The Road Ahead
by Pat Regnier

March 9, 2007

[Continued, page 3]

Q: What about my biggest investment of all—my house?

A: Christopher Van Slyke, a financial planner in La Jolla, Calif., tells clients two things about real estate and retirement. First, before you start counting your profits, think about how much you'll pay for the house you'll live in next. Unless you're willing to move far away, the cost of your empty-nest dream cottage has shot up too. Second, consider the recent explosion in prices an anomaly. "The returns of real estate in the long term are somewhere between corporate bonds and stocks," reckons Van Slyke. Many boomers face another challenge. As pension expert Olivia Mitchell notes, you won't be able to tap all your home's equity if you've already borrowed heavily against it.

As with stocks, demographics could also dampen home prices as boomers first downsize and then, ahem, move on. Some economists think real estate is even more vulnerable to those trends. "Equities are traded in the global market," says MIT's Poterba. "I presume foreign investors will be somewhat less interested in my four bedroom colonial." But once again, though this may lower returns, it doesn't necessarily portend a crash. Housing economist Karl Case of Wellesley College notes that boomers span a wide age range.

"I'm 60, and if I'm going to be in my house another 20 years, the baby boom still stretches out another 20 years behind me," says Case. "The pattern isn't as cliffy as you might expect." Even if the value of your house slides, Case adds, you have built-in insurance: The cost of the house you're buying will have gone down too.

Q: Gee, this is a bit of a comedown. Isn't there anything I can do to reach my goals faster?

A: If we've stressed the negatives, it's all to hammer home this crucial point: Asset returns are not in your control. Your retirement plan shouldn't hinge on any best-case scenarios. Instead it should be built around getting the most out of the factors you can control. Fund expenses, for example. If Arnott is right, stocks would beat bonds by about a percentage point, so a fund charging 1.5% in annual expenses is on its way to losing the race before its manager makes his first trade. A solid index fund charges a tiny fraction as much. You can also make sure to minimize taxes. If you have money in taxable accounts, take a serious look at funds that are managed for optimal tax efficiency. Once you've maxed out the match on your 401(k), consider sheltering money in a Roth IRA if you are eligible. You might also convert some of your investments in a traditional IRA to a Roth. With a Roth, you pay your taxes up front; the optimal amount to put in will depend on your current tax bracket and what you expect your future tax bracket will be. But with tax rates near a historical low today even as the government's future obligations keep piling up, there's a solid case for paying at least some taxes ASAP. "Draw a chart of tax rates—if that was a stock, you'd buy it now," says Robert Gordon of Twenty-First Securities in New York City.

But at the top the list of things you can control is how much you save. You need to be aggressive here. That means saving at least 10% of your income, and 15% to 20% if you can possibly swing it, especially if you've gotten off to a late start.

Q: Can't I just work longer?

A: Don't give yourself that deceptively easy out. Working past 65 can be rewarding—and, as we explain in the next story, it may be your best shot if you hit your mid-sixties light on savings. But don't ease up on investing today with the idea that you can fill the gap by working more later. You may not be able to find or keep a good job. Retirement surveys suggest that most of us stop working earlier than we expect. That might change as the growth of the labor force slows, which could spur companies to recruit older workers. Then again, employers might just offshore even more work than they do now. If you think of your career as a part of your portfolio—call it your labor capital—then assuming that you can squeeze out another two years of earnings is akin to deciding to get 10% a year on stocks. It'd be nice, but it's not entirely up to you.

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