Yahoo has a list of 10 retirement pitfalls and I'm going to list and comment on them all. Here's today's pitfall:
Buying more house than you can afford: Purchasing a bigger house than you can afford can do huge damage to your retirement fund. This is because you're placing all your money into your mortgage instead of investing a portion of it for retirement. While a house does have some tax advantages on the mortgage loan, they are not nearly as good as the tax advantages of a 401(k) plan or an IRA. It's also much more difficult to get your retirement money out of the house than from a retirement fund. While housing as an investment is something you might want to consider to create more wealth, your own house should not be viewed as a retirement investment, and you should make sure that you can pay your mortgage and contribute to your retirement fund at the same time.
Ha! They're singing my song now!!!!!
Buying a house you can afford is a key part of my formula for buying a house and is also recommended by several financial "experts" including Suze Orman.
Now I must admit that it's tempting to try and buy the biggest house you can afford (we're going through this process now as we look at homes -- trying to balance needs and wants.) But for the sake of your long-term financial health, you must control yourself, take a realistic look at your finances and then decide what size of mortgage you can afford. Because if you stretch too far, you're be tied to a financial anchor for the next 30 years that will pull you down, down, down.
Although I agree with this, I am tempted by the idea of having equity release on retirement. Not for my main retirement fund you understand, but for extra frivolous money. I'm not planning on leaving a great sum as a legacy so why not access the money and spend it.
Posted by: plonkee | June 13, 2007 at 07:47 AM
My wife and I were discussing this just the other day. We purchased our house just before we were married. We did not buy more house than we would afford, but we did buy more house than we needed... then. Now here we are six years, two kids, and a dog later and we are happy that our house still "fits". It would have been much more expensive and inconvenient to have started initially in a smaller home, sold it, and then moved to a bigger one.
As for house versus retirement, it is not even a fair fight. While a home certainly has value and will probably appreciate, it is NOT a spendable asset. The only way to truly access the equity is to sell it, but then where are you going to live? Other real estate options will have also appreciated.
Posted by: Art Dinkin | June 13, 2007 at 10:08 AM
I'd have to agree that buying more house than you can afford is a serious pitfall in financial planning. The major drawback is that it really limits your options in my opinion. Not only will it decrease the amount of money you can put away for retirement but it also ties you down to whatever job you have at the time because you'll probably make some pretty large mortgage payments in relation to your income. This may be okay if you love your job but if you get tired of it or want a career change having to make the house payments may put your dreams out of reach for a while.
Also I think having a big house (more than you really need) just encourages consumerism. You're tempted to furnish all those big rooms so the place doesn't look "bare" and buy junk you don't need because you have a place to put it. It's just a viscious cycle.
Posted by: Edwin | June 16, 2007 at 01:57 AM