Many people consider their home to be their best investment because they get to live in what they hope is a one-way street to real estate appreciation. People’s homes are often the largest percentage of their net worth. However, as I often remind clients, it may be fine to enjoy living in a nice house, but the house should be considered as your residence and not necessarily your retirement nest egg.
Home is certainly where your heart is, but planning on funding your retirement from the value of your home is risky. This is because real estate prices don’t move consistently, and there’s no guarantee that the price you will get for your house will be able to support your retirement. Turning home equity into cash in your hand is not easy.
Be wary of being paper rich but cash poor. If the majority of your assets are tied in your house and you need cash, you have limited liquidity. Home equity loans aren’t prudent if you are on a fixed income because you may not have enough income to cover the monthly payments due on the borrowed money.
While real estate may appreciate, in many cases real estate prices for new homes have done only slightly better than returns on low-risk Treasury bills. Even low returning Treasury bills have an upside: you don’t need to call the repairman every time something breaks.
Even if current real estate prices seem to be climbing, that trend will not necessarily continue. Don’t bank on the fact that your home’s appreciation will leave you with profits after you downsize and/or rent for several years. Depending on where you choose to retire, “smaller” may not mean “cheaper.”
While your home may be your nest, don’t put all your eggs in it. Diversify your investments and don’t lock all your wealth in your house. Read this piece for more about the importance of diversifying your investments: Profile-Financial.com/reduce-risk
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published February 18, 2015. Updated June 2021