Re: Reserve Studies
From: Jim Snyder-Grant (
Date: Tue, 8 Aug 2006 08:52:02 -0700 (PDT)
At New View (Acton MA - ) we've had two different
reserve studies in our 10 years of having a reserve fund. Our current
spreadsheet assumes that our investments will keep up with inflation,
no more no less. That's not a hard standard to meet - CDs increase
their rates as inflation kicks in. You tend to get a bit behind as
rates are going up, and a bit ahead as rates are falling, but it's a
reasonable goal on fixed investments (and it makes the math easy - you
need 30,000 in today's dollars to put in a new roof in 20 years, you
need to put in 30,000, pretty much. The compounding of the investments
matches the losses of inflation.

We looked at inching up the risk/reward ratio curve a bit -- TIPs,
MITTs, and more -- and we decided against it. The group was, mostly,
willing, but the problem came when we crunched the numbers. The
problem is that taking on extra risk for reaching a fixed goal (that
roof, for example), you need to cover the worst case. So you don't get
to put in all that less money. You might end up with more than you
need, which is much less wonderful for a housing reserve fund than it
is for a personal retirement account. Folks here that are managing to
save money for their own retirements DO take on extra risk, because
what they need later on is more flexible, and the rewards of having
more than you planned for retirement are meaningful for most people.

In fact, at this point, a good majority of folks here would RATHER be
hit with some unexpected expense in later years for housing
replacement, than to be overcharged now for the reserve fund. They
figure (and I think they are right) that they can get better returns
with that money with their own stock-heavy investments than pooling it
in a fixed-investment fund. And those short on money now would also
rather keep the reserve contributions small.

So, we are fully funded in our reserve fund, but we are willing to
make middle-of-the-road assumptions about what is needed for
replacements, rather than extra-conservative ones. We are willing as a
group to pick up the slack if our guesses prove wrong.

Conclusion: When you are thinking about reserves, you also need to
think about the wider cloud of resources that homeowners have on their
own, that can be tapped in assesments. If you have homeowners that
don't have the typical American less-than-zero savings rate, you have
more options.


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