The topsy-turvy new world of retirement planning

After a short walk around the neighborhood earlier today it occurred to me that if retirement planning wasn't already difficult enough, the roller-coaster ride of the recent housing boom (that is now undergoing a painful bust) is making things even more complicated for some people.

[No, the picture to the right is not our neighborhood - that lucky homeowner has a view of El Capitan in Yosemite National Park and you can rent it for a weekend if you want to.]

As most of the places in our neighborhood are second homes, many of them initially purchased as empty lots with homes constructed later, quite a few of these homeowners own two properties today - their primary residence in the Bay Area and one in the mountains.

A few years ago this was a great circumstance to find yourself in, but not today - especially if you live in California.

With retirement drawing near for some, the math of financing a life of leisure must be getting awfully complex (and maybe a bit frightening) given what's happening to home prices in the state. If, a few years ago when doing some retirement planning, you had figured in the value of your primary residence close to work and then you also figured that you'd be able to sell it at 2005 prices (or better) in 2008 or 2009, well, you may have quite a surprise in store.

If you were just a few years away from retirement and you decided to work another couple years to sock away, say, another $20,000 or so a year figuring that your combined real estate equity and retirement savings would be sufficient, what have plunging real estate prices done to all your meticulous calculations?

The aspiring retirees still need to sell that first house and pocket the gains before they can move on to a slower pace of life that is sufficiently funded.

What happens if the price of that house close to work is falling faster than the future retiree is adding to their retirement savings - it would appear to be a losing proposition to work those extra few years if your house loses, say, $50,000 or $100,000 a year while you're only adding $20,000 or $30,000 a year to your bottom line through conventional savings.

You'd probably have been better off selling a couple years ago when everyone was falling all over themselves trying to become a homeowner rather than waiting until next year or the year after when the only thing that will be falling are home prices.

Of course, it didn't used to be that way - in recent years, housing appreciation has been doing the heavy lifting in retirement savings for many. The word "savings" was even redefined by dimwitted economists who figured that home equity was as good as "old-fashioned" savings like money in the bank or company shares that now also look a bit precarious.

As if it wasn't already difficult enough, the housing boom is making a mess of many peoples retirement plans - hopefully, not too many of them were counting on real estate prices maintaining their lofty levels for years and years to come.

ooo

This week's cartoon from The Economist: