“My idea of an agreeable person is a person who agrees with me.”
–Benjamin Disraeli
Someone will always insist that the earth is flat or that the sun revolves around it. In fact, since people cannot even agree on the obvious, I have decided that unanimous decisions are just abnormal. It is a wonder that the jury system works at all.
So, you can imagine my surprise when it turns out that ninety-seven percent of millionaires—a nearly unanimous number–agree on one course of action and have acted on it. This is according to the granddaddy of wealth studies, The Millionaire Next Door.
No subject ever gets a ninety-seven percent approval rating. Apparently, this behavior on the part of the financially secure is a sort of Holy Grail of wealth management.
So, what do you think it is? A type of behavior? An investment? A secret formula?
No. You may have guessed it, especially if you looked at the picture: they buy a house as part of an overall financial strategy.
YOUR HOME AND YOUR FUTURE
Surprised? You should not be. In fact, according many sources, the early purchase of a home is a reliable indicator of future financial success.
Now, remember, owning a home is hardly a guarantee of anything. Ask anyone who went through the Great Recession. Our house lost one-third of its value almost overnight. Some of my investment properties lost half their value. Many homeowners went broke and suffered permanent financial damage. Many have never fully recovered.
The key point is that, while no guarantee, owning a home gives an owner options. You can borrow against it. You can rent it out, in whole or in part, and gain income. And there are some tax advantages to ownership. You can and should make it part of an overall financial plan. Just understand the risks.
YOUR HOUSE AND YOUR RETIREMENT
Still, if you want actually to retire early there is one fact that cannot be ignored: just under HALF of your retirement expenses are going to be housing related. The source is the Consumer Price Index—Elderly (CPI-E). Given this reality, the only factor that is controllable is ground rent—roughly what you pay on a mortgage. All other costs—maintenance, depreciation, and utilities will rise as inflation does. Nonetheless, fixing the cost of occupying any property is critical to retiring early.
If you get nothing else from this post, please understand how important that is.
Take a look at the future for an individual aged 75 or more. According to the BiPartisan Policy Center (BPC) (2016), median financial assets at that age are a measly $29,000, while home equity is approximately $217,000. Put another way, savings at that age are nearly gone for typical seniors, while home equity can still be used upon sale, or by getting a reverse mortgage, borrowing, or other means.
Owning, paying off, nailing down and fixing most of future housing costs are a key for most people. Their future retirement budget depends on it. The wealthy know this, and overwhelmingly, they act. Many purchase a home as early as they can.
If you are young and have not purchased a house, you may be asking yourself how it is possible to achieve that goal, especially with student loans, depressed salaries, etc. In upcoming posts we will discuss some strategies that can help achieve ownership. Achieving home ownership is never easy, especially not for Millennials.
SUMMARY:
- Purchase of a home is a key part of an overall financial plan for retirement.
- Housing cost is the number one expense in retirement. Paying off your house and reducing housing expenses is a key.
- Real estate ownership has its ups and downs. Expect costs and unexpected unpleasant issues. In the long run, it is worth it, but the ride is not always enjoyable.
ACTION STEPS:
- Make a purchase of real estate a part of any long-term financial plan.
- Begin to find out about the real estate market. Lenders often have primers for the first-time or inexperienced home buyers. Take the time to read them, even if you are not ready to purchase.
- A purchase is not easy. In other sources and in future installments past blog 30, we will talk about down payments, financing, and other hurdles.
Disclaimer: consult with a financial professional before taking any steps outlined here. Not all advice is suitable for your circumstances or investment style.
Sound advice! Our three kids all got their houses and their spouses in a ten month span three years ago and see the strength in it
It is not an unmixed blessing. I have the scars to prove it.
Still, the idea of renting late in life is unappealing. And that is the point. Renting has some sound advantages–but you have to look at many of the decisions outlined here as keys to providing the best possible outcome in the long term.