Myth #6: I Need To Invest in a House (part 2)

Another factor that works against downsizing is that people have grown accustomed to a certain standard of living they aren’t willing to sacrifice after retiring. Time after time, my clients stay in the home they lived in for years. Or they buy something of comparable cost elsewhere.

Ask yourself what it will really be like after retirement. What kind of a lifestyle will you be living? Will you truly be willing to live with less, or is your vision romantically tinged? Romance is fine. I’m all for it. But, if you are basing your financial future on it, watch out. I’m not suggesting that you give up your dream. You can have it if you plan for it, but be realistic. Many of my recently retired clients report they are spending more money than they thought they would—or planned to.

A couple I know has an enormous home with multiple bedrooms, a three-car garage, and a large yard. Their kids are in college. Now there are only two people living in this huge house, which has appreciated nicely since they bought it. The husband, 52, is a retired legislator who now has a full-time job in private industry.

They could easily sell the home, find a smaller place, and realize a six-figure gain. But the husband wants a large garage for his racing boats and for a shop. The wife wants a big yard and wants to live in an upscale neighborhood. Add it all up and you have a couple that is not going to realize a gain from the sale of their current home because they aren’t going to sell it. They are unwilling to shift to a less expensive lifestyle.

Many of us could live in a smaller and less expensive home right now. But it seems ingrained in our culture that we must move from a large home to an even larger home—otherwise, we feel we’re not really getting ahead.

We forget that we are buying into more than just a bigger house: besides the mortgage being higher, the real estate taxes are higher and the insurance is more. It costs more to heat it, to light it, and to maintain it. It takes more after-tax income on a monthly basis to maintain a larger house, so we have to work harder to keep up with the expenses. The extra work usually means less time available to enjoy the very home we are working to buy.

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Myth #6: I Need To Invest in a House

When I do a retirement projection for a client, I put together an evaluation of his or her total investments. Nearly every client says to me, “Just a minute! You forgot something. You didn’t include my house.”

I say, “That’s true. I didn’t include your house. Your house is a roof over your head. It’s not an investment.”

When I told this fact to one couple, they looked surprised. “But it’s a two bedroom rambler,” the wife protested. “And it’s in a nice neighborhood. Its assessed value has risen steadily for the past six years. How can you say it’s not an investment?”

“Do you plan on continuing to live there?” I asked.

“Yes. We’re not moving any time soon.”

“Then unless you plan on ultimately selling it and then downsizing to a smaller, less expensive house—and living off the proceeds of the gain—it is not an investment. It’s just a roof over your head.”

Some clients say they plan to live in their house for about five years, and then sell it to buy a bigger house. That’s fine, but if the real estate market has risen, increasing the value of your home, then the prices of all the other homes in the area have risen as well. Your gain will be swallowed up by the increased price of your new home. You will not be getting ahead.

You buy a house for $300,000 and ten years later you sell it for $600,000. On paper, it looks like you’ve made a lot of money. But the only way you will realize an investment gain is to sell your current house, then downsize to a less expensive home or live in a rental and invest your profits from the sale.

Some clients tell me that they do intend to downsize—especially after the kids graduate from high school. But few truly do so when the time comes. Or if they do, depending on where they want to move, they find that even a smaller house is as expensive as the larger one they currently own. Smaller does not necessarily mean less expensive. Land costs may be higher in a new area or the new home may be outfitted with expensive extras, such as an outdoor whirlpool or higher-grade appliances and cabinets.

A couple who came to me for counseling always planned to move back to California after their kids graduated from high school. They wanted to sell their home, a large multi-bedroom house in an upscale Seattle neighborhood. They intended to find a smaller home in a warmer climate.

“What kind of house are you looking for?” I asked.

“Well,” the wife said, “one of those really nice beachfront condos.”

I talked to them for a while and asked them how large this place might be. Did the husband need an area for an office? How about a two-car garage? Did the wife want a garden? When we researched how much such a place might cost them, it turned out to be greater than the value of their current home.

We have this notion that when we retire we’ll downsize and live in a smaller place—that things will be different. We’ll find that little paradise cottage on the ocean or in the mountains and have all this excess money to live on from the sale of our old house. Far too late, we find out that reality is very different.

Myth #5: Parents Must Pay for College (part 4)

Since the investment in college is so large today, you can help yourselves and your children by allowing them to participate in the decision and the economic cost. Talk to them about the issue when they are in sixth grade, in junior high, and in high school. Allow them to take more responsibility for their lives for the long term. Work with them to discover what they really want to do. Help them understand what it will cost to attend a college in-state versus out of-state, or the cost of learning a vocational skill, or studying overseas. How much will they have to earn or borrow beyond what you are willing to contribute? If they decide to take out a loan, then they need to understand what it will take to pay it off. Perhaps this will allow them to gain some life experience that will be as valuable a part of their education as the degree they earn.

Dick is a thirty-four-year-old attorney who works for one of the most prestigious law firms in Portland, Oregon. He had to put himself through college, and he graduated with about $50,000 in student loans to pay off.

He told me, “When I was attending school, I took care of business. Because I was paying for it, getting good grades was a very high priority for me. Plus I had to use my time wisely to fit in enough time for studying around my work schedule. While I was working, my buddies—whose parents were footing their college bills—were hanging out at the local tavern in the afternoon or watching TV. Most of them didn’t study much and weren’t at all clear about why they were in college in the first place.”

Dick told me that his student loan is down to $7,500 and should be paid off before the end of the year. “It’s been a long journey,” he said, “but it’s almost done. And I’ll tell you—when I get it paid off, you won’t find anyone prouder.”

When kids participate in paying for their college expenses, they receive a valuable life lesson about what it takes to accomplish a financial goal. It allows them to be more responsible and share in the reward of fulfilling a financial obligation. And it might motivate them to find out more about what they want to do in life.

We are petrified by the thought of denying our children anything. We believe that giving them everything is the way to be good parents. It doesn’t work. They don’t learn responsibility, and this accommodating environment doesn’t always support them in discovering their own abiding passions. We must accept the fact that it’s okay to let them work at it a bit.

When confronting the cost of fully funding a college education for their kids today, a lot of people are coming to the conclusion that they just don’t have enough to do it. Perhaps that’s okay. And even if you do have enough money, it’s still okay to question the whole idea.

Now, let me be clear. It’s still fine to pay for your kids’ college if you choose to. But you can reflect on it first instead of automatically thinking that you have to pay for it.

When it comes to one of the biggest financial obligations of your life—your kids’ college costs—there are alternatives. Explore them.

Myth #5: Parents Must Pay for College (part 3)

While considering education options, you must also ask yourself: What is best for my child? Doug, a client of mine, had paid a considerable amount of money to send his son to an elite film school. The family took on tremendous debt in order to pay this expense. Doug followed a similar plan for his daughter and made the same level of commitment to her. He and his wife worked to exhaustion to make it happen. They moved her to New York, set her up in an apartment, and registered her for art school.

After one quarter, she dropped out and told them it was torture. She wasn’t able to perform at the college curriculum level. It wasn’t what she wanted to do. After some soul searching, she decided she wants to work as a guide in wilderness education. Years of work and deprivation and emotional stress went toward fulfilling this mandate to send their daughter to college, and it was not what was best for her in the long run.

Sometimes this insistence to pay for our kids’ college education can set them further back than ahead. Duncan’s parents paid for four years of his college. But it was understood that what he was to get out of college was a degree in a “responsible” profession—which meant a money-making profession. This highly creative individual became an accountant and worked years for CPA firms and in the business world before uncovering his true vocation and talent as a writer. For years he ignored his true path out of a deep-rooted desire to please his parents who had paid his way.

His parents meant well. They wanted the best for him. But they were operating from automatic beliefs—that he should go to college, that he should become degreed in a respectable profession, and that they should pay for it. He was never involved in the decision. He was to succeed. He was to achieve.

If Duncan’s parents had allowed him to invest in this decision both psychologically and financially, it might have awakened him sooner to his natural vocation—writing. In his case, a liberal arts degree with time out for some travel would have made much more sense than an accounting degree.

Step back and ask yourself if college is the best place for your children to express themselves at their highest ability and greatest fulfillment. Is your automatic decision to spend a fortune on four or more years of college based on what is truly best for them, or is it based on what you assume is best for them?

Do you really need to fall prey to this automatic decision to pay for four or more years of college? After all, who is this unique individual who is your daughter or son? How can you help them gain the real-world skills that will enhance their strengths and support their interests so they can become fully expressive in their lives? Does that include college or are there other things you should be investigating?

Some kids are better served by going to a junior college or a trade school. Some kids are better served attending school overseas, or entering the Peace Corps, or starting work and gaining some experience first. If your child has always dreamed of making films, then moving to Hollywood and pursuing a specialized one-year film program may be just what she needs.

When they graduate from high school, kids are only seventeen or eighteen years old. Some need a chance to develop a bit more emotionally before committing to a career and a very expensive college. Some need more time or experience to be able to discover more of their true interests. It takes considerable grace and wisdom for parents to promote such development.

Myth #5: Parents Must Pay for College (part 2)

Not only is the cost of a college education rising at least 6% a year, but there is another disturbing trend afoot. Even if you have systematically saved the $74,000 to $175,000 for tuition, it is becoming increasingly unlikely your child will be admitted to the college of his or her choice, especially if it is an upper echelon school. So if saving for your child’s college education means you must sacrifice all your other financial goals, you may want to rethink your plan.

Dave, a client of mine, sent his daughter to the most prestigious private high school in San Francisco with the intent that she would have an advantage getting into Stanford or an equivalent elite college—he and his wife had their hearts set on this goal. The high school was very difficult academically. A 3.5 GPA at this school is equivalent to a 4.0 in most public high schools. His daughter earned a 3.5 GPA, did things to bolster her education on her summer vacations, and excelled in extracurricular activities.

To make all of this possible, they had saved an enormous amount of money annually for ten years, hoping to send their daughter to Stanford. They regularly sacrificed other things to realize this dream, such as trips abroad and improvements to their home.

Recently, they met with her high school counselor. They were told, “Your daughter won’t get into Stanford.” Dave was shocked. When he protested, the counselor rattled off the names of numerous students who had not been accepted, even with 4.0 averages and exceptional citizenship and extracurricular accomplishments.

There are so many baby boomers with kids who have excelled academically that the likelihood of every child getting into the elite school they aim for is down there with the chance of an excellent high school basketball player making it into the NBA.

Myth #5: Parents Must Pay for College

Most clients who come through my door consider it a given that they have to fully fund their children’s college education for four years. It’s a ton of money. And for a lot of kids, it’s neither what they want to do nor what is best for them.

For those who do want to go to college, allowing them to share in the cost actually prepares them to be more responsible later in life. It also gives them the incentive to discover in school what they really want to do instead of just getting a degree to please their parents.

This “I have to pay for the kids’ college” mandate is so strong that people are shocked when I question it. When I show them the financial implications of this mandate, their eyes roll back in their heads.

A couple who begins saving for college for their ten-year-old child will have to put away approximately $1,000 a month for eight years for their child to attend a typical in-state public school, and $1,675 to attend a typical private one. Even if a couple begins saving when the child is born, the monthly bill is still on average $600 for an in-state public school and $995 for a private college, each month, for eighteen years. And this is per child!

We love our children and of course we want the best for them. But we automatically make this mental leap that the best thing for them is to go to college. We assume that to be a good parent means we must pay for all of it. We certainly don’t want our kids going around telling their friends, “Well, my parents aren’t going to pay for my college.” What would the neighbors think?

Where is it written that we have to pay for our kids’ entire college education? Where is it written that we are bad parents if we don’t? You don’t have to pay for four years (or more) of your child’s college. Financial planning is about peace of mind, not the avoidance of guilt.

I am certainly not saying that college is bad. Far from it. For thousands, if not millions of people, it is a valuable experience. But I am drawing attention to the automatic assumption that you have to pay for it, and at the institution of your child’s choice, and for as long as they want to attend. Because of the automatic belief that parents must pay for college, most parents do not involve their kids in the decision-making process of how it will be paid for.

I want my daughters to go to college, but I want them to pay for part of it. I want them to generate the will power, the interest, and the drive to do what it takes to make it happen. I tell them I will help them in accomplishing what they want, but that they have to be the driving force. It will be a family effort, but it must be propelled by their desire.

Myth #4: I Can’t ‘Cause I’m Broke (part 2)

A few years ago, I decided to go to China to adopt a baby. The trip would take about ten days. I needed a travel companion. I asked a friend of mine who is a seasoned traveler to accompany me. She’d know what food to eat and what not to drink. She had experience in other cultures where English is rarely spoken. She would not be intimidated by traveling in China, as I might be.

She was a successful stockbroker, and I knew that she could afford it. I called her and asked her if she would consider coming with me. Immediately, her reaction was, “No—I can’t—I can’t leave my business for that long . . . I don’t think that would work.”

A week later, she called me back, and broke into tears. She explained, “I asked my business partner (her husband) if I could go. He said, ‘If you want to go, go!’ And then I thought, when I’m sixty-five, what will I say to myself? ‘Oh yeah, I’m really glad I didn’t go to China with Karen because I got to work for two more weeks.’”

She came with me. We had the time of our lives. And the relationship she now has with my daughter is priceless. If there is something you deeply want to do, you can find a way. You can afford it.

When faced with the challenge of a new goal, our immediate reaction is usually, “I haven’t saved for it. I can’t do that.”

Saying you don’t have the money is just an excuse. It’s an easy out. When we say that, we don’t have to confront what it will take to accomplish the goal.

It also lets us off the hook with other people. We know that saying, “I can’t afford it” is a socially acceptable excuse for not going for it. Hopefully, our real friends will see through our objection and tell us, “If you really want it, you’ll find a way. Do it!” And they should—we all need a little prodding occasionally.

Unfortunately, we are all too often polite. We don’t want to make waves around money issues. So the next time a friend tells you that he or she can’t follow a dream because he or she doesn’t have the money—don’t automatically agree!

You have options. If there’s something you really want, do a little brainstorming and make some choices. Maybe you don’t need to get that new living room furniture this year if it means you will be able to take that dream vacation instead. Maybe you don’t have to go out to lunch every day for the next six months if it means being able to take that art class you’ve always wanted to take. Maybe you don’t have to spend $1,000 on presents this holiday season if you can get out of debt instead. Maybe you don’t need to add to your wardrobe this year if you can instead fly your sister in from Baltimore to attend the family reunion.

You have possibilities. But to access them you need to allow yourself to overcome the automatic response that says, “I can’t.”

Instead, try “I can.” If you allow yourself to see your wish as a potential reality, you can begin the constructive process of taking small steps in that direction. You can begin working on the “how,” and begin to remove the obstacles between you and your goal.

Ask yourself, “Six months from now, a year from now, three years from now, what will I wish I had done?” Look at your life right now. What are those things that you are most proud of already having accomplished? The trip to Greece? The 1957 Thunderbird you finally bought? The little independent theater production you helped establish? I bet these were the very things that at first blush you didn’t think you could do because there was not enough money. Yet, you found a way to achieve them. They were goals you chose consciously and pursued successfully.

One should use discretion here. I am not suggesting you go hog-wild pursuing anything and everything you might want. But if it is something very special that calls to you deeply, then find a way to bring it into your life.

In many cases, the financial resources for something you sincerely desire do not materialize until you commit to it. I have seen this countless times in my own life and in the lives of my clients. Doors with resources behind them opened only after the commitment was made.

So go. Do it! Commit! If there’s something you want, say “I can.” Then find a way to make it happen.