- The American dream is changing, with homeownership no longer at the top of the average American’s priority list. By a narrow margin, saving for retirement has taken the top spot.
- However, despite comfortable retirement being the ultimate goal, an overwhelming number of Americans have little to no actual savings in the bank.
- Creator of Paychecks and Balances, Marcus Garrett shares why he and the rest of America are focusing what money they have on their golden years instead of buying a house.
I made a choice to prioritize saving for retirement over homeownership, and I’m not alone. In a recent GOBankingRates survey, 29 percent of respondents indicated that their primary savings goal is saving for retirement. Saving for a home was a close second at 27 percent.
Whether retirement or homeownership was their primary savings goal, however, the survey found that almost three in four respondents had less than $5,000 saved and one in three had $0 in their saving account. The primary obstacle to saving more money each month? “Living paycheck-to-paycheck.”
Pulitzer Prize-winning columnist Ellen Goodman described this phenomenon best when she said, “Normal is getting dressed in clothes that you buy for work and driving through traffic in a car that you are still paying for in order to get to the job you need to pay for the clothes and the car, and the house you leave vacant all day so you can afford to live in it.”
With so many people struggling to save, it begs the question: With what little money you have to stash away, is it better to save for retirement or buy a home? Let’s run the numbers to make the informed choice.
Retirement Saving Is My No. 1 Focus
If you can afford to save for retirement and pay off your mortgage at the same time, you are in the minority. The AARP found fewer and fewer retirees have paid or plan to pay off their homes before retirement. In 2018, 44 percent of Americans had a mortgage despite being retired.
If you’re already struggling to live on your after-tax income, this might further justify using the benefits of pre-tax contributions and the need to take advantage of your employer match, if available. These combined benefits can help accelerate reaching your retirement savings goals. Further, unlike paying for a home with after-tax money, the benefits of compound interest can help expand your savings in these legal, tax-sheltered accounts long before the IRS gets their hands on your hard-earned income.
While I’ve chosen to prioritize retirement saving, this doesn’t mean reaching my retirement goal is any less daunting or a shorter journey than most who choose to pay off their mortgage. As I’ve said in the past, even assuming a reasonable return of 7 percent, I would still need to invest the following each month — depending on the age I start — just to reach $500,000 by age 67:
Age 25: $181/mo.
Age 30: $260/mo.
Age 35: $379/mo.
Age 40: $560/mo.
Age 45: $851/mo.
I can no more guarantee that I will reach retirement age than homeowners can guarantee they’ll reach their final loan payment. Each of these financial priorities is a calculated risk. The point is that when deciding which you should prioritize, homeownership is not always the clear winner–and, more importantly, it is hardly ever the better investment long-term.
More on Saving: How Much You Should Have in Your Retirement Fund at Every Age
Home Ownership Is Not the Best Investment Choice
What homeownership is: a reasonable way to force you to save. What homeownership is not: the best investment choice.
For those who believe renting is a waste of money, you might want to rethink your stance. You’re likely completely ignoring the additional expenses homeowners face, which include, but are not limited to: a (usually significant) downpayment, limited mobility, and out-of-pocket liability for maintenance and repairs. For renters, a landlord handles these costs, but homeowners are burdened by them.
Further, unless you are fortunate enough to live in all but the hottest real estate markets in the United States, you might continue to run the risk of a low return on your housing investment. On our podcast Paychecks & Balances, we did an interview with Kirk Chosolm, wealth manager, who found that a $625,000 house costs you well over $1 million to own. Factoring in inflation, interest and state-specific expenses, and assuming you made an original deposit of 20 percent, your true cost of homeownership may net you as little as $1,430 after 30 years.
Do You Know? The Cost of Renting vs. Owning a Home in 50 Cities
If these numbers conflict with investment advice you’ve read or heard before, it’s probably because the advice presented two distinctly different ideas as one concept. Yes, real estate is a sound investment. Yet, most homeowners are not real estate barons of the modern 21st century. Your typical homeowner has one loan, and their one loan is for their primary residence.
What goes undisclosed in most conversations advancing the one-size-fits-all benefits of homeownership is the fact that, in reality, most homeowners will never pay off their homes in the first place. According to the U.S. Census Bureau’s American Community Survey, only one in five housing units (includes trailers, apartments and houses) were owner-occupied without a mortgage. Even an optimistic read of these numbers indicate that people cannot or do not prioritize paying off their mortgages, choosing instead to refinance, upgrade or downgrade during the life of the loan. Statistically at least, people are just as likely to meet their maker before they meet their final home loan payment.
If you no longer trust polls or surveys, you can perform a mental survey by taking a moment to imagine the list of all your friends that celebrated purchasing a home and compare that to the much shorter (likely nonexistent) list of all your friends that celebrated paying off a home. With this in mind, it is more accurate to refer to your average homeowner as a home loan owner.
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