Don’t Make This Retirement Mistake

On the dashboard of my personal financial software, there’s a number.

Financial gurus tell me this number is one of the three most important in my life. One other is my credit score. The third is my age. (After all, I can shape the other two only if I’m still kicking.)

I certainly don’t measure myself against these numbers. Although I admit to paying a lot more attention to the age figure as it creeps up.

But other people use them to assess me, that’s for sure.

In fact, to hear some folks tell it, these little financial indicators are more important than a person’s morality, ethics or good works. (Particularly nasty are dating sites that require your credit score … the romantic in me says yuck to that.)

Age, credit score and … can you guess the other number? Do you know yours?

Above all, can you rely on its accuracy? What if it’s just a mirage?

You wouldn’t go out to sea without knowing precisely how much fuel, water, food and other essentials you had on board. After all, your life depends on it.

But there’s a good chance you’re heading into retirement with a faulty figure for your net worth …

Speculating on Your Future

Ever since I studied economics at university, the distinction between price and value has fascinated me.

Price is the amount of currency someone wants to part with for something at any moment in time.

$1.75 for a grande at Starbucks.

$299 for the latest video game console my daughter wants for Christmas.

Value is our subjective assessment of how useful something is. My daughter’s video game may cost $299. But I promise you, at that price, there are many things I could use a lot more.

In markets, price is supposed to be an indicator of value. But prices have a way of becoming detached from value.

For example, a while back every kid wanted a silly little gadget that spins on your finger. For a few weeks they were selling for ridiculous prices because demand was so high. Once the kids figured out it was actually a boring little gimmick, the price dropped.

But trouble really starts when you introduce time into the price/value relationship. That’s where net worth comes in.

For example, right now I think my home will fetch a certain price. That price contributes a sizable chunk to my net worth. My net worth, in turn, is the foundation of my retirement plans.

I’m certain I could sell my home right now to one of the young families flooding into my neighborhood because of the good schools. They have the income to afford my price.

But I don’t plan to sell my house for another couple of decades at best. What if the young families of the future can’t afford my price?

What happens to my net worth then?

Beggar Thy Children

When we retire, we usually cash in the assets that make up our net worth, including our homes. For example, a couple I know recently sold their home and used the proceeds to acquire an apartment in an assisted living community that will take care of them for as long as they live.

But if today’s younger generation can’t afford to buy our homes at the prices we use to measure our net worth, we may be stuck.

And it certainly looks as if the kids won’t be alright in 2037.

According to the Credit Suisse Research Institute’s global wealth report, if the world’s wealth were divided equally, each household would be worth $56,540.

But the top 1% own more than half of all wealth. The median household wealth is just $3,582. If you’re worth more than that, you’re in the richest 50% of the world’s population.

We can debate the reasons for this lopsided distribution of wealth. But there’s no debating the fact that people who reached adulthood since 2000 are on the losing end of it.

It’s particularly bad in the U.S.

On average, Americans between 30 and 39 have half as much wealth in 2017 as that age group had in 2007.

That means they will be significantly less well-off 10 to 20 years from now … unable to afford the sort of homes we take for granted today.

In other words, thanks to increasing inequality, you may be heading into retirement with faulty numbers.

Plan Your Future Around Value, Not Price

At Banyan Hill, we constantly ask ourselves: What’s the Big Idea in my writing? What ties it all together?

As I wrote this article, it struck me that The Bauman Letter’s Big Idea is the absolute importance of planning your future based on value, not price.

You know, for example, that you can’t rely on current stock prices to remain the same throughout your retirement. Converting stock holdings to other assets that tend to hold their value before stock prices fall is a key strategy.

Given what wealth inequality is doing to our younger generations, if you’re heading for retirement in the next couple of decades, you may want to consider the same strategy … when it comes to your home.

Kind regards,

Ted Bauman
Editor, The Bauman Letter