Don’t Make This Retirement Mistake
On the dashboard of my personal financial software, there is a number.
Financial gurus tell me that this number is one of the three most important in my life. Another 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 that I pay a lot more attention to the age figure as it increases.
But other people use them to evaluate me, that’s for sure.
In fact, to listen to some people, 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 I suck at that.)
Age, credit score and… can you guess the other number? Do you know yours?
Above all, can you trust its accuracy? What if it’s just a mirage?
He would not go out to sea without knowing precisely how much fuel, water, food, and other essentials he had on board. After all, your life depends on it.
But there’s a good chance you’ll head into retirement with a faulty net worth figure…
Speculating on your future
Ever since I studied economics in college, the distinction between price and value has fascinated me.
Price is the amount of currency someone wants to part with for something at any time.
$1.75 for a large at Starbucks.
$299 for the last video game console my daughter wants for Christmas.
Worth it is our subjective assessment of how useful something is. My daughter’s video game may be $299, but I promise you there are so many things at that price that she could use so much more.
In markets, price is supposed to be an indicator of value. But prices have a way of separating themselves from value.
For example, once upon a time, every kid wanted a silly little contraption that spins on your finger. For a few weeks they were selling at ridiculous prices because the demand was very high. Once the kids realized that it was actually a boring little gimmick, the price dropped.
But the problems really start when you introduce time into the price/value ratio. That’s where net worth comes in.
For example, right now I think my house will have a certain price. That price contributes a sizable chunk of my net worth. My net worth, in turn, is the foundation of my retirement plans.
I’m sure I could sell my house right now to one of the young families that flood into my neighborhood because of the good schools. They have the income to pay my price.
But I don’t plan on selling 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?
impoverish your children
When we retire, we generally cash in on 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 purchase an assisted living apartment 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 like the children will not be well 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. Tea median household wealth is only $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 asymmetric distribution of wealth. But there’s no arguing the fact that people who have reached adulthood since the year 2000 are on the losing end.
It’s particularly bad in the US.
On average, Americans between the ages of 30 and 39 have half the wealth in 2017 that that age group had in 2007.
That means they will be significantly less affluent 10 to 20 years from now… unable to afford the kind of housing we take for granted today.
In other words, thanks to rising inequality, you may be heading into retirement with bad numbers.
Plan your future around value, not price
I constantly ask myself: What is the Big Idea in my writing? What unites it all?
While writing this article, I realized that my The big idea is the absolute importance of planning your future based on value, not price.
You know, for example, that you can’t trust current stock prices to stay the same in your retirement. Converting stock holdings into other assets that tend to hold their value before stock prices fall is a key strategy.
Given what wealth inequality is causing in our younger generations, if you’re heading into retirement in the next two decades, you may want to consider the same strategy… when it comes to your home.