How much of your total net worth (assets [what you own] minus liabilities [what you owe]) is comprised of the value of the family domicile? This is an important number. A recent report indicates that the value of the homes owned by working age people comprises about 50% of total net worth for those residing in the heartland of the United States and almost 60% of net worth for denizens of the East and West coasts. Many homeowners have enjoyed substantial gains in the values of their homes. The danger of having a lot of one’s wealth tied up in the family home is that net worth may seem adequate when planning for retirement. But if the value of the home represents a large percentage of total worth you may be deluded into thinking that you are better off financially than you are, unless you’re prepared to downsize or rent to provide more spending resources during retirement. Consider this example.
Example: Edward and Edie Edifice are within a decade of retirement and have a seemingly adequate net worth of $1 million. They have been running retirement spending projections based on their $1 million net worth and like what they see. But closer inspection reveals that $550,000 of their net worth consists of equity in their home, net of a sizeable mortgage. Since they have no intention of moving when they retire, the value of the home should be excluded when analyzing retirement cash flow. The Edifices are sobered by this revised, but more realistic projection.
Smart Money Tips
• Jump in and out of the stock market at your own peril. Some people believe they can time the stock market. They think they can jump in when prices are low and jump out when they’re at their peak. These people are usually wrong. Stock market gains generally occur in spurts and these spurts often occur at unexpected times. The danger of attempting to time the market is you’ll miss these spurts. History has shown time and again that most of the gains in the stock market are earned over very short periods of time, frequently soon after stocks have taken a drubbing. So, if you’re not invested in stocks during the month or quarter that the market zooms, you lose out. The moral of this story is simple: never try to time the market.
• Planning for children with different needs. A lot of parents fret over how they’re going to pass on their estates. They want to treat each child the same, but the children often have different needs, or some may be able to handle money while others can’t. In these cases, trying to treat them all the same in your estate planning could be a mistake. If you have any concerns about how to pass on your estate to your kids, speak with an experienced estate planning attorney. He or she is likely to have considerable experience dealing with families in a similar position.
Food for Thought
I will say this about being an optimist: even when things don’t turn out well, you are certain they will get better.
-Frank Hughes
Money Can Be Funny
Do not be fooled into believing that because a man is rich he is necessarily smart. There is ample proof to the contrary.
-Julius Rosenwald
Word of the Week
divagate verb (DY-vuh-gayt) – To wander or digress
Origin: From Latin divagari (to wander off), from dis- (away) + vagary (to wander).
She has become so preoccupied with her ambitious fitness regimen that she divagates from the pressing tasks at hand.