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       Investor's Insight - Monday, February 13, 2006           
          "A Digest of Investment Opinion From the 
             World's Leading Financial Advisers"

Comment The Post Below...


by Scott Burns

D.B. in Houston wrote with an interesting dilemma. "My wife 
and I are both 31 and have good jobs. Our combined income is 
about $175,000 a year, and we have been saving about 20 per-
cent of it during our seven years of marriage. Today we have 
a net worth of about $300,000. It is divided between $200,000 
in 401(k)s, $15,000 in money market accounts, $40,000 in IRA 
accounts and $40,000 in home equity. We have 13 years left 
on a 15-year mortgage with a balance of $150,000.

"We save this much because I want to retire early and not 
be forced to work much past 55.

"A small detail I haven't mentioned: My wife is pregnant 
with triplets.

"Obviously, our expenses will change. I'm wondering if the 
current 20 percent savings is too much and if we are living 
too much for the future and not enough for today. I've been 
thinking about a larger house in a better neighborhood.

"If we moved to a more expensive home, we would obviously 
have to curtail our savings a bit. But with real estate 
doing just as well as the stock market these days, part of
me says I could 'invest' in a new home and still continue 
having our net worth grow at its current rate. Basically, 
we'd be shifting monthly stock market investments to a 
house payment.


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"How does one decide what the best route is?"

The first thing you need to know is that all plans will 
pale before your new triplet reality. 

The good news, unrecognized in most financial planning, 
is that your children will teach you a valuable lesson. 
To accommodate their needs, you and your wife will learn 
to get along on less for yourselves. (You'll also learn 
that this is not a deprivation: It is what the vast major-
ity of parents do with zeal and pleasure.) 

The more you spend on your children, the less you will 
need in your retirement nest egg. Since nurturing them 
reduces the personal standard of consumption you and your 
wife share, it will take less investment to support that 
reduced standard.

I know, that's hard to believe. 

So follow me, D.B., in this example with your personal 
figures. Currently, you and your wife have a consumption 
standard of $140,000 a year ($175,000 less $35,000 in sav-
ings). Your financial assets amount to $240,000, excluding 
your money market account. So you have 1.7 years of con-
sumption in savings.

If that nest egg grows at a real (inflation-adjusted) rate 
of 7 percent, it will double in 10 years, quadruple in 20 
years, and multiply eightfold in 30 years. So at 61 you 
will have 13.7 years of real consumption in your nest egg 
-- not quite enough to retire.

Now suppose your soon-to-be-born triplets reduce your cur-
rent personal living standard by (ho-ho!) 20 percent for
the next 25 years or so. That means the standard of living 
you'll need to replace in retirement won't be $140,000. It 
will be $112,000 ($140,000 less $28,000). As a consequence, 
your current $240,000 nest egg is equal to 2.14 years of 
personal consumption.

Growing at the same rate, it will multiply to 17 years of 
real personal consumption in 30 years. That's enough to 
put you in the ballpark for retirement, particularly when 
you consider that part of your remaining $112,000 consump-
tion standard is your mortgage, which will be paid off in 
13 years.

Indeed, some of the $28,000 "reduction" in consumption 
standard may be spent on a larger house in a better neigh-

This approach is unconventional, but it is rooted in the 
life cycle hypothesis for which the late Franco Modigliani 
won a Nobel Prize. The calculations I've done were "back of 
the envelope" figures to demonstrate the principle. In fact, 
software exists to explore every aspect of life cycle plann-
ing. It's called Economic Security Planner and is available 
at www.esplanner.com.


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Will more house be a good substitute for investing in fin-
ancial assets?

It depends on your ZIP code. For the last 40 years residents 
of the East and West coasts have increased their net worth 
by where they chose to live, not what they chose for work 
nor how they chose to save. 

One thing to consider: Rapid mortgage pay-down may not be 
in your long-term best interest. Your family may be better 
off if you (1) finance for a longer term and (2) aggressive-
ly save in a cash value life insurance policy. This will 
give you greater flexibility for both college expenses and 
early retirement.

(Investor's Insight reflects the opinions of experts. It does 
not recommend any specific investments, and no endorsement is 
implied or should be inferred. For more information, contact 
the individual firms cited).



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