| Thursday, November 03, 2005 |
| Wow - I guess I struck a cord with that last post... |
I have been getting a lot of great comments and emails about my last post I need HOW MUCH for retirement? First, I want to thank everyone for reading and responding - it is always nice to know that I am not just posting in a vacuum. Secondly, I am still in shock at the anticipated price tag for my retirement. I had honestly never done the math before and finally facing such a large number was pretty humbling.
What I am still trying to come to terms with is how much of my financial future will depend on my ability to get decent investment returns. I have not paid as much attention as I should to the stock market. When I was younger I focused so much of my financial energy on paying off college loans, car loans, credit card debt, amassing an emergency fund, saving for a down payment, etc. Now that I am finally at a point where I have accomplished all of those hard fought goals it is rather disturbing to find a whole new struggle lies in front of me.
So, how do I get my current and future retirement savings to work harder? How can I guarantee myself 8%, 10%, heck 3% annual returns?
It has been suggested that I should leverage some of the equity I have built up in my investment condo and home to either invest in the market or purchase more real estate. While I am sure that is the smart thing to do, it is not something I am comfortable doing. The Boston area housing market is always high on economists list as "most likely to experience a correction" meaning both of my properties could go down in value. If that should happen, my equity cushion should prevent me from being upside down in my mortgages. If the correction should never happen then great! Hopefully I can pay both mortgages off and own my property free and clear.
Since I receive rent from both I already feel that my real estate investments have been working pretty hard. However, I do not want to stake my whole financial future on them - that just feels too much like putting all my eggs in one basket. So, it is time for me to start focusing on other investment options.
Ugh, just when you think you have climbed a mountain you look up and see the alps in front of you and realize that you have just walked up a hill and the real work lies ahead... |
| posted by Boston Gal @ 7:35 AM *
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| 4 Comments: |
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Just adding a few points you may not have considered
1) If you're considering inflation at 3.5% each year, you'll also have income increases (which hopefully should be higher than the inflation rate) and expenses (some, like your mortgage payments, may not increase as much as inflation does). Net-net, you should be able to save more.
2) An alternate approach is to leave out inflation AND interest i.e. assume that whatever you save is invested such that it earns inflation plus. In such a case, you need to physically save the equivalent of $4000 / mth x 25 years which would be a little over a million - that's what YOU put into the kitty, interest and capital growth take care of the inflation.
3) Last but not least - I agree with you about not dipping into your home equity, but look at buying rental real estate as and when you can - it outpaces inflation over the long term.
Best wishes - Will be back to see what additional earning / saving tactics you come up with.
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Was thinking a little more based on my own goals and realized where the difference came in. Adding it here for you to look at :
Your target : $3,500,000 (a little higher, but that's better)
Inflation / Interest rate : 3.5% (anything you earn more than the inflation rate is a bonus)
Time available : 36 years.
Today's value of the $3.5 Million, discounted @3.5% : $1,014,415
If you had a million plus today, and it grew at the inflation rate, you'd have the 3.5 million when you need it.
You already have : $348,000
Balance needed : $666,415.
If you borrowed this money today, invested it to grow at the inflation rate, and paid off through your monthly / annual savings, you'd have the 3.5 million available when you need it.
Annual instalment for $666,415 : Around 33,000/- (using the same 3.5% rate.) - that's about a third of the 90+ you calculated.
Obviously, you would aim for a higher return than the inflation rate - Also, as time passes and your earnings increase, you could save more every year. But as it stands, the 3.5 million seems quite doable if 33K savings a year isn't an issue.
Best wishes.
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Jane,
I wanted to leave you with a note of clarification. In my comments, in your previous post, I wasn't suggesting that you pull equity from your real estate now.
I was suggesting that as your real estate assets grow, 5, 10, or 15 years down the road, be sure to watch the amount of real estate equity that you have. The return on real estate equity is zero.
I would be against you tampering with your equity at this point. But let's say 10 years from now you have $600,000 in real estate equity. I would, at that point, recommend that you consider the wisdom of that amount of net worth earning you zero return.
Sorry I wasn't more clear. I would be happy to dialogue on this if you like.
Keep up the good work.
David Porter
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Thank you for clarifying David. It is a good thing to keep in mind - having my equity as a source I can tap for investment in the future.
I will keep it in mind.
Thank you!
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Just adding a few points you may not have considered
1) If you're considering inflation at 3.5% each year, you'll also have income increases (which hopefully should be higher than the inflation rate) and expenses (some, like your mortgage payments, may not increase as much as inflation does). Net-net, you should be able to save more.
2) An alternate approach is to leave out inflation AND interest i.e. assume that whatever you save is invested such that it earns inflation plus. In such a case, you need to physically save the equivalent of $4000 / mth x 25 years which would be a little over a million - that's what YOU put into the kitty, interest and capital growth take care of the inflation.
3) Last but not least - I agree with you about not dipping into your home equity, but look at buying rental real estate as and when you can - it outpaces inflation over the long term.
Best wishes - Will be back to see what additional earning / saving tactics you come up with.