Friday, September 05, 2008

Retirement Savings Lessons Re-Learned from the Housing Bust

How the Housing Crash Hurts Your Retirement by Walter Updegrade from highlights problems scenarios caused by the housing bubble which had a negative impact for some retirement plans when housing crashed. The problem scenarios identified by the article were:
  • Joining because making "guaranteed" money. With "everybody" making money in housing, some began to concentrate more investments or take more risks in real estate assets. While housing values were rapidly rising, housing investments were great.

  • Reduction in savings rate. With a rising market, some start putting away less, letting the gains substitute for savings. Since very few sell at the top, the gains can often temporary in a bubble market.

  • Increasing debt payments. People began to borrow against the increased equity of their home. However, for those that did not sell their home, they now carry higher debt payments on a home that has decreased in value.
  • In my experience, similar scenarios have occurred with other asset bubble and ensuing crashes, such as tech stocks in 2000 to 2002 and gold in the late seventies.

    Our goal for retirement savings is to preserve wealth, and therefore, we tend to be conservative in our investments. For those areas which are potentially in a bubble, our solution is to only invest a small portion of our portfolio, less than 5% in most cases. While I may not gain as much as others, I also won't lose as much when there is a crash.

    For more on Reaping the Rewards, check back every Friday for a new segment.

    This is not financial advice. Please consult a professional advisor.

    Copyright © 2008 Achievement Catalyst, LLC

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