A Home Is Not a Retirement Plan

CNBC reported yesterday that the 2014 Retirement Confidence Survey, produced by the non-profit Employee Benefit Research Institute and Greenwald & Associates, shows that American workers are more confident in their ability to retire comfortably because of recent stock and housing market gains over the last few of years.

In the comment section, I said, as I often do, “A home is not a retirement plan.” This garnered comments, which I appreciate. Comments inspire me and make me think. One commenter said that a home can be part of a retirement plan. They included the example of northeasterners who sell their homes and move to a smaller, less expensive home down south. They often pay for their new home with cash and then have money left over. Another commenter said that it is nice to have a free place to live in retirement, rather than a place to rent.

While I agree with these folks in theory, in reality this is not what is happening in America. In June 2013, the New York Times published their analysis of the Consumer Financial Protection Bureau report which estimates that “30 percent of all homeowners 70 and older have mortgages to pay off.” This is in contrast to a 2001 Survey of Consumer Finances study done by The Federal Reserve that found that 8 percent of homeowners 75 or older carried mortgage debt. The trend is getting worse.

My concern is that too many Americans view their home as an asset for retirement, but do not manage their home loan as such. According to Credit Sesame, between 2001 and 2008, the average length of time that a seller lived in their home was six years. In 2007, at the height of the housing market, about 27.6 percent of Americans lived in their home for 10 years and 50.2 percent lived in their homes for 20 years. That changed after the housing bust in 2008. The latest study by the National Association of Home Buyers, using data as recent as 2011, estimate that the average home buyers is expected to stay in their home for about 13 years. Conservative calculations, taking into account that recent years may be an anomaly, put the estimate at 16 years

The average home loan is still a conventional 30-year fixed loan. This suggests that the majority of buyers buy a newer home before their previous loan is paid off, unless they pay off their loan in half the time. Until their home loan is paid off, they are at the mercy of their mortgage lender. Because of this, we believe a home is a liability until it is paid off.

Your Home as a Liability

Scott Shellady, a senior vice president of derivatives for Trean Group, a futures and commodities exchange in Chicago, all but claimed the practice of considering a home as an investment as dead.

We agree that Americans need to include their home in their portfolio in a different way.  It is not accurate to claim 100 percent of your home value as an investment unless your home loan is 100 percent paid off. It is not accurate to claim your home equity in your net worth. Unless your home loan is paid off or you have the cash to pay it off, your home is a liability.

We bought our condo for $130,000. For simple math, let us say it is now worth $150,000. Taking into consideration the mortgage payoff, we owe $120,000. That gives us $30,000 equity. We cannot include either our home value of $150,000 or our equity of $30,000 in our net worth because we still owe $120,000. Our home is neither paid off nor do we have $120,000 cash to meet our home loan payoff.

We are making monthly payments and still have 22 years of payments to go. If we do not pay our home loan off early or refinance our home loan, we will pay a total of $324,000 over the life of our loan. Based on the 22 years of payments we have left, we will pay roughly $237,000 more. We expect, but cannot guarantee that our home value will appreciate over the next 22 years. As we saw in 2008, the appreciation Carleton Sheets spoke of is not guaranteed. Therefore, with all things remaining constant, we have a liability of $87,000.

$150,000 Current Home Value – $237,000 Remaining Expense = – $87,000 Liability

Looking at how a home loan affects your net worth in this way, you can see why we advise buying a home that is right-sized. To this day, we still talk about the real estate agent who tried to sell us a $950,000 house and how bad our situation would be if we had listened to her.

Your Home as an Investment

If you still want to use your home as an investment, you can. A home should be a long-term investment.  If you are not sure where you will be living in the next five years, do not consider buying a home. If you need a designer loan in order to afford the home you want, you are committing to more than you can afford.

Buy a home below or, at least, within your means with a fixed-rate mortgage and a down payment. Pay your off mortgage on time or early. Do not use the equity in your home as an ATM. Provide maintenance and reasonable upgrades over time. Do not be duped into upgrading or upsizing your home. Once you have lived in your home long enough to pay it off, it will then be a realized asset and its value can be included in your net worth. Until then, as many retirees and those burned by the housing bust of 2008 are learning, you will be at the mercy of your bank and the real estate market.

Since we bought our home, we have traveled extensively. While doing this, we have saved for retirement and feel comfortably on track. This is not due to the appreciation of our condo. The fact that we bought a right-size home has made all the difference. We are not house poor. We would love to have a $500,000 mid-century modern home, but would rather meet our financial and life goals.

It is up to each of us to decide what we want and make our life work accordingly. Most of us are not rich and need to weigh trade-offs. We must practice patience, save money and ignore what others think we should want.

If you want a house full of kids, do it. Consider that you may give up some things for that dream. If you want a big, fancy house with no kids, you will have trade-offs, too. A home is only a portion of your dreams. Do not let one dream steal from the others and do not let the expectations of others influence yours.

Most of us have a dream retirement. Do not let your home be the thief of that dream.

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