Sunday, January 11, 2009

Learning from the Mistakes of Others

It's one thing to watch folks make financial mistakes out of greed, stupidity or both. But it is quite another to watch what is happening to some retirees like Jim Kosel who did any number of things right, only to be foiled by what would, in other economic times, be forgivable mistakes.

Kosel is featured in the Portland Oregonian article, What To Do When The Nest Egg Cracks.

Kosel followed most of the rules pre-retirement: He saved on a regular basis; He saved over a long period of time; He planned his retirement in detail; He downsized by moving to a smaller town.

So why is he now driving a school bus and deferring his dreams of taking an RV around the country?

Well, somewhere along the line, just after he sold his urban home and found a smaller one in a rural area, he got the bright idea of NOT paying cash for the new home. Instead, he took out a mortgage, and played the stock market with the proceeds of his original sale. The idea was that he could both pay the mortgage and pocket some extra cash.

But his retirement plans hadn't included a downturn that saw 50% of his retirement funds vanish. Not only did his "extra cash" go away, so did the money for the mortgage. His retirement plans didn't include a mortgage payment. Nor did his plans include his wife losing her job.

So instead of traveling across the country in an RV, he's driving a school bus.

Hindsight being 50-50, it's easy to see where Kosel made his mistakes. No one should have a mortgage in retirement. And he should have purchased and fully paid for the RV he wanted. Economic conditions and gas prices might ground the RV upon occasion, but at least he would have it available to him.

Still, I do feel sorry for him, because I think he set a fine example for his family. If it can go so wrong for him, what about the rest of us?

7 comments:

Morrison said...

Grace,
These mistakes are nothing new. The stock market has been unsteady since the day it was conceived. It still never ceases to fascinate me how people think that if they invest in the stock market, it will answer all their dreams and make them rich.
I have had an ongoing debate with another blogger, who I will not mention, who about a year ago was boasting how she sold her home and took the equity, invested it in the stock market and became a millionaire. I was totally against such a strategy.
I was faced with the same scenario but took a different route. I sold my home but used the equity to buy another downsized home for cash, then took the remaining equity and deposited it in ROTH IRA's in an FDIC bank, in laddered CD's. My opponent said I wasn't planing for retirement correctly because the low 4-5% I was earning on the CD's didn't adequately address inflation.

DH and I took early retirement BUT we both continued to work part time: he a few days per week, me a few days per month. The income offset the reduced interest and high inflation plus higher energy & food costs.

Fast forward to today: I haven't lost one single penny during this most drastic of all downturns. Despite a 24% drop in income, I don't have to scramble to pay rent or a mortgage or any other debt, nor have we had to work longer or harder. I just cut back on services to offset the income decline. Our retirement funds are still intact and whole and earning interest (2-3% now).

My nemesis, in the interim had to accept a loss and has withdrawn all of her wall street holdings and put them? where else? in a bank, in a CD. All investments, regardless of where they are, are earning less. I don't know how they pay their rent every month. Nor do I care.

I learned this by following the woes of Wall St. since I was a little girl. Retirees in the 70's lost their money, as well as in the Stock Market crash of 1987 and 2001. You can't trust the damn place. Most advisers tell folks, if you are 10 years from retirement do NOT invest in Wall St. The man in the article got greedy and lost his future. His story is not new nor will we never hear such stories again, now and in the future. People just don't learn from either their own mistakes (too late) or from others mistakes.

Grace. said...

While I don't share your disdain for the stock market, I would never take risks with those expenses/assets that I need for a comfortable retirement. Housing is at the top of that list and is among the most controllable of my retirement assets. My mortgage has five years to go and it will be paid off. If I downsize in retirement, I might consider the difference between what I get for the old home and what I pay for the new home as "play money" to be invested in the stock market. But to risk my housing itself? No way.

Morrison said...

Grace,
I did put $35K play money into the stock market. It made a $5K paper profit. BUT when the downturn came, I lost the $5k and $2500 of my original investment. I quickly moved the money out of the stock market and into a money market fund (Treasury). If I had kept it in the original investment I would have lost 54% of my capital investment. Not a good thing. I can make back the $2500 in a year (which I almost have) from CD interest. I have since put the money into a bond earning 4.66% but I watch it very closely. It's starting back at the beginning.

I have never had any luck with the stock market. Sorry. I just don't 'get it'. In hindsight, when I made the $5k profit, I should have moved the money out but who knew? You always think you can make more. Never do. Never do. Tried and true works for me.

Florence said...

Oh my, I cannot imagine taking the proceeds from the sale of my home, putting it in the stock market, and taking out a mortgage on a new residence. What a BAD IDEA! We have a goal of paying off our mortgage this year. We don't plan to move anytime soon but if we ever do, you can bet your sweet bippy that the new house will cost whatever we get from the sale of this one or less. Oh my, what a sad tale!!

Momthing1 said...

Recently I read an article (in Kiplinger's I believe) that mentioned using a reverse mortgage to purchase a "down-size" home.
The particular example was sell your house and receive 700k, buy a 500k home, put 300k down and take a 200k reverse mortgage, use your remaining 400k to invest conservatively.

Morrison, while I agree your nemesis' approach was very aggressive (too aggressive for my tastes), your approach is far too conservative for me. 100% of your retirement money should not be in CDs, unless your nest egg is large enough that you can afford guaranteed negative growth. If you have no need for your money to keep pace with inflation, then 100% CDs is just fine. You mention bear markets, but don't mention the bulls that happened in between. Long-term investors get both.

The lesson I learn from this particular article is consider the consequences of worst case scenario. If you don't find the consequences acceptable, you need a different plan.

Morrison said...

Mom thing-I'm too near the age whereby I shouldn't be investing in stocks. I am, however, in bonds, in addition to the CD's. Plus DH brings in an income. Works for us.

Anonymous said...

He should have bought the house free and clear A bird in the hand is worth two in the bush.

And the stock market is not a casino.