Too Many Lifestyle Assets?
February 20, 2017
The issue that investors tend to worry about most is whether they have enough money for retirement. People want to be sure they do not run out of money and they can maintain their desired standard of living. People generally do not expect their capital to grow, but they do want a sense of financial well-being and comfort that they can enjoy their retirement.
Several articles this week were centered around these issues. The WSJ’s Wealth Management Section reported on the experiences of seven recent retirees. The most surprising was the statement that they had been misled by the financial planning world into to thinking they would spend less money during retirement. The truth was they were spending more money. Others were shocked at how expensive medical care becomes. The resulting plea to those yet to retire was save more and plan to have to spend more.
An article in the NY Times focused on life expectancy for retirees. Retirement is an uncertain period of time. If you make it to age 65 the odds are really good that either you or your spouse will see 85. Some clients are taken aback in planning discussions that we encourage them to consider living to 95 as a real possibility.
This brings me to a key observation. In retirement, it is critical to look at your assets in two separate “buckets” of assets. I will call one your “earning” assets and the other your “lifestyle” assets. Earning assets are things like stocks, bonds, and income producing real estate that provide you with the income to augment social security and pension funds. Lifestyle assets are those assets that we acquire over time that produce no income but help us live the lives we desire. These include our primary residence, any beach or lake homes, or the country farm. Others might include multiple country club memberships, and even boats and planes. Not only do lifestyle assets fail to produce income, they also cost money to maintain.
As you plan for retirement, look at both your earning assets and your lifestyle assets, and ask yourself two key questions. First, are my earning assets working hard for me and will they support me for a very long time? Second, can you afford the cost of maintaining your lifestyle assets? Over years of helping clients, I have seen a simple rule that helps in this evaluation. If your lifestyle assets are greater than 40% of your total assets, you are at risk of experiencing some financial stress as your earning assets could struggle to support your lifestyle. This is just a rule of thumb, and everyone is different, but I have seen couples in their 80s where their lifestyle assets are greater than 80%! If you can keep your lifestyle assets to 25% or less of your total, you are less likely to face the difficult decision of having to liquidate a memory filled lifestyle asset to support your long retirement.
Carl Gambrell
