Your Home is not an Investment or Retirement Asset Pt 1

Astute wealthy people don’t look at their home as an “investment” or consider it to be a “retirement” asset.  If you are planning to build a secure nest egg for your retirement, you have to break this destructive assumption.   I’ve heard this argument from people for decades and watch as they rush directly away from the path to financial security.

Understand that the decision to buy a house is completely emotional.  A house is something that you use.   Do you consider your car to be a retirement asset or an investment?  Accept that emotion and step back to analyze your decision.

Let’s take a look at some of the myths of home ownership.

  • My house is my retirement.  How is it your retirement?  Are you planning to sell it and retire to the cheapest part of the United States possible, purchase a much cheaper home and live on the returns generated by the difference?  If yes, then it may be.

What if your home is not completely paid off yet. Now you have to net out the mortgage from your sale price.  Let’s look at the numbers:

Southern California home worth $800,000 with a mortgage of $400,000.   Sell and buy a home in Arkansas for the average 2010 price of $175,000.   $800,000 – $400,000 mtg = $400,000 – $55,000 (realtor fee and closing costs) = $345,000 – $175,000 (new home) = $170,000 – $10,000 (closing costs, moving, taxes, insurance) = $160,000.

Now let’s factor in capital gains taxes.  Assuming your home purchase was $300,000.  You were taking money out over the years to fund college and living expenses just like millions of other people (reason why mortgage is at $400,000).   Your gain is $500,000, of which the government allows $500,000 to be exempt if married.

If you are single, your exemption is only $250,000 so you will still be taxed on the remaining $250,000.  Your federal taxes on $250,000 is 15% (2010 federal capital gains rate) = $37,500.  Your California tax rate could be anywhere from 5% to 15%.   Let’s assume 5% = $12,500.  Now your nest egg is $160,000 – $37,500 (federal capital gains tax) – $12,500 (State capital gains tax) = $110,000 to cover 40 years of retirement.

Looking at the best scenario of no capital gains taxes.  Assume a rate of return of 5%/year on $160,000 = $8,000/yr income.  If you’re in CDs, try 1% instead for $1,600/yr.

What this means is that you need to depend primarily on Social Security.   That nest egg of $160,000 will be depleted over the next 10 years unless wisely invested.  Why?  because you haven’t taken into account:  health issues, car, house repairs, inflation and a myriad of other unexpected costs that your Social Security income will be insufficient to cover.

Is it possible to live well on Social Security and just the income from $160,000?  Yes absolutely in a low cost part of the country but you have to be very disciplined and plan for everything.

Remember that the nest egg needs to cover you for 30-40 years of retirement.

What if no, I don’t want to sell my home and move to a cheaper area. In this situation, you have little or no savings except the equity in your home like millions of other people who considered their home to be a retirement investment.

One of your option is to live on Social Security income only which does not justify how the home is a retirement investment.

The second option is to take a reverse mortgage from your home to supplement your retirement income.  In this case, if you are in your 60s, the mortgage holder will give you income based on 30% of your home loan value.  So, assuming you retired this year in this recession and your home is now worth $300,000 (many homes in California are worth substantially less than this.)   You now have $798/month to spend for the rest of your life or a lump sum one-time payment of $120,000.   Keep in mind, you still have taxes, insurance, repairs, etc which pretty much eats up most of the $798/month income.

  • My house is an investment. Yes, your house is an investment for your children and the IRS.  If you’ve done everything right, bought at the right time, paid off the mortgage, and maintained the property, you’ve built a great investment for your children and Uncle Sam.  Otherwise, it is simply an item that you’ve bought to use during your lifetime.

You can’t eat your house.  You can’t carve up pieces of your porch and sell it for money when you need it.  Your house doesn’t make money and send you checks every month while you’re retired.   It actually sucks up more money as the years go on.

The equity in a house is realized after it’s sold.  That usually happens after an owner is dead so it’s of little use to you while you are alive and in retirement.

Readers:  How much of your home value are you counting on for your retirement?

Your Home is not an Investment – Part 2

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