In Part 1, we dealt with retirement plan accounts and how to steer clear of trouble. For many, other than retirement accounts (and human capital), their primary residence may be considered their next largest asset. The problem is, a house is not necessarily an investment asset that can be readily converted to cash for future spending. Let’s look at some of the specifics.
Doing the Math
Many individuals have a somewhat erroneous view of what their house is worth as a starting point. The past half dozen years has dampened this somewhat. But, we still see clients that think their house is so unique and so special that it will command a significant premium over the current market. We can all hope that proves true, but many times it does not.
My wife and I have been blessed to live in the same house for over 25 years. The house is almost 75 years old and we are but the second family to own the house. It indeed has many unique and unusual features. That said, based on Zillow (a website for house prices), our house has appreciated at about 3% per year after subtracting out major improvements. Perhaps the rate of inflation was a bit over 2% for this timeframe, so the house appreciated at the inflation rate plus 1% per year. Not bad, but not the premium returns expected from some other investment assets.
Don’t Count on It
In my personal example, the house has been a reasonable storehouse of value, adjusted for inflation but has also provided my family with substantial benefits beyond the financial aspects. It has provided shelter, a home environment and a place where our family grew and matured. All of those things are valuable but may not actually convert into money.
Individuals nearing retirement sometimes think they will sell their existing house for 2x and buy a smaller place for 1x in their later years. In 30+ years I don’t think we have really seen this occur but a couple times. The more likely scenario is the existing house is sold and a smaller, yet similarly priced house is bought. Therefore, no substantial resources are available to be converted to retirement assets.
Everyone needs a place to live but counting on your house as a retirement asset might be a mistake. Don’t go into a house transaction with that mindset. Don’t overbuy; and always think about how attractive the house will be to someone else, anyone else, at some point in the future when you want to sell. Accomplishing what you want financially starts with avoiding big mistakes. Ready for a real conversation?