Ask Money

Investing in a home vs. retirement savings

Chris Farrell Jan 25, 2011

Question: I am a 54-year-old single male earning $47,000 per year. Due to the fact that I have worked with an overseas relief organization (read: volunteer) for most of my life, I only have $35K in retirement savings, mostly in a Roth IRA, a 403 (b) and $18K in savings. I am currently teaching and plan on working well into my 70’s. I’m wondering what will leave me better off when I retire: renting and maxing out my retirement vehicles, or buying a home and saving little? Conventional wisdom says that if I continue to rent I will be throwing money away, but won’t I also be throwing money away if I buy a home due to the upfront and recurring costs of owning a home plus mortgage interest? After all, I will probably need to sell the house when I retire, right? Thanks so much. Wes, San Diego, CA

Answer: One of the biggest myths in real estate–and there are a number of contenders–is that renting is throwing your money away. It’s simply wrong.

What is true is that an advantage of home ownership, besides the quality of life it offers, is that paying off the mortgage is a form of forced savings. The equity build-up or savings becomes increasingly important the older you get.

Yet in many cases you would do even better renting and automatically putting the savings you aren’t spending on the home into a well-diversified portfolio.

Worse, so many homeowners got themselves into financial stress in recent years because they had stripped out the equity in their homes over the years. They own, but they didn’t get the benefit of forced savings.

So, one part of the answer is financial. Do the numbers in your area favor owning or renting? If you continue to rent will you take maximum advantage of retirement savings vehicles?

The other critical question is lifestyle. How do you like to spend your time? I have some friends that couldn’t rent. A home is a place to garden. They enjoy spending weekends making repairs. It’s a nest, a refuge. To them, Jane Austen was right: “Ah! There is nothing like staying at home for real comfort.”

Yet I have other friends for whom owning a home is a chore, an oppressive and expensive burden that takes time and money away from what they would really like to do, such as travel. They should be renting, not owning. Renting and saving gives you a lot of flexibility and choice.

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