It may be your biggest asset—but your home shouldn’t form the backbone of your retirement plan.
When I needed to cross the Atlantic recently, I didn’t rent a speedboat for the job. Similarly, as I plan my journey towards retirement, I won’t be using my home as a retirement vehicle.
Call me old-fashioned, but I don’t like the idea of using a financial vehicle for purposes other than what it was designed for. The 403(b), the 401(k), the IRA…these are powerful tools, sleekly designed and refined to perform a specific function—to help you save as much as you can for retirement. Your home, on the other hand, was designed to be lived in.
Invest in the nestI recently read that more than 75% of Americans age 65 or above are homeowners. This doesn’t surprise me: For many retirees, a home of one’s own represents emotional security and even social status. And funneling money into home improvements, landscaping and maintenance are all ways to invest in the nest.
However, rather than viewing one’s home as a secure nest, there has been a tendency in recent decades—possibly due to the rise of home equity lines of credit (HELOCs) and easy, reverse mortgages—towards viewing it as yet another financial asset or investment. And this is deeply problematic. As they hoard most of their wealth in the form of bricks and mortar, many retirement-unready Americans are eyeing their houses not only as homes but potential sources of income, to be tapped in the event of calamity.
Based on the latest U.S. Census Bureau data (from 2011), for Americans aged 65-69, the median net worth per household was $194,226. But excluding home equity, Americans in this same age group were worth just $43,921. Which is why, when I think about my net worth, I don’t generally factor in the value of my home.
There’s little doubt that millions of us homeowners will move into a smaller, more manageable property one day. But if most of your net worth is invested in your home, you may have no choice but to downsize long before you’re ready to do so. You can’t just draw money from it, as needed, like you would with a savings account. An expensive medical emergency might force you to liquidate the entire thing and, given that the housing market is cyclical, you may find yourself in a down market where you’ll need to sell it while it’s devalued.
The reality of real estate investingThe idea of building up a property portfolio appeals to our territorial instincts—and collecting rent on a second, third or fifth property may seem effortless. But using your real estate as a retirement fund is neither cost-free nor straightforward; it is something you need to consistently reinvest in to yield any returns. Unlike the assets you own in a 403(b) or IRA portfolio, home equity requires constant reinvestment. Houses can be expensive to maintain, and property taxes need to be accounted for when looking at annual returns. They need to be adjusted not only for inflation but for all those maintenance costs, taxes and other fees associated with homeownership (including property management fees, if you’re not physically maintaining the home(s) yourself).
And even if the property is kept in tip-top condition, you’re not guaranteed continuous income; there may be long gaps between tenancies, and there may be issues getting tenants to pay on time or with tenants who refuse to pay or need to be evicted. The risks cannot be overstated.
Owning a single home, or even several units in the same building, does not offer much in the way of diversification. What if the neighborhood goes to the dogs, causing home prices to plummet? This kind of overconcentration of proverbial eggs in one basket can be minimized when you diversify your investments. For example, a mutual fund can sell you a slice from each of the biggest companies in the U.S. stock market across a broad range of sectors.
Don’t get me wrong: I think people should pay down their mortgages aggressively, but never as a substitute for maxing out their retirement accounts. Homeownership undoubtedly offers security—but consider home equity as a slice—rather than the bulk—of a well-diversified portfolio.
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