Start by looking at IRAs, 401Ks, then at your real estate

After the financial market turmoil of the last couple of years, many baby boomers have lost confidence in their retirement plans. Let’s take a look at where those plans stand today after being hit by the two biggest financial tsunamis in our lifetime.  In addition, let’s examine what can be done to make retirement still achievable.

First, retirement accounts of every type were generally hit hard by the market crash in 2008. Although the market has recovered much of the losses, most investors are not back to even. The primary reason for most of that discrepancy is the fact that many investors responded emotionally, rather than rationally, to the crash. As a result, some went to cash and never had the courage to return to the market and participate in the recovery. Others who rode their portfolio down were in such shock for so long that they mistook “doing nothing” for a valid strategy to ride the market back up again.

Another strategy to escape market volatility was the flight to safety into government bonds. Unfortunately, the low returns are not meaningful to anyone seeking retirement income. Furthermore, bonds with longer maturities will be exposed to significant value declines when market interest rates rise.

Second, the bursting of the housing bubble has significantly reduced the value of homes that baby boomers had relied upon to help them support their retirement. It’s unlikely that most baby boomers within five years of retirement will see their home equity improve enough to utilize it as part of their retirement resources. Therefore, integrating one’s real estate holdings into a revised retirement plan becomes more complex than ever before.

Once we accept the current financial reality, it would be beneficial to assess our personal situation. To accomplish that, I recommend starting on a comprehensive, quantifiable retirement scenario. Although it’s very basic and one-dimensional, using an online “retirement calculator” will get most people started thinking about their future.

While there are many important planning areas, let’s focus on the two that I believe are the most critical.

The first is the optimization of an existing retirement plan such as IRAs, 401Ks or 403b accounts. For starters, that means maintaining maximum contribution levels. It also should be clear that retirement accounts require a great deal of attention. Whether it’s understanding available investment choices or implementing rational diversification strategies, the effort needs to be made.

Since managing one’s money effectively for the remaining years before retirement is crucial, a lack of knowledge, interest or time is not a good reason for neglecting to make a full commitment to one’s financial future.

The second pre-retirement planning area that deserves serious attention involves real estate holdings. Planning to pay off the mortgage is a desirable goal. However, that may be difficult, especially if maintaining one’s lifestyle is at issue. If a potential retirement is within three to five years, I recommend looking seriously at whether the current home will work well in retirement.

Now that the kids are “guaranteed” not to come back again, does the house still have the right size, location or floor plan? Even though one may not get top dollar when selling a home today, one is also not paying top dollar in buying a replacement.  Another important planning consideration for buying one’s retirement home now is that it will be virtually impossible to qualify for a mortgage later on.

In summary, baby boomers in their mid-50s now need to get serious about planning for their eventual exit from full-time employment, aka retirement. Time is no longer on their side. With the “once in a lifetime” stock market crash of 2008 and the real estate market bust more or less behind them, they need to be as pro-active as ever in getting their financial future under control again.

I can’t think of a better place to start than on their retirement accounts, and I can’t think of a better time to start planning than right now.


Dieter Thurow is president of Thurow Wealth Management Inc. TWM provides comprehensive and personalized retirement solutions to professionals and business owners in the North Bay. He is located in Healdsburg and welcomes your comments at dieter@dthurow.com.