Retirement Planning and Your House as Part of the Plan

I shudder when I read phrases like this: “counted on proceeds from the house sale to boost their retirement income” or “slumping real-estate market in Sarasota, Fla., has damped the longtime retirement dreams”. Both of these comments appeared in an article in yesterday’s Wall Street Journal. It is easy to envision whatever equity you have built up in your home as part of your retirement plan but at the same time, it is foolhardy to think that the roof over head has any economic impact, other than the pressure it puts on your retirement income.



How we view our balance sheet

In the book that this blog is based on, I discuss this phenomenon at length (chapter six, page 55). Few people realize that the equity built up in their home is not what it appears to be.

They think of it as profit. It is not. It doesn’t even qualify as a dividend. Once you purchase a home, you provide numerous years of upkeep, pay the taxes that increase exponentially as the years drift by and you remodel and improve the property. You do this in the hopes of creating a better selling price. But does it return what you assumed it would have had you invested the money elsewhere?

Yes and no. Yes because if the markets cooperate and the prices soar well beyond what, deep in your heart, you know is unreasonable, much like the market provided for us just last year, you perceive the net worth to be high. But the downside of that thinking is harsh. Your house is worth more because the market is up. But so to is everyone’s property. To replace your out-priced home, you will buy another out-priced home and when the markets settle down and prices adjust, you are left with a feeling of loss.

And no. Had you taken all of that cash you invested in making your home more live-able and hopefully more sale-able, and invested it, you would not be worrying today about whether you could retire early or, as some articles of late have wonder, if at all. Granted, this requires you to live as low as possible, put all of your excess cash into another market – securities – also fraught with ups and downs and which is now being referred to as the “lost investment decade”.



So where does that leave us. Focus on your home as a self-sustaining unit. Can you afford to live in the home you are currently in while maintaining it and paying for the taxes and insurance? If the answer is yes, move on to what you have as retirement income beyond those numbers. If the answer is no, consider finding some shelter that qualifies, a place that allows you to live economically. This will not necessarily be where you dream it might be.

If you are still working, look to creating a better nest, a place that is both comfortable and able to accommodate you in your retirement years. This will allow you to stop wondering about whether you can afford retirement allowing you to instead, focus on generating income for those years ahead. Once you remove the “profit” from selling your home and calculated the cost of staying right where you are, you can make a better estimation of what it will take to live in retirement.

If you are close to retirement as the linked article above suggests and your home’s value is revising your dreams, this is the market you hoped would never happen. But it has and coping is what we do best.

Your current home has a cost that is part of your liabilities. To turn it into an asset does not erase it from the liability side of the balance sheet. It simply shifts it to another location with new costs.

Focus on the things you can control. Investing in the stock market is not one of them unfortunately. But not investing is equally dangerous. The total value of your portfolio may be down but that will not be a forever event. The upside of working just a little longer than you had planned: the equities you are buying now are undervalued. This means buying more (shares in your mutual funds) for less and when the market finishes this correction, and it will, you will be far better off than you had imagined.