Investments Not to Include in Your Retirement Planning

By Scott Lummer
Chief Investment Officer, mPower

Thanks for the Questions!

Last week I invited you to send me questions on investment issues. I was somewhat doubtful about whether anybody was paying attention, so I was pleasantly surprised by the number of questions submitted, even after discounting the ones from my mother (yes Mom, I agree that the price of gasoline on the West Coast is outrageous, and no, I won't forget to send a card to Aunt Rose on her birthday).

One good question I received is one that often confuses homeowners who are planning their retirement. Here it is:

When setting up my retirement plan and determining how I should invest my money, should I include the value of my home or should I exclude it? If I include it, should I include all of the value or just the amount of the equity? I have $100,000 of equity in my house, plus money in stocks, money market funds, etc. — it matters quite a bit if I were to include or exclude the real estate value in my calculations.

My answer: Yes, it does matter quite a bit. And, the answer is that you should NOT include the value of your house in planning your retirement.

The reason is that in most cases the vast majority of the money, if not all of it, is unavailable for other purposes. After you retire, you still have to live somewhere, and most people choose to remain in their houses. If you keep your house, all of that equity is still tied up.

Smaller Is Not Necessarily Less Expensive

Yes, many people talk about moving into a smaller house because they will need less space once their children move away. That's the theory. But, in reality, few people downgrade their living quarters.

My former neighbors are a good example. They retired five years ago but stayed in the same house in Chicago that they had owned for 15 years. Just this year, they decided to re-locate to Tucson, and, yes, their new house is 30 percent smaller. But, because of all the amenities, the location, and moving and real estate transaction expenses, they are actually investing more money into the new residence.

(By the way, one of the advantages for them of moving cross-country is that this has finally forced the youngest child to move out — these days adult children often look at the rent-free option of staying with mom and dad as a "retirement benefit" that enables them to save money.)

Owning a house does have some benefit through the retirement years. Even though you will likely not use the equity for other purposes, if the mortgage is fully paid by the time you reach retirement, you can subtract the mortgage payment from the income you will need for living expenses. So, if your monthly mortgage payment is $1,000 now but you pay the mortgage off before you retire, your annual living expenses in retirement will be $12,000 less than they are now. Of course, you will still need to pay taxes and insurance.

What About My Beanie Baby Collection?

This leads to another question I often get. What types of more esoteric "investments" should be included in a retirement plan? Specifically, should things like art, coin and stamp collections, or jewelry be counted?

In almost all cases, I recommend that no assets outside of traditional securities and mutual funds be put into the retirement plan, for the same reasons that a house should not be included. Those Beanie Babies and baseball cards you own may be rare but rarer still is the retiree who can transfer them into a meaningful portion of his or her retirement income.

Yes, we do hear tales of the person who discovered a true masterpiece hanging in her living room and became rich as a result, but your chances of hitting it rich are much better if you buy a dozen lotto tickets. Actually, come to think of it, most of the people who tell me that the purchase of jewelry or art should be treated as an investment are jewelers and art gallery owners.

Of course, as consumers, we are more than willing to think of a large purchase as an investment because it helps us justify the expenditure. But, it is unwise to count such a purchase as part of a retirement plan because the result is that you run the risk of falling short of your goals.

So, if your spouse reminds you that your 10th anniversary is coming up (you know, the "diamond" anniversary) or starts talking about investing in rapidly appreciating "Mark McGwire rookie cards," bring out this article. It may not do any good but at least you'll go down fighting.

Of course, knowing that my wife reads this column, I would be remiss if I didn't point out the long-term investment viability of state-of-the-art gas grills … like the kind I saw at the hardware store last week.

Scott L. Lummer, Ph.D., CFA, mPower's Chief Investment Officer, is a recognized expert in the investment field. He has conducted extensive research on asset allocation, international investing, risk management, mutual fund analysis, ethics and valuation, and is a co-author of The Pension Investment Handbook. He wants to know what's on your mind, so feel free to send him your questions about the stock market! He'll answer as many as he can in his weekly column.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Investments Not to Include in Your Retirement Planning

By Scott Lummer
Chief Investment Officer, mPower

Thanks for the Questions!

Last week I invited you to send me questions on investment issues. I was somewhat doubtful about whether anybody was paying attention, so I was pleasantly surprised by the number of questions submitted, even after discounting the ones from my mother (yes Mom, I agree that the price of gasoline on the West Coast is outrageous, and no, I won't forget to send a card to Aunt Rose on her birthday).

One good question I received is one that often confuses homeowners who are planning their retirement. Here it is:

When setting up my retirement plan and determining how I should invest my money, should I include the value of my home or should I exclude it? If I include it, should I include all of the value or just the amount of the equity? I have $100,000 of equity in my house, plus money in stocks, money market funds, etc. — it matters quite a bit if I were to include or exclude the real estate value in my calculations.

My answer: Yes, it does matter quite a bit. And, the answer is that you should NOT include the value of your house in planning your retirement.

The reason is that in most cases the vast majority of the money, if not all of it, is unavailable for other purposes. After you retire, you still have to live somewhere, and most people choose to remain in their houses. If you keep your house, all of that equity is still tied up.

Smaller Is Not Necessarily Less Expensive

Yes, many people talk about moving into a smaller house because they will need less space once their children move away. That's the theory. But, in reality, few people downgrade their living quarters.

My former neighbors are a good example. They retired five years ago but stayed in the same house in Chicago that they had owned for 15 years. Just this year, they decided to re-locate to Tucson, and, yes, their new house is 30 percent smaller. But, because of all the amenities, the location, and moving and real estate transaction expenses, they are actually investing more money into the new residence.

(By the way, one of the advantages for them of moving cross-country is that this has finally forced the youngest child to move out — these days adult children often look at the rent-free option of staying with mom and dad as a "retirement benefit" that enables them to save money.)

Owning a house does have some benefit through the retirement years. Even though you will likely not use the equity for other purposes, if the mortgage is fully paid by the time you reach retirement, you can subtract the mortgage payment from the income you will need for living expenses. So, if your monthly mortgage payment is $1,000 now but you pay the mortgage off before you retire, your annual living expenses in retirement will be $12,000 less than they are now. Of course, you will still need to pay taxes and insurance.

What About My Beanie Baby Collection?

This leads to another question I often get. What types of more esoteric "investments" should be included in a retirement plan? Specifically, should things like art, coin and stamp collections, or jewelry be counted?

In almost all cases, I recommend that no assets outside of traditional securities and mutual funds be put into the retirement plan, for the same reasons that a house should not be included. Those Beanie Babies and baseball cards you own may be rare but rarer still is the retiree who can transfer them into a meaningful portion of his or her retirement income.

Yes, we do hear tales of the person who discovered a true masterpiece hanging in her living room and became rich as a result, but your chances of hitting it rich are much better if you buy a dozen lotto tickets. Actually, come to think of it, most of the people who tell me that the purchase of jewelry or art should be treated as an investment are jewelers and art gallery owners.

Of course, as consumers, we are more than willing to think of a large purchase as an investment because it helps us justify the expenditure. But, it is unwise to count such a purchase as part of a retirement plan because the result is that you run the risk of falling short of your goals.

So, if your spouse reminds you that your 10th anniversary is coming up (you know, the "diamond" anniversary) or starts talking about investing in rapidly appreciating "Mark McGwire rookie cards," bring out this article. It may not do any good but at least you'll go down fighting.

Of course, knowing that my wife reads this column, I would be remiss if I didn't point out the long-term investment viability of state-of-the-art gas grills … like the kind I saw at the hardware store last week.

Scott L. Lummer, Ph.D., CFA, mPower's Chief Investment Officer, is a recognized expert in the investment field. He has conducted extensive research on asset allocation, international investing, risk management, mutual fund analysis, ethics and valuation, and is a co-author of The Pension Investment Handbook. He wants to know what's on your mind, so feel free to send him your questions about the stock market! He'll answer as many as he can in his weekly column.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.