulative for so long that investors need to take great care as we transition into a stagflationary environment, where the Fed is much less able to stimulate the economy.

Financial planning for retirement, is a very different perspective from a long term investment case that so many investors take as their outlook when they are much younger. Investing in property over a shorter time period is much more risky, and highly capital intensive with high expenses.

Make sure you rethink carefully about property in retirement. Run your retirement through safe, secure, and authentic Best Practice Financial Planning Software to test your thinking.

At the current time there are many reasons for caution on property.

Housing units per capita is hitting record highs.

Summary

 Retirement finances will likely surprise you and be much more challenging than you expect for a range of reasons. Get prepared as soon as possible. Delay will likely only increase the inefficiency of your retirement plan. Make sure you become proactive to protect  your best interest.

It is very important that you don’t make financial decisions based solely on your opinion. A data driven approach is necessary given the significant complexity involved. Using sound and reliable planning software suggests that amongst the biggest factors in your retirement is how you manage your real estate.

For those who plan early, and make good decisions, there are substantial benefits.  To make sure you have Best Practice guidance, make sure the software, experience, and advice is sound, secure, and authentic. That is not a given.  A guide to ensuring Best Practice is here:

https://cb-investment-management.com/services/financial-planning/    

 

Best Practice is a matter of your Best Interest.


Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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