• Tuesday, February 27, 2024
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BusinessDay

Retirement: Are you relying too much on your home?

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When it comes to retirement, many people rely on their homes. We are told over and over again that our homes are investments, and that they are our biggest assets. As a result, many people rely on home appreciation to help fund their retirement. The recent real estate market crash has been contributing to a re-evaluation of that stance, but there are still plenty who still view their homes as investments. And, while a home may be an emotional investment, it might not be the great retirement investment asset that many think it is.

I was reading in Money Adviser, from Consumer Reports, that,

 Historically, real estate has returned only about half a percent a year after taking inflation into account. Even during the housing boom of 1977 to 2004, prices for residential real estate increased by only 7 percent annually after inflation.

What an eye-opening look at home ownership. Sure, 7 percent is a decent enough return, but I doubt most people were getting that. I suspect that the outrageous appreciation in some markets (ahem, California) skewed the overall results. While I am glad that I bought a home (most days), the truth is that I don’t see it as something that is going to offer a substantial return on investment. In fact, I fully expect that by the time I pay interest, utilities, maintenance, repairs, property taxes and other costs on the home, I will come out behind — even with the tax breaks that come with home ownership.

Unfortunately, our society puts undue emphasis on home ownership as an investment. We still think that a home will appreciate enough over time to provide a significant amount of retirement support down the road. However, unless you have been in your home a long time, building up equity and enjoying some decent appreciation, your home probably won’t provide what you need to retire. While a reverse mortgage or other equity loans — or even selling and downsizing — can help, your home probably won’t provide everything you need.

Creating a Different Retirement Plan

While your home might be able to provide some help to you in retirement, it is important not to rely on it too much. After all, one of the main tenets of successful investing is diversity. Consider maxing out your tax advantaged retirement accounts, and consider your portfolio. A healthy mix of stocks, bonds and cash, mixed in with the real estate that is your home, is much better than relying too much on your home.

Indeed, after this most recent crash, it is likely that home appreciation will return to patterns more consistent with the historic half a percent annual return after inflation. Most investments return more than that (although with cash rates where they are right now, it’s more of a toss up). Relying too heavily on your home to support you later in life might be a poor decision.

If you do decide to buy a home and live in it for a couple of decades as a way to generate income later, though, be wise about your purchase. Consider a modest a home that you can truly afford and save up for a down payment. Many people bought more expensive homes, using “creative” financing techniques, assuming that appreciation would lead to a more valuable home later. A large number of these folks now have negative equity, unaffordable mortgages and homes they can’t sell. Debate what you want about whether it’s an investment, but that’s no way to fund a retirement for sure.