Sunday, July 6, 2008

The New Millennium Retirement Part 2 of 3

The New Millennium Retirement Part 2 of 3
On my last blog, I started the new millennium retirement series discussion; in which the outlook for the generation x retirement is more complex and challenging. Some strategies can be implemented with enough time and planning; unfortunately many seem to be unaware of the situation until it is too late. Barca Financial implemented a series of workshops in which a learning process takes place. With this knowledge the process can start. For example a strategy that we have been discussing is the equity in real estate which unless is put to work, it remains lock in the property returning a zero rate of return. Many Americans leave this valuable asset lock for years until it is too late. The following is one of the many strategies we use.
Here is how it works, if you have some equity in your real estate property (ies), preferably in rental properties since the renters will pay for your retirement or your primary home, you take it out in cash out lump sum to be invested in a liquid, safe and inexpensive vehicle. Many Americans have taken money out in a refi transaction, unfortunately they use it to pay down debt and other purchases that will return no dividends, if paying for credit cards, and they should look into a credit card strategy and use other means to pay down debt. This becomes a vicious cycle every 4 to 5 years, since they do not have the discipline to invest the money for the long term. They also incurred a higher mortgage payment and less liquidity for incidentals. Others take a HELOC (home equity line of credit) for their emergency funding. This worked well before; although many lenders, banks sent letters stating that they are freezing or reducing these loans. Borrowers that bought in the height of the bubble could be upside down on their equity and home values. If they depended on these funds they can face some trouble. The key is to remain liquid during slow markets and a bear market. For those that came to our workshop and learned the way to harvest their equity in time are enjoying ample cash flow and an average 7% or more on their investments. We heard the reversed mortgage strategy and we know that it is only advisable as a last resort; these homeowners did not plan properly and this is the only way to get the remaining equity available in their home.
This strategy works well for properties that are going to be sold eventually before retirement. Many retirees face the decision to keep their home or move to a smaller place, children have moved out and the house may be too big and expensive to keep. Currently the average homestead is about 5 years, if we incurred a fixed 30-year mortgage; we should know that we are paying a lot up front for that interest rate. A 5 or 6% is not the actual effective rate. If you do the numbers we come out in the 80%+ or more depending on the year. It would take approximately 21 years into a 30 year mortgage to reach 50% owed to the bank. During all this time the lenders use arbitrage and make money. Our strategy is the opposite. The home owner becomes the banker and uses arbitrage to have liquidity, safety and a rate of return. If illness, unemployment, or a family crisis occurs this fund becomes a very safe way to fund it, without jeopardizing one’s retirement funds. By reorganizing your holdings you can prevent losses and be in a better position.
Look for upcoming workshops on the topic Wealth Accumulation on our website: