Retirement: Are You Relying Too Much On Your Home?

by Miranda Marquit · 11 comments

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.

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{ read the comments below or add one }

  • George Pilling says:

    Don’t people always, regardless of the state of the economy or the trend of any economic factors – inflation, deflation, stability, instability, Wall Sreet, etc. have to have a place to live? Rents go up with inflation, and when costs of fuel, agricultural products, medical care, etc. are rising rapidly isn’t inflation inevitable? Ditto with major increases in Government spending, and higher deficits, inflation will follow without question. If you own a home hang on to it. It provides security, the first requirement of a successful retirement. It’s not going to be worth less with time so there’s really no down side in keeping it. Maintenance costs couldn’t possibly be as much as renting a place to live would be, and rents are going to increase with inflation.

  • bigcollapso says:

    The problem is that the “money” people don’t even begin to understand what is happening. It’s like a dog chasing a car. Sub-Prim, Then Alt-A, Then Prime, Then all real estate, eventually at least some will realize that its all money. It’s the end of the Industrial Age, the end of Small government, the end of Free market economies and the end of fiat currency. When you duplicate systems that have failed every time that they have been tried, guess what?

  • Glass Is Half says:

    Definitely agree with your point that “if you are able” you should diversify your investments and retirement options. However for most people funds are restricted and while a home might not appreciate as much as we would like … being able to get some money back at retirement vs. nothing for those renting still makes home investments a necessary and useful proposition.

  • vered says:

    Part of the problem is that with a house there’s a lot of pressure to buy more house than you can afford.

    • marci357 says:

      Just say “NO”….
      You are the one signing on the dotted line….
      only get as much as you need – and don’t let pressure affect you 🙂
      It’s your decision.

    • MoneyNing says:

      I think the problem exists whether or not you can afford to buy a huge house or not. Most people can’t seem to see the freedom of having more savings. Instead, they just want to buy as expensive a place as they can possibly buy with the best case scenario of how their income will turn out.

      So what if you can afford a $600,000 mansion when $450,000 will do just great? Wouldn’t having $150,000 more allow you to enjoy life better?

  • Jenna says:

    It seems like buying a home is a good investment if you’re willing to do a lot of DIY repairs and spend the time researching and negotiating work that you can’t do yourself.

  • marci357 says:

    My paid for home is only a piece of my retirement pie…
    My paid for home means I DON”T have to pay rent or mortgage during retirement and because of that I can get by on a lot less income/savings during retirement.

    I figure that’s $700/month I don’t have to have as after tax income in retirement – or over $8000/year…. That’s a BIG bundle I don’t need to make every year 🙂

    In addition, the tiny lot is landscaped with permanent edible landscaping – so a big part of my grocery bill is eliminated also . Lots of savings there…

  • MoneyNing says:

    Houses are almost never good financial investments, and I live in California. My parents bought a house in Toronto which depreciated after owning it for 20 years. One of my friends bought a condo in Tokyo and told me that he finally came back to even after 20 years, and it was BEFORE the 2007 crash.

    On the other hand, many people in Hong Kong have condos that appreciated 2, 3, 4 times in value during the past decade. Though several years ago (right after the dot com bust), there were news everywhere saying that tons of people are upside down on their mortgage.

    If you can time the market on real estate purchases, you can make a ton of money, but for pretty much everybody else, buying a house that appreciated is just a matter of the market cooperating with your situation (job, age, family needs etc).

  • Tracy says:

    Hi Miranda, those are great points. Right now, we’re in a situation where nothing in our area is selling so while the estimated value of our home has gone up by 20K since we bought it, it’s not real money because we can’t sell it. After watching the house down the street sit on the market for a year and be reduced by $40K and still no takers, it’s hit home hard that a house can be one of the least liquid investments there is.

    I’ve also watched as formerly desirable neighborhoods in my city have gone downhill. So 30 years ago you could have bought a house in neighborhood A or B, both equally in demand, but now the house in neighborhood A would sell for four times less than neighborhood B. So there is some degree of luck involved, too.

    We have a low interest rate, so it makes more sense for us to pay our mortgage on schedule and use our cash to fund our retirement accounts instead and build up a healthy cash reserve. I love my house but it’s not much of an investment.

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