Archive for September, 2008

The Wall Street Journal this week highlighted a problem that’s only getting worse as the financial sector melts down. 

Baby Boomers Delay Retirement

Declines in Assets Force a Generation to Face New Reality

By KELLY GREENE

Nancy Davis, a 59-year-old senior marketing manager for a law firm in San Diego, had hoped to ease into her retirement after her son finishes college in two years.

But “I may be 70 before I retire at this point,” she said Friday, after watching the markets take their toll on her 401(k). “It’s very unnerving.”

For millions of Americans approaching retirement, events of recent weeks are delivering a clear message: Not so fast. With nest eggs shrinking, housing prices still falling and anxieties about their financial future growing, the oldest members of the baby-boom generation are putting the brakes on plans to leave the office.

“We’ll see more and more people postpone” their retirement dates, says Helga Cuthbert, a certified financial planner in Decatur, Ga., who spent a good part of last week fielding telephone calls from nervous investors. “Their expectations about the future and the kinds of returns they would get were simply unrealistic.”

As discouraging as that message might sound, it’s exactly what many baby boomers need to hear, according to financial planners and researchers. Most people underestimate how much money they will need for retirements that could easily last two or three decades, and are leaving the work force with nest eggs that are likely to expire long before they do.

Consider: Less than one-quarter of workers age 55 and older — just 23% — have savings and investments totaling $250,000 or more, according to a study published in April by the Employee Benefit Research Institute in Washington. About 60% have less than $100,000. The average retirement age in the U.S. is 63 — but most investors don’t recognize the benefits from working even just two or three additional years, financial advisers say. According to research from T. Rowe Price, the Baltimore-based mutual-funds company, a 62-year-old with a $100,000 salary and a $500,000 nest egg will see his annual retirement income from investments and Social Security rise by 6% for every additional year he remains in the work force.

Working longer “gives people time to build up their 401(k) balance, can result in a bigger benefit from Social Security, and reduces the amount of time people will have to depend on their savings,” says Alicia Munnell, director of the Center for Retirement Research at Boston College and author of a recent book about the value of extending time in the work force. “The arguments in favor of working longer are overwhelming. We just need to convince people.”

Even before events of the past two weeks, some older adults had begun adjusting their sights. In a survey published in May, 27% of surveyed workers age 45-plus said the economic slowdown had prompted them to postpone plans to retire, according to AARP, the Washington-based advocacy group.

John Dougherty is among them. “Two weeks ago, it was frustrating; last week it was scary,” says Mr. Dougherty, a mortgage broker in Raleigh, N.C. who estimates that his nest egg has lost 20% of its value in the past 18 months. He had planned to retire at age 62 — but now, like Ms. Davis, he says 70 might be a more realistic target.

“Time will tell if my physical capabilities will allow me to continue to work that long,” he added.

Patrick Hayes, a 58-year-old physician in Columbus, Ohio, was hoping to retire in two years. “But I’m watching my funds getting smaller and smaller, and I keep hearing this is the worst thing since the Depression,” he says. “It’s particularly tough if the market gets hit in your early years of retirement. If you’re about to retire and something like this happens, maybe you should stay working.

“What I don’t want to do is take 10 years off, be 70 years old — and have to go back to work if I’ve lost my technical skills,” he added.

That story — retirees returning to work — is also being played out in the wake of the market turmoil. At RetirementJobs.com, an online job search provider, “the volume of visitor traffic to our online résumé writing service doubled in the past week,” says Tim Driver, chief executive officer. “The common motivation we’ve heard from these people is that they need to go back to work due to the economy.”

Jack Pogalz, a 63-year-old project manager in Cottage Grove, Minn., was laid off last year from a medical-device maker and has been looking for part-time work as a grant writer in the nonprofit sector. But he recently shifted his job search to full-time employment after realizing that his 401(k) has dropped 16% since December. “That translates into about four years of income” in retirement, he says. “It’s either get back into the work force or retirement’s going to be cut that much shorter.”

So far, he has had a number of interviews but no offers. “The age thing I think is hurting a little bit,” he says. “With the job market increasingly getting tighter, I think it’s going to get more difficult.”

Even retirees who have been prudent with their nest eggs say they’re facing tough times — and tough decisions. “We weren’t extravagant people. We didn’t go on cruises. We didn’t buy a Cadillac. And here we are, we thought we could retire, but our savings are just going too fast for us,” says Noreen Hilinski, a 67-year-old retiree in Madison, Conn. Her financial planner told her recently that she and her husband, a 69-year-old retired engineer, have used about 10% of their investments.

That news has her considering asking the catalog-company where she used to work to let her come back for the holiday season. Her husband is looking for odd jobs, perhaps in a hardware store, she says.

“There’s a lot of people who are going to go back to work in my age bracket,” Ms. Hilinski says. “More and more of my friends are talking about going back to work.”

Jack Wolfe, a 64-year-old retiree from a natural-gas-pipeline company, moved to a lake between Houston and Dallas last year. Now, he’s trying to go back to work, “and the closest we are to anything is 60 or 70 miles,” he says. “I’m probably going to have to go to work for a few months at a time. What I’d really like to do is inspection work on new pipelines.”

After nearly a decade in retirement, “I’m trying to go back to work and let our portfolio build back up,” he explained. “We’ve lost such a big amount of money lately, we’re going to get to the point where we can’t recover.”

He and his wife, also retired from the same company, lost about half their savings after Sept. 11, 2001, he says. “We were building it back up really slow. Then this thing hit, and it put the nail in the coffin.”

There is an alternative that will help you salvage retirement savings. Visit Great Lakes Investment Fund to learn more.

Yesterday I started a discussion on how finding, screening, and selecting tenants is Critical Success Factor #2 for being successful at owning rental properties. And I began to discuss the four steps that need to be taken to screen and select successfully.

I talked about step 1 yesterday. That was Set expectations up front.

I’ll finish up with the rest of the steps today. 

2. Do not advertise your unit for rent too early.

You heard that right. You can advertise too early and cost yourself a ton of unnecessary time and aggravation. Here’s why. Renters generally work on about a 30 day cycle, so they typically start looking for their next place around the time they giving notice on their current rental.

So what this means is if you advertise too early (before it’s ready to rent), you’ll waste a ton of time showing the place to lots of people that will need to or want to move faster than when your house will be available. On my first couple of rentals I thought that I would be slick and put a sign in the window the day I closed and keep it there through the time it took to do the rehab.

I can’t tell you how many people that I showed those houses to. I ended up renting them both to people that – guess what – had just given their notice and wanted to move in about 30 days. So trust me on this. Put a sign in the window, but not until the time is right.

3. Hold an Open House

Do not do individual appointments to show the unit. Ever. It took me two rent-ups to figure this out. Advertise the heck out of your units during the week, and drive all of your calls to a 30 minute “Rental Open House” on either Saturday morning (not too early!) or Sunday afternoon (in the fall I plan the time around Lion’s games). This saves you time and effort and creates a sense of urgency because you’ll get all of your prospects there at the same time. I’ve actually had one bidding war and one near-fight at my open houses, and I can consistently rent out my units after just one of these open houses.

3. Check References

After you go through the trouble of collecting the information, you need to call ALL employment and past rental references. I go back five years for both. There is no substitute for doing this yourself, because I’ve gathered more information from the tone of voice from these references than you’d believe.

4. Require Full Payment Before Handing Over the Keys

And finally, do not hand over the keys until they are 100% paid up in terms of first month’s rent AND the security deposit. Not having all the money necessary to move in needs to be one of your screening devices. The rationale – they knew they were moving, so if they couldn’t save up enough money to pay you up front, what makes you think that they’ll be capable of managing their money well enough to pay you on time every month?

If you use these four steps every time you rent one of your units, you will substantially decrease the likelihood that you’ll end up with a deadbeat tenant.

And that’s a good thing, because my primary goal in structuring my business is that I wanted to sit back and collect checks every month, and not get any calls from renters.

If you need to know more about my particular strategy and methodology for pursuing residential rentals as a business, then you need my “The Set and Forget Metro Detroit No Hassle Suburban Rental Property Bootcamp“. It goes through the rent-up and EVERYTHING else that you need to know to be a successful rental property owner.

That’s harsh I know. And the way that I run my business it’s not at all accurate, because I have some of the best renters that you could imagine.

But think about it – you have a house that’s worth, say $100,000. You’ve bought it, done some work to it, and you’ve made sure that you’ve complied with the rental-unit laws in your city.

Then you spend time looking for someone to GIVE the house to. Someone that has absolutely no vested interest in your property whatsoever. And someone that’s not going to tell you about anything that needs to be done until it directly inconveniences them.

How’s that for a fair trade-off?

While that may sound harsh, it really is the truth. And if you choose poorly you can end up with a very unpleasant and expensive situation.

And in my view that’s what has spawned the “tenants and toilets” phrase and it’s the primary reason that most people are scared to death of owning rental properties.

Which is a crying shame, because it doesn’t have to be that way.

And even with all of this, most of the rental property owners that I know STILL, unbelievably, don’t put much effort into screening their tenants.

As I discussed in a prior post, Critical Success Factor #1 for being successful in owning rental properties is property selection. That included not only area, but configuration, condition, and amenities, such as a/c and appliances, as well. My strong belief is that it you get this right you can substantially reduce your risk of getting a bad tenant, because a better house draws better tenants overall.

Since I define success in this area as tenants that pay on time and never call me, I therefore categorically state that Critical Success Factor #2 is Tenant Selection and Screening.

And if you get CSF #1 right, this part is actually pretty simple to accomplish with a couple of steps. 

1. Set expectations up front

I have a detailed rental application, and I do a strict background check that includes credit, employment,  past rental references, and a nationwide criminal and sex offender search. I charge an application fee, up front, in cash, to cover the cost of the background check, and I charge the maximum security deposit allowed by law in the state of Michigan. I tell my tenant prospects all of this up front, and this screens out a significant number of people.

Stay tuned for Part 2 of this Post . . . . .

If you need to know more about my particular strategy and methodology for pursuing residential rentals as a business, then you need my “Set and Forget Metro Detroit No Hassle Suburban Rental Property Bootcamp”. It goes through the rent-up and EVERYTHING else that you need to know to be a successful rental property owner. 

The meme bug is sweeping the real estate blogging world again. 

@ToddWaller tagged me a couple of days ago to reveal potentially embarrassing facts, after he had supposedly done so himself. I didn’t see any embarassing things on his list, but there were a bunch of interesting things that I learned about him. So in the spirit of TMI and full disclosure, here are a few mildily interesting things about me that very few people actually know:

And I’m sure that’s far more than you ever wanted to know about me. 

So – now it’s my turn to tag a few others to do the same.

Let’s keep things reasonably local:

@12thnight

@MDU1109

@digitalvision

@MichaelBeaton

@primesuspect

@llaurentsmith

It’s your turn to tell everyone a few interesting things about you.

For those following along, hit Twitter and add these folks to your Following list.  There are pearls of wisdom and the wit of kings & queens to be found amongst these folks.  Of course, there’s a lot of stuff out there where you might need a shovel……

Here are the ground rules if you would like to keep this chain letter meme going:

The rules to play are easy …
1. Link to the person who tagged you.
2. Post the rules on the blog.
3. Write six random things about yourself.
4. Tag six people at the end of your post.
5. Let each person know they have been tagged.
6. Let the tagger know when your entry is up.

As I look at the stock market, at the moment the DOW is at 10,844, down another 215 points today. Do you know what this means?

That as of right now the market is only 476 points above where it was eight years ago after the internet bubble burst. It’s still above the lows that we saw after 911, but when you look at the market as a whole?

Over the last eight years the market has had an average annual return of 0.26%

You read that right. I didn’t mess up my decimals. One quarter of ONE percent. Per year. On average. If things continue we’re on track to have the fifth down market year out of the last eight.

But that’s not really the point of this post. Besides, you and your 401k know this already.

My point is really two things:

• That all of this weakness, and in particular the weakness in the financial sector, should end up driving more money into investments in hard ASSETS. And that means things that have intrinsic value where the value can’t go to zero.

Don’t think so? Ask any Lehman Brothers or AIG shareholder if a month ago, heck a WEEK ago, they would have even considered it POSSIBLE that their investment would go to zero. Do you want to bet lunch on the answer?

• That all of this bailout cash that the Federal Reserve is busily printing is going to further exacerbate INFLATION, which is already above 4%. Again, this should drive more investment dollars into hard assets with intrinsic value.

Both of these factors should give a spark to the real estate market by driving investors to buy real estate. And in particular I expect this to be particularly beneficial for the first time homebuyer market because that’s where a lot of investors buy. And that just happens to be the part of the market that’s keeping the rest of the market down.

Over the past few days though I’ve had some spirited discussions with folks that favor investing in precious metals, which are considered another “store of value” when inflation or other economic problems arise. While I do agree that they provide a good store of value, I disagree that this is the right time to buy them. That’s what makes the conversation “spirited”.

One factor in particular is important to consider when trying to decide between real estate and precious metals. And that’s this – would you rather buy something near it’s historical low price (real estate) and ride the price UP or something near it’s historical high price (gold and precious metals) and ride the price DOWN?

Which provides a better hedge?

I’m obviously biased but given that choice I’m staying with real estate.

For more information on how to buy real estate in your retirement account, click on the link and visit GreatLakesInvestmentFund.com.