Monday, May 18

A house shouldn't be a priority

By which I mean: A house should not be a priority above funding your retirement!





Look, I used to own a house. I miss it. I really miss having a garden -- especially the free and tasty raspberries and plums. But even after we pay off the debt, I refuse to sacrifice our retirement savings for a house.





And it seems like I may be one of the only ones who thinks this.





Over and over, I hear about houses. How people are saving up for one. How they're putting other items on hold.





Folks, they are nice, but they are not a necessity. Not even when you have kids. They are a luxury. In the midst of all these subprime loans, we seem to have forgotten that.





**People talk about how they are stretched thin so that they could afford a house. Well, then clearly you can't afford a house.




**People talk about how hard it was to find a place so that the kids could have separate bedrooms, so they ended up with a tiny house they don't like. Since when do kids have to have separate bedrooms? (Yes, I understand puberty may eventually force this issue if you have a boy and a girl. But I don't think that's the main reason most folks decide their kids each need a bedroom.)





**People talk about how they have to put retirement savings on hold for awhile, so that they can get a house. Or they put money toward a down payment while they still have interest-bearing debt. Folks: Do some math and reassess your priorities.




First, you're losing money by keeping the interest-bearing debt -- at least, when you look at the savings rate for that down-payment account. I can sort of understand some people's rationalization about saving for an emergency fund while still paying down debt. I get that, to an an extent.





But I cannot, for the life of me, understand why you'd continue to ding yourself for longer than was absolutely necessary. Don't forget: Your debt-to-credit ratio (and debt vs income) are taken into account when you apply for a loan. So you're making things harder on yourself -- as if the new, saner mortgage guidelines weren't enough of a hurdle for most people.







**Finally, people talk about putting retirement on hold to get a downpayment. Since when is it financially sound to put off future security for more immediate gratification?





Because "immediate gratification" is exactly what you're doing. I'm sorry if you folks don't want to hear it. But once again, a house is not a necessity. So ranking a luxury (house) over a necessity (retirement funds) is pretty much the antithesis of all PF advice.





Sure, back when house prices were going up, up, up -- and real estate was disappearing days after being listed -- PF experts advised us to make the leap. But that was then. How many experts are still saying you should make it a priority? And of those, how many are simply catering to what they know the audience wants? (You can only force so many unpleasant truths down people's throats. And if you're taking away their lattes, you may have to concede that a house is important.)





Just remember, you might own a house. But the house owns you, right back. It's the same reason that I don't want to get a car before we pay off our debt: Both create a new drain on your finances. (And now you can't even argue that houses will definitely appreciate, at least in the short-term.) There will be repair costs, property taxes, homeowner's insurance and all sorts of other unexpected liabilities.





And, when you're figuring out your maximum mortgage, can you guarantee that you'll remember to factor in the retirement contributions you want to restart? I doubt I would. I'd figure out how to make it all work. Then I'd realize that I needed an extra couple hundred each month to go toward retirement. That'd pinch the budget even further.





This whole subject arose over on Sense to Save, when Kacie asked her readers what they thought about postponing retirement savings in order to save for a downpayment. She was taking a page out of the oh-so-hallowed Dave Ramsey book. (Sorry to all the Ramsey followers for the sarcasm. He has some good ideas, but it scares me how blindly folks sometimes follow him.) He suggests that it makes sense to put it off -- though for no longer tahn 18-24 months.





To give props to Kacie, she and her husband will apparently take the middle road: Save for both. It won't get them to a house as quickly as they would like, but it also won't leave their retirement accounts destitute.





So why am I so violently against saving for a downpayment rather than retirement? Oh, where to begin...





First, if you put money in your 401(k), you do have the option of borrowing it for a downpayment at a later date. (Don't forget, this whole thing could also be avoided simply by contributing to a Roth IRA, which allows you to take any invested funds back out penalty-free.)Of course, this comes with caveats. You want to be in a much more stable economy than we currently are. There are very strict repayment rules, and if you become unemployed (through your own volition or not) you are expected to pay it back pretty much immediately. Still, by putting money into your 401(k) you are keeping your housing option open, while still securing your future.





And, yes, I know that naysayers will insist that it's not that simple. You could put money in and your 401(k) could lose value. That's money you could have been putting in something secure like a savings account or CD. This is a valid point to consider. But also a valid point: If you invest carefully and/or conservatively, your stocks will be lower risk. And, technically, your "losses" are not real until you sell the stock. So if you buy shares, which lose value in the short-term, you still have the chance to make money in the long-term by holding on to them. History has shown that the market does inevitably rebound. While we may not see the heydays of the last decade or so, I feel confident that we will, in fact, see people make money on stocks again. (And not through short selling.)





Arguably, a dropping value does it make it harder to borrow from your 401(k), but then again dropping house price can be a huge problem as well, if circumstances change and you need to sell. Nothing right now is a certain investment.





Speaking of selling your house, what if circumstances force a move? And what if that move is to an area with substantially higher housing costs? Did you put off your retirement savings for nothing? Will you have to do it again to amass enough for another downpayment? How long are you willing to stave off investing in your future?





Finally, I have to use my favorite example from Deal With Your Debt by Liz Pulliam Weston:





A woman starts investing in retirement at age 22 and stops at age 32. Each of those years, she contributes $3,000. After this, she never puts in another dime.



Her twin, however, contributes starting at age 32 and continuing through age 62. She, too, contributes an annual $3,000.



At retirement, the first twin will have around $200,000 more in her retirement fund, despite having contributed 1/3 the amount of her late-to-the-game sister.





Naturally, this example is based on average returns that may no longer be applicable. But I do feel certain that the market will, in time, inch back up to something approaching bearable. (No pun intended.) And, either way, these twins would have withstood mostly the same market forces. So while the difference might be smaller in today's conditions, it would still exist and be notable.





I love this example because it truly drives home the fact that compound interest is completely undervalued by most Americans. I was certainly shocked to read this example. It seems so impossible that a 10 year head start (especially compared to an extra 2 decades' contributions) would lead to such a marked difference in funds.





So, given how powerful compound interest can be, I don't understand how anyone could rationalize saving for a house over paying into a retirement fund. You're getting what you want now, but at the expense of your future security.



Let's recap:





I know no one wants to hear it, but here's the thing: A house is not a necessity. No matter how badly you want it; no matter how much it pains you not to have it. It is never a necessity. It is a wonderful luxury that I hope everyone gets to experience (with financially prudent saving). But it is simply not indispensable. Funds for retirement, however, are absolutely integral. Take it from someone who receives $883 each month from the government. In a city where 1 BR apartments are $700.





Even assuming phenomenal changes are made and Social Security stands for our retirement (and I know plenty of you doubt that will happen), could you live on $1,500 a month in retirement?





If you said yes, remember:




  • Inflation for cost of living, but not necessarily reflected in SSA payments.

  • Medicare coverage is not free. Part B (non-hospitalized medical care) is $96.40 a month.

  • If you want better coverage, that will cost you, too.

  • Want decent precription drug coverage (Part D)? More money.

  • You still have the "donut hole" to worry about. Once your Part D coverage company has paid $2,700 (your deductible, oddly, is included in that amount, despite sometimes being more than $200) you are responsible for 100% of the costs for the next $4,350. Then, your coverage kicks in again -- at a higher rate than before. (Isn't that sweet?)

  • You can get a supplemental plan that avoids the donut hole (technically called the coverage gap) but it'll cost you. Surprise, surprise.


Of course, if you're pretty broke, Medicaid will take pity on you and help you pay some of the premiums and will lower your co-pays. But that's only in specific cases.



Still think retirement can be put off for awhile?

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10 Comments:

Blogger Shtinkykat said...

Amen sister! I think another reason why people want to own a home is because it's an outside symbol of wealth and success. I don't own a home but I have quite a bit squirrelled away in my 401k, but no one will know. I try not to let the fact that I'm still a renter bug me, but I have to admit, it still does.

May 18, 2009 at 6:00 AM

 
Blogger DogAteMyFinances said...

I totally agree with this, but for a different reason.

There comes a point -- and I'm there now -- when you just feel like a loser for still renting. You shouldn't have to ask if pale yellow is an OK paint color. You want to mount your flat screen. It might be irrational, but boy howdy is it there.

You can justify it just the same, make examples that are very close to the retirement savings example using historic real estate appreciation, which is obviously iffy now as well. Plus, the house's appreciation is tax free.

That said, I think retirement is way, way more important than a house. Maybe because I delivered too many Meals on Wheels to destitute widows in houses they would not leave.

May 18, 2009 at 6:22 AM

 
Blogger Mrs. Modern Tightwad said...

I completely lolled when I read this. I was just ranting to a friend the other day how parents these days seem to think sharing a room will scar kids for life. I seem to think they would put up with sharing a room if it means they didn't have to worry about their parents long-term care, retirement, or maybe even school loans.

That being said, while I don't think a house is a necessity; I think it can be a practicality. I've been examining our options in Portland, and with housing prices dropping like they have, it might actually be cheaper for us to buy a house than it would be to continue renting.

It kind of leaves me in a quandry. I don't know if I should buckle down and pay off the last of our debt or continue looking for the best ways to reduce our expenses, even if that includes buying a house. (Since neither my husband or I have worked for companies with retirement match we are already woefully inadequate in that department as it seemed better to pay off high-interest debt.)

Luckily, my husband's new job will include benefits and a company match on retirement, so that should be a new adventure. :)

May 18, 2009 at 10:17 AM

 
Blogger Revanche said...

A place to live is a necessity. What form it takes, owned or rented, is a detail that should be dictated by what fits well into your budget and life plans.

So I don't disagree with you.

I think it's foolish to tie yourself to a huge purchase like a house if you have to sacrifice all your other savings in order to make the purchase and the subsequent payments. If that's the best it's going to be, then you're setting yourself up for a struggle just to stay in the house. And you can forget about being prepared or flexible in case of emergencies or unanticipated change.

I'd say a house has always been a priority for me, but always a lower one than getting on the road to financial stability which includes cash savings, retirement savings, investments, and steadily increasing income. A house is not automatically your Home; it's pretty much just a roof + a mortgage/money sink if you buy based on an unrealistic budget that precludes saving for retirement or any savings at all. It's the equivalent of putting all your eggs into one basket.

May 18, 2009 at 11:59 AM

 
Blogger Abby said...

Shtinkykat,

Yes, it is a certain symbol of having "arrived," I suppose. Though there are some folks who argue it's just not worth their time/energy/headaches. Certainly, if I had my choice, Tim and I would have a nice little place, though. Being a renter can still sting, even when you know you're doing the smart thing.


DogAteMyFinances,

While I think you're far too young to feel so bad for "still" renting, I do feel ya. There are times I long for a house. I want to be able to make my own decisions about our living space.

And don't forget house appreciation is only tax-free up to $250,000 (and only if you've lived there consistently) per owner. That may seem pretty do-able, but my dad's mom lived in what was once a starter-home area in Newton Highlands, MA in the 1950s. She didn't sell until the early 2000s. I'd be willing to bet that appreciated something fierce. (And since she bought the house with her first husband, but later remarried, I don't know if her second husband's death reset the base house value or not.)

So there is still the chance of Capital Gains Tax, especially if you end up selling either very far into the future or in the very short-term.


Mrs. MT,

A house can most certainly be a practicality. And if it's within your budget, terrific!

I think the biggest thing to remember is a) a house will beget other expenses, count on it and b) so long as you still have interest-bearing debt, you're essentially adding extra interest rates to your existing debt by taking out a mortgage. You simply need to run the numbers and see if it makes sense: Will you save enough by not renting (and by itemizing) to negate the pitfalls of remaining in debt? Can you get a mortgage with your existing debt levels? etc.

May 18, 2009 at 12:22 PM

 
Blogger Shevy said...

Interesting. I have a competely opposite outlook on this (for myself at any rate, as I can't say that ownership is necessarily right for everyone). Also, I'm in Canada, so many aspects you mentioned are different here.

Our rural home is a major part of our retirement plan. We paid cash for it (under $30K) from the profit I made selling my starter condo. That money wouldn't have done much in our RRSP's (we only have 15 years left to retirement) but it gives us a paid-for place to live for the rest of our lives.

We can live nicely in the rural area on $24K per year, whereas we'd need more than twice that to retire in the city. And, we'll have just about $24K from our Canada Pension Plan, Old Age Security and a tiny annuity from a previous employer combined. That doesn't include any income from our RRSP's (probably about $100/mo by the time we retire).

So, we wouldn't be living the high life but we'd be okay. I'm not worried about inflation. The pension amounts are mostly indexed and our CPP amounts will be higher than calculated because we'll have earned more money in the intervening 15 years.

We don't have to worry about medical costs. I think we can manage the $108/month it costs for a family and at some point that will drop down to the couples rate when Dear Child is an adult. BC also has a great Pharmacare Plan for all seniors. You end up paying about $5 per perscription.

What else did I notice that wasn't applicable here? Capital Gains. There is no Capital Gains Tax on the sale of your principal residence in Canada (although there is for secondary homes and investment properties).

We'd be in much worse shape in retirement if we had to rent. It always makes sense to run your own numbers and make your decision from there.

May 18, 2009 at 3:28 PM

 
Blogger FB @ FabulouslyBroke.com said...

I'd only buy a home if it had an emotional value for me.

Such as having a backyard to BBQ in, a home I could paint or fix up and not say "that's not my problem"... and if the price made sense

If not, I'm perfectly comfortable renting for my entire life. I don't have any qualms about that.

Kids are resilient. They can live and grow up anywhere. I for one, lived for many years in the same room as my brothers because I was scared to sleep alone.

We're SIBLINGS, not alien monsters just because we're different genders...


(any reason why you do comment moderation AND word verification? Isn't it usually one or the other?)

May 19, 2009 at 4:19 AM

 
Blogger Abby said...

FB,

Glad to know that even opposite genders can cohabitate without bloodshed or mental scarring.

As for the comments, thanks for bringing them to my attention. I just sort of guessed about things when I set up this blog. Never revisited them. From now on, the moderation is off. If that creates too much spam, I'll reinstate it and turn off word verification

May 19, 2009 at 11:55 AM

 
Blogger Abby said...

Shevy,

Yes, sorry, I was being a tad America-centric. I don't know much about housing in other countries. I hope it is that easy for you folks. Goodness knows, with Tim's and my health, we may have to flee to Canada one day anyway!

May 20, 2009 at 1:06 AM

 
Anonymous R. May said...

Thank you thank you thank you!

We are raised with this stupid American dream - central of which is buying a house.

I have no use for a house - at least one I'm not paying cash for. If you have a mortgage you don't own a house - you rent-to-own it from the bank.

I think if people really look at the cost of a mortgaged house, including all the maintenance and repairs - they would be surprised to find how 'ahead' they really are.

I will only consider buying if I have the cash to buy it outright. Which means in addition to a fully funded retirement.

June 5, 2009 at 11:57 AM

 

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