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Bankrate's 2008 Retirement Guide
Turbulent times
Retirement plans for many are in jeopardy. Understanding the problem is the first step to recovery.
Turbulent times
Multiple crises sabotage retirement plans
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Declining real estate values
Recent trends in real estate have given many homeowners the idea that investing in their homes can serve as a standalone retirement plan. During the run-up, some people "invested" more money in their bathrooms than they did in their retirement accounts. For those who didn't get out before the bubble burst, the pain is growing more intense as the real estate market continues its downward spiral.

Mari Adam of Adam Financial Associates in Boca Raton, Fla., says counting on a primary residence as a retirement plan was a recipe for disaster. Many who were riding the wave in the real estate bonanza and were planning to sell their homes at high prices have been hit with a rude awakening. According to First American CoreLogic, a data firm in Santa Ana, Calif., home prices peaked in mid-2006 after rising 86 percent since January 2000. Since then, that index has fallen 13 percent, while home values in some markets such as Las Vegas, Los Angeles, San Diego, Miami and Phoenix have sunk nearly 30 percent.

"(Your primary residence) is not a retirement asset" says Adam. "It does no good until you sell it and then you still have to live somewhere. We have clients with considerable assets in real estate and it is a problem because they can't get their money out," says Adam.

According to Moody's, the declining real estate values have created a perfect storm causing more homeowners to fall into the realm of negative equity. An estimated 12 million households, or 16 percent of all homeowners in the United States, owe more than their homes are worth. That compares to 6 percent last year and 4 percent in 2006. Having so many homes in negative equity will eventually lead to more foreclosures, which will bring real estate values even lower.

Higher inflation and a declining dollar
The risk of higher inflation in the coming years also has a big impact on retirement planning. As the Federal Reserve pumps more money into the system, it will only further erode the relative value of the dollar, decreasing purchasing power. Most importantly, retirees are often hit harder with inflation because many of their major products and services -- such as health care, food and travel -- often increase at far faster rates.On Oct. 29, the Federal Reserve reduced the federal funds rate again to 1 percent. While that move was intended to help spark more lending, it will also increase inflationary pressures.

The government officially uses the consumer price index to measure inflation but Miles says real inflation figures are likely much higher. Miles agrees inflation can hit retirees harder and even if it subsides, increased taxes to pay for entitlement programs such as Social Security and Medicare will likely have the same effect on their purchasing power.

"The dollar has been cut in half in the past six or seven years and even if inflation becomes less of an issue, there will likely be an increase in taxes in coming years," says Miles.

-- Posted: Nov. 10, 2008
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