By Richard Riva
What financial advice did you get from your parents growing up? You may have heard things like:
- A home is a good investment.
- You’re wasting money if you pay rent.
- Just invest in your 401(k) and you’ll be set for retirement.
Unfortunately, our economy has changed drastically over the decades. Your parents’ advice (no matter how well-intentioned it may be) probably won’t work in today’s markets. Here are five reasons why.
1. Cost of Living Has Increased
The cost of living has increased dramatically since your parents were young. Something that would’ve cost $20 in the ’60s would cost $180 in 2021—that’s an increase of 800%! (1)
People’s debt-to-asset ratios are also much higher than they used to be. For example, when your parents bought a house back in the ’60s, the median price of a home was $11,900. They didn’t have to go into much debt to purchase it, and if they’ve lived in it for 30+ years, as most older couples do, it may represent 90% of their wealth today. The median income at the same time was $5,800, which results in a purchase price that is twice that of the household’s annual income. (2) In today’s income example and house prices, the purchase is often 10 times that of the annual income or more.
This leads me to my next point…
2. Housing Prices Have Increased
The median listing price for a home in Newport Beach, California, is $2.8 million. (3) Even in other parts of California, it’s typical to pay $1 to $2 million for a home (a far cry from what your parents probably spent when they were young).
Unfortunately, it’s quite common for today’s families to become “house poor” as they tie up all their assets just to become a coveted homeowner. Many of these same families then have to sell their homes to free up cash if they’re ever hit with high medical bills or unexpected financial troubles.
Striking a balance between home ownership and preparing for retirement has never been more difficult. Forecasting your goals and finances to uncover the potential challenges in the future can uncover strategies to serve you in the future with more insight than what your parents had available to them.
3. Families Relocate More Than They Used To
Remember me saying most people stayed in their homes for at least 30 years back in your parents’ day? Well, today’s families typically live in a house for about 8 years before they buy something else or relocate. (4) This makes sense if you think about it. People are much more mobile now than they used to be. They’re working from home. They’re applying for jobs online and then moving across the country.
You can see how much more of an impact buying a house has on your finances today than when your parents were young. It’s not the “guaranteed” investment they may have told you it was. Depending on how long you stay put, it may not be enough time to build any real wealth at all. Tax law changes in capital gains, and how often people are moving around the country with more remote opportunities in employment can result in lower net returns than you need to achieve your goals. Connect the plans from your tax advisor and your wealth advisor to see how your investment strategies will position you in the future. We make these connections for our clients so they have a higher level of confidence in their financial affairs over their lifetime.
4. Medical Costs Have Risen Dramatically
In 1960, the average person spent $146 a year on healthcare. By 2018, that number had jumped to $11,172 per person per year! (5) These drastic increases have forced today’s families to think about alternatives that their parents may have never considered—things like long-term care insurance, health savings accounts (HSAs), and other alternatives to traditional investments.
5. The Way We Save For Retirement Is Different
Today’s workers aren’t staying at the same job for 30+ years and getting a pension like they used to. You have to balance saving for retirement using 401(k)s, Roth IRAs, HSAs, and other avenues to ensure you don’t end up in the highest tax bracket in retirement.
If you only invested in a 401(k), as many parents recommend, you’d be in for a stark surprise in retirement because you’d have to pay taxes on 100% of your withdrawals. Instead, today’s investors actively meet with trusted financial advisors who can help them map out a plan that maximizes their savings and minimizes taxes using various strategies.
How We Help
At Wealth Management Solutions, we understand how much the financial landscape has changed since your parents were your age. If you’d like guidance on how to make smart financial decisions for your family—and plan for a secure retirement—we’d love to talk with you. Schedule a complimentary consultation by contacting us at (949) 475-9700 or info@wms-llc.com.
About Richard
Richard Riva, the founding partner of Wealth Management Solutions, saw firsthand how a lack of financial planning can result in tremendous pain when his family experienced the loss of their three-generation family estate after the premature passing of their father. His passion is preserving your future by planning today. Richard and his team have more than 60 years of experience in providing the care, stewardship, and course corrections that guide their clients to manage their investments and financial affairs in line with their family values and objectives. Richard is a proud veteran and currently serves in the California State Guard.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
The opinions voiced in this material are for general information only and are not intended to provide specific investment advice or recommendations for any individual.
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(1) https://www.usinflationcalculator.com/
(2) https://www2.census.gov/library/publications/decennial/1960/pc-s1-supplementary-reports/pc-s1-48.pdf
(3) https://www.realtor.com/realestateandhomes-search/Newport-Beach_CA/overview
(5) https://www.thebalance.com/causes-of-rising-healthcare-costs-4064878
