Friday, February 24, 2006

A House Is Not A Retirement Fund

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It will take the weekend for my forehead to heal from all the slapping I gave it while reading a story in the New York Times today.

Using data contained in the Survey of Consumer Finances, which was released on Wednesday by the Federal Reserve, the Times explained how peole are saving less and, therefore, turning to the value of their homes to pay for retirement.

The story, which was written by Mokoto Rich and Eduardo Porter, gets into why this plan of action is potentially dangerous. But, of course, anyone who's been paying attention to the possibility of a housing bubble knows this already. Just think what could happen to those approaching retirement in the next eight years. They could find themselves shirtless, screwed, up a creek without a paddle, on the government dole and wanting.

If cashing out the house is your plan, please, reconsider. A house is NOT a retirement investment. It's your house. It's what you live in, not something you exchange for cash when you don't need it. The day you don't need it is the day you die. It's not supposed to be a savings account.

And let me stop those who are already thinking about folks who have cashed out of California and moved to Arizona with hundreds of thousands to spare as they live in a condo in Scottsdale. That isn't going to be the case when this bubble pops. Housing values, even if they flatten, are going to remain flat for more than a decade. When you consider inflation, those homes will actually be losing money over time. Cashing out is going to become harder to do, unless, of course, you're plan is to live in a van down by the river.

Here's an excerpt from the Times story:
New data released yesterday from the Federal Reserve shows that for the elderly, like Americans in general, housing wealth has soared even as other forms of savings have declined.

The Fed's latest survey of consumer finance showed that overall wealth increased very little for most American families from 2001 to 2004. For the typical American household, net worth — the sum of all assets less debts — barely increased, to $93,100 from $91,700. Their savings dropped by 23 percent while the value of their homes rose 22 percent.

For retirees, this shifting financial status is likely to force many of them into a decision no other generation has faced: to use their home as the centerpiece of their retirement plan.

Americans have not traditionally used their homes to finance retirement, choosing instead to pay down the mortgage and bequeath the house to their children. But the increasing wealth that has concentrated in homes during the boom of the last decade, compared with dwindling pension benefits and lackluster market returns, means that many retirees are finding that their largest source of additional income could come, in fact, from their homes.

"People are living longer and longer, so over time they're going to be draining their retirement accounts," said Gillette Edmunds, an investor and author, with Jim Keene, of "Retire on the House: Using Real Estate to Secure Your Retirement" (John Wiley & Sons: 2005.)

"The only thing they are not draining yet is their houses," Mr. Edmunds said, "and that's what they're going to have to turn to."

— The Boy in the Big Housing Bubble