[ybc]

Forget the Mansion:
Why Buying Bigger Doesn’t
Guarantee a Rich Retirement
August 23, 2006; Page D1

This is one tab the house won’t pick up.

It’s among today’s most popular retirement-savings strategies: Buy the big house, hope the real-estate boom continues and then trade down at retirement, thus freeing up home equity that will pay for years of early-bird specials.

Sound appealing? Trouble is, you will fork over a heap of dollars — and you’ll end up with a surprisingly small nest egg.

• Living large: To understand why, imagine you are age 35, have a $400,000 home with a $300,000 mortgage and are looking to retire at age 65.

What’s the best way to build yourself a nest egg? You might stick with your current home, pay down that mortgage over the next 30 years and stash your spare cash in stock and bond mutual funds. Call this the “small-house strategy” (though, in many parts of the country, a $400,000 home wouldn’t be exactly small).

MONEY PIT

Buying, selling and owning real estate isn’t cheap.
• Baby-boomer homeowners spent an average of $2,200 on home improvements in 2003.

• On a $200,000 mortgage, closing costs will typically cost you around $3,000.

• In 2004, home sellers paid real-estate brokers an average of 5.1% in commissions.

Sources: Bankrate.com; Harvard’s Joint Center for Housing Studies; REAL TrendsAlternatively, you could opt for the “big-house strategy” — trading up to a $1 million home and aiming to pay down the resulting $900,000 mortgage between now and retirement. At age 65, you would then cash in a big chunk of your home equity by swapping back to the equivalent of a $400,000 home.

Which strategy would leave you richer? To make sure today’s real-estate junkies don’t quibble too much, we’ll make the assumptions favorable to the big-house strategy.

For starters, let’s assume you could get a 30-year fixed-rate mortgage at 6.5%. The $900,000 mortgage would cost you some $5,700 a month, versus $1,900 for the $300,000 mortgage.

Let’s go further and ignore any real-estate commission you might pay today to sell your $400,000 home and trade up to the $1 million house. We will also presume that, when you sell at age 65, you can unload the big house without paying any capital-gains taxes or any commission to a real-estate broker.

Meanwhile, we’ll peg your home’s price appreciation at 5% a year, versus 3% for inflation. That two-percentage-point annual real return is right in line with the historical average.

“People might look at this and say, ‘Five percent on my house is ridiculous; I’m getting 14%,’ ” notes Charles Farrell, a financial consultant in Medina, Ohio, who helped me with this analysis. “But you aren’t going to get 14% a year for 30 years.”

Mr. Farrell calculates that, at age 65, your $1 million home would be worth $1.8 million, figured in today’s dollars. At that point, you sell it and buy that $400,000 home.

Because smaller homes would also be appreciating at two percentage points a year above inflation, a $400,000 home by then would cost roughly $700,000 in today’s dollars. That would leave you with $1.1 million for retirement living expenses.

That might seem like a decent gain — but it comes at a steep price. With the big-house strategy, not only would you face hefty mortgage payments, but you also would have to pony up for property taxes, maintenance costs, homeowner’s insurance and utilities.

Let’s lowball these ongoing expenses and put them at 2% a year of your property’s value. Add that to the mortgage, and you would be coughing up $88,000 in the first year you own the big house.

• Staying small: To be sure, with the small-house strategy, you would also have ongoing expenses and monthly mortgage payments. The sums involved, however, would be far smaller. Suppose you took the money you saved by sticking with the small house and sunk it into a mix of mutual funds.

Let’s be extremely conservative and assume these mutual funds clock a mere 2.2 percentage points a year above inflation. That is what you can earn today by buying 10-year inflation-indexed Treasury notes, possibly the safest long-term investment you can make. After 30 years, Mr. Farrell calculates that your portfolio would be worth $2 million in today’s dollars, almost twice what you would pocket with the big-house strategy.

True, we are ignoring the value of the mortgage-tax deduction with the big-house strategy, and we haven’t figured in the taxes on the investment portfolio with the small-house strategy. On the other hand, if you followed the small-house strategy, you could get a tax deduction for contributing to an individual retirement account or 401(k) plan. Your 401(k) investments might also garner a matching contribution from your employer.

The bottom line: Unless you lose nearly half your investment portfolio to taxes, the small-house strategy wins hands down. And, of course, the margin of victory would be even larger if we use more realistic assumptions.

For instance, suppose the investment portfolio earned four percentage points a year above inflation, while maintenance, utilities and other costs ran at 3% of your home’s value. Result: The small-house strategy would give you not double the spending money, but triple.

“The killer is the expenses on the big house,” Mr. Farrell says. “It’s costing you a lot to carry this $1 million investment. That money is just going out the window, while the small-house guy is investing the money.”

There is, however, an upside to buying the bigger home. For the next 30 years, you would live in a grander place. But that just highlights what this is all about. Buying a bigger house isn’t an investment. Rather, it is a lifestyle choice — and it comes with a brutally large price tag.

[ybc]

Any landlord here who’s using property management companies? I actually think that owning real estate is very nice (with a good cost base, of course), but don’t think that can handle the hassle of managing it. So what will the math be if one has to use a property management company (considering vacancy time, management fee, etc)? what type of places are the best for rentals?

[ybc]

“And I ate everything also including horse steaks, fish eggs, goose liver and lamb’s brain (that was in France).” — if you like Lamb’s brain, then go to the Chinese Muslim Restraunt on Convoy – they serve “whole lamb soup” that has lamb’s brain in it. It is one of their specialties. Tasted delicious to me until I heard that it had lamb’s brain in it!

[ybc]

Do you think that’s the rational behavior? (i.e. if you were a builder, that’s what you would have done to maximize profit?) In another word, are builders financially disciplined?

I wonder why not building smaller houses at lower price points? Demand for those should still be there.

[ybc]

Bugs, will developers reassess their situations and start to build cheaper houses and continue to be in the business? Of course they’ll have to deal with the current inventory first. How much flexibility do they have?

[ybc]

PerryChase – thanks for sharing your experience traveling in China. You’re a sharp observer. Visiting Xinjiang was my childhood dream. I would volunteer myself as a translator the next time you go, although you do just fine without one.:-) I’m know that I’m off the topic, so thanks again. Next time I go to China, I will ask for tip from you!:-)

[ybc]

PerryChase,

Have you been to Tibet and Xingjiang? I always wanted to go there. I agree with you completely. I remember that in high school and in college, we had students from those regions (Xingjiang) who were on full scholarship. It was the government’s program to get the most promised youth better educated — even though they would not have been admitted otherwise. But there is still a lot of resentment among people in Tibet and Xingjing, I believe. In the end, there is a lot to say about independence and autonomy. Chinese government’s attempt was more serious, more competently carried out, with some cruelty along the way. (Compared to US’s Iraqi fiasco).

When Bush wants to spread “liberty and democracy” around the world, he perhaps didn’t realize that he’s invading others’ sense of independence, including their religious beliefs. (Well, their lifes too!) Plus, he only cares about people agreeing with him (or even worshiping him) anyway. So I don’t know if his version of “democracy” is democracy at all. I read that one of the things that he absolutely insisted on was that the new Iraqi government “thank” the US for “liberating” Iraq.

[ybc]

What the Brits are saying…
http://news.independent.co.uk/uk/politics/article1220089.ece

[ybc]

“Joe Darby’s cover was blown by Donald Rumsfeld”

http://www.abc.net.au/worldtoday/content/2006/s1716503.htm

Joe Darby is the soldier who submitted those prisoner abuse photos and requested to stay anonymous.

“MICHAEL ROWLAND: The whistle-blower has told of how he slept with a loaded pistol once the graphic images became public, as Charles Graner and the other soldiers implicated tried to discover the identity of the leaker.

In the end Joe Darby’s cover was blown by none other than Defence Secretary Donald Rumsfeld, and it happened in the worst possible circumstances.

Specialist Darby was eating lunch in an army mess hall with 400 other soldiers in may 2004, when Mr Rumsfeld appeared on an overhead TV and dropped his name.

From that point onwards Joe Darby’s life was never to be the same.”
———————–
PerryChase, I think that you speak with reason and wisdom, thanks!

I never cared much about politics but I did care about policies and their impacts on people’s lives. The policies of this administration (foreign, economy, science, environmental, etc) made me care about politics; because the damages from such bad policies will have long,long lasting impacts. Democracy is highjacked by a very skilled political machine right now; and this political machine and its frat boy head believes in ideology and it’s also incredulous imcompetent (Iraq, Katrina). Still, I think that the US will be resilient enough to come back, although the peak probably is over.

[ybc]

7) The strategic benefit of the Arab world’s first reasonable government. A representative government is going to allow Iraq to be the first nation in the Arab world in which the citizenry shares in the oil wealth and doesn’t fear its government. That will help diminish the appeal of the fundamentalist lunatics over there.

Great — care to predict when that will happen?

[ybc]

The soldier who was outed by the Secretary of Defense

On a TV magazine program (forgot which one), I learned how the soldier whistle blower who submitted those Abu Grib prison photos anonymously lost his cover. Donald Rumsfeld testisfied to the congress, and he named the soldier’s name! The soldier said that he was watching TV in Iraq, and was shocked to heard his name. Nobody knew at the time. He had to sleep with a gun under his pillow afterwards.

I feel sad for the soldier, and for the country.

[ybc]

THE BUSH QUIZ: THE TWENTIETH HUNDRED DAYS
by PAUL SLANSKY
Issue of 2006-08-07
Posted 2006-07-31

1. Complete George W. Bush¡¯s quote: ¡°I believe that
my job is _____.¡±

(a) to protect life. And sometimes people have to die
in order to protect life, see? And that saddens me.

(b) hard. It¡¯s a heckuva hard job. It¡¯s difficult.
But I¡¯m doin¡¯ it, see, and I¡¯m gonna keep on doin¡¯
it, because that¡¯s the job of a President.

(c) to go out and explain to people what¡¯s on my
mind. That¡¯s why I¡¯m having this press conference,
see? I¡¯m telling you what¡¯s on my mind. And what¡¯s
on my mind is winning the war on terror.

(d) to construe the laws I sign in a Presidential way.
Because that¡¯s part of being a leader, see, is
construing with your gut.

2. Who is Peter Wallsten?

(a) The partially blind reporter whom George W. Bush
mocked (¡°Are you going to ask that question with
shades on?¡±) for not removing his sunglasses while
addressing the President.

(b) The wheelchair-bound senior citizen whom George W.
Bush mocked (¡°You look mighty comfortable¡±) for not
standing in the presence of the President.

(c) The C.I.A. employee who, after delivering the
¡°Bin Laden Determined to Strike in U.S.¡± briefing,
was told by George W. Bush, ¡°All right, you¡¯ve
covered your ass now.¡±

(d) The Iraq-war amputee with whom George W. Bush
tried to bond by telling him about a scratch he got
during ¡°combat with a cedar¡± while clearing brush.

Match the number with what it quantifies.

3. At least 30,000.
4. More than 5,000.
5. Zero.
6. Around 200.

(a) Dollars¡¯ worth of merchandise that the former
Bush domestic-policy adviser Claude Allen was alleged
to have stolen from Target and other stores through a
phony refund scam.

(b) Shotgun pellets embedded in the face and upper
body of Harry Whittington by Dick Cheney.

(c) National monuments or icons that Secretary of
Homeland Security Michael Chertoff said there are in
New York City.

(d) dollars donated by Barbara Bush to a hurricane
relief fund with the stipulation that the money be
spent on software bought from a company run by her son
Neil.

7. Complete George W. Bush¡¯s quote: ¡°Nobody likes
_______.¡±

(a) it when the press commits treason.
(b) being lied to.
(c) Osama bin Laden except the Democrats.
(d) beheadings.

8. Three of these quotes were made by George W. Bush.
Which one was made by Donald Rumsfeld?

(a) ¡°Nobody likes war. It creates a sense of¡ªof
uncertainty in the country.¡±
(b) ¡°The plan [in Iraq] is to prevent a civil war,
and, to the extent one were to occur, to have the,
from a security standpoint, have the Iraqi security
forces deal with it to the extent they¡¯re able to.¡±

(c) ¡°Sometimes leaders show up who do a great
disservice to the traditions and people of a country.
¡±

(d) ¡°There are limits to how much corn can be used
for ethanol. After all, we got to eat some.¡±

Who¡¯s who?

9. John Green.
10. James B. Comey.
11. James E. Hansen.
12. Harry Taylor.

(a) The ¡°Good Morning America¡± producer who was
suspended after e-mails he sent, including one in
which he wrote, ¡°Bush makes me sick,¡± were leaked.

(b) The NASA official who said, ¡°It seems more like
Nazi Germany or the Soviet Union than the United
States,¡± after the Administration began censoring
climate scientists who tried to speak about global
warming.

(c) The Justice Department official who refused to
authorize the National Security Agency¡¯s domestic
surveillance program.

(d) The questioner at a Charlotte event who told
George W. Bush, ¡°I would hope, from time to time,
that you have the humility and the grace to be ashamed
of yourself.¡±

13. How did Dick Cheney say that the September 11th
attacks might have been prevented?

(a) If George W. Bush¡¯s father had taken out Saddam
Hussein in 1991.

(b) If the Bush Administration had been able to
eavesdrop on the hijackers¡¯ phone conversations
without court orders.

(c) If the National Security Agency hadn¡¯t waited
until September 12th to translate two messages warning
of the attacks which had been intercepted on September
10th.

(d) If even one of the F.B.I. agent Harry Samit¡¯s
more than seventy warnings that Zacarias Moussaoui was
a terrorist had been heeded.

14. Three of these quotes were made by George W. Bush.
Which one was made by Dick Cheney?

(a) ¡°I do want to give you some thoughts about what
I¡¯m thinking about.¡±

(b) ¡°They ought to learn to sing the national anthem
in English.¡±

(c) ¡°We have all the legal authority we need.¡±

(d) ¡°When you turn on your TV screen and see innocent
people die day in and day out, it affects the
mentality of our country.¡±

15. What pair of men did George W. Bush refer to as an
¡°interesting cat¡± and a ¡°dangerous dude¡±?

(a) The Iraqi Defense Minister and the Al Qaeda leader
Abu Musab al-Zarqawi.

(b) Elvis Presley and ¡°Colonel¡± Tom Parker, during
the guided tour of Graceland that Bush gave to
Japanese Prime Minister Junichiro Koizumi.

(c) Owen Wilson and Matt Dillon, after a special White
House screening of ¡°You, Me and Dupree.¡±

16. What was George W. Bush talking about when he
declared, ¡°I¡¯m the decider, and I decide what¡¯s
best¡±?

(a) Pushing ahead with the Dubai ports deal despite
not having known about it until it appeared in the
media.

(b) Blocking a Justice Department probe of the
Administration¡¯s secret domestic spying operation.

(c) Keeping Donald Rumsfeld as Defense Secretary
despite calls by six retired generals for his firing.

(d) Vetoing a stem-cell-research bill.

17. What did George W. Bush say was ¡°the best
moment¡± during his years in the White House?

(a) ¡°The first day I sat at my desk in the Oval
Office and thought about all the history that happened
there and realized that now it was my turn.¡±

(b) ¡°When I caught a seven-and-a-half-pound
largemouth bass on my lake.¡±

(c) ¡°When they told me we caught Saddam in his
hidey-hole.¡±

18. True or false: When Tim Russert, the host of
¡°Meet the Press,¡± said that ¡°there were a lot of
misjudgments made¡± regarding Iraq, his guest
Condoleezza Rice pointed out, ¡°There are also some
misjudgments that were not made.¡±

19. Which of these words were among the top ten
responses in a Pew Research Center poll that asked
voters for the first word that came to mind when they
think about George W. Bush?

(a) ¡°Decisive,¡± ¡°charming,¡± ¡°brilliant,¡± and
¡°truthful.¡±

(b) ¡°Booze,¡± ¡°cocaine,¡± ¡°failure,¡± and
¡°smirk.¡±

(c) ¡°Illegitimate,¡± ¡°simian,¡± ¡°hotheaded,¡± and
¡°torture.¡±

(d) ¡°Incompetent,¡± ¡°idiot,¡± ¡°liar,¡± and ¡°ass.¡±

Answers:

(1) c, (2) a, (3) d, (4) a, (5) c, (6) b, (7) d, (8)
b, (9) a, (10) c, (11) b, (12) d, (13) b, (14) c, (15)
a, (16) c, (17) b, (18) True, (19) d

[ybc]

Puts that I currently hold (somewhat economy and housing related) include CFC, BBY, SBUX. I had some others but sold. But I bought all these when stock prices were higher, so this is not an endorsement to buy them now… It was actually reading this forum about Countrywide’s lending practice that gave me the idea to buy a put on the company…my puts on SBUX and BBY’s expire in 1/07; while CFC expires in 1/08. I did own put on Wholefood once, but my timing was off, so that was a 100% loss (that’s why puts are risky!) I heard someone on CNBC mentioned Bed,Bath and Beyond, but I haven’t checked that one out yet.
I had a short on PFCB and SIRI in a “stock contest”game that I play and both did wonders for me:-) Too bad I didn’t actually short them.

The same person on CNBC suggested putting PMI companies, I’m not sure, I think that the real risk resides with 2nd loan holders (those piggybank loans), if I know a bank that holds a lot of those, I’d consider buying a put. Any ideas?

[ybc]

Masayako,

What’re your basic assumptions (especially regarding royalty rate, CDMA handset market and their WCDMA chip market share) to derive at QCOM’s $15 intrinsic value, if you can share?

[ybc]

It’s better to exam what they do instead of what they say. CEO Bob Toll sold a lot of stocks at the top of the market in 2005. This year he exercised a lot of stocks, but didn’t sell. So maybe he’s more confident about his stock at this level. Although if he’s really really confident, should have bought back some stocks…

[Author]

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