Is paying off your home saving for retirement?
For most Americans, a home is the first appreciating asset they will own. Unlike stock market investments, the housing market is relatively stable, and most homes tend to appreciate over time. This fact has some Americans asking the question, “is paying off your home saving for retirement?” To some extent, the answer is yes.
Zillow reports, from January 1996 to November 2017, suburban homes appreciated 112% and urban homes appreciated an astounding 195%. This data includes the multi-year Financial Crisis, during which many homes saw a steep depreciation in value. Last month, the 20-city S&P CoreLogic Case-Shiller home price index appreciated 6.4% year-over-year and has hovered around this rate each month for the past few years. Higher-cost metros in the Pacific Northwest, California, and other western states have seen double-digit rates of appreciation. Even with market fluctuations, a responsible homeowner who pays their mortgage on time and takes care of their home, will likely see the home appreciate in value over time.
Consider this scenario, you finance a home that costs $315,000 with a 15-year fixed rate mortgage and it appreciates at a rate of 8% annually for the next 15 years. Once you’ve paid off your mortgage loan, the home would be essentially worth $1 million. Homeowners can access home equity through cash-out refinances and home equity lines of credit, even if they have not paid off their home.
When you retire, in addition to savings, you’ll also need a place to live. Investments in 401(k) and IRA accounts accumulate retirement savings but will not put a roof over your head. On top of investments in retirement accounts, owning a home is safe way to ensure a comfortable retirement.
Taking a diversified approach to saving for a retirement, like automatically contributing to an employer-sponsored 401(k), especially if there is a matching opportunity, and investing in other stocks and bonds, is a good way to set yourself up for a sound financial future. But remember your home when calculating retirement savings. Stocks and bonds tend to have a higher return than real estate, when you’re a shrewd investor who actively participates in the market. Yet, responsible mortgage repayment is a passive investment, that you have to make anyway, and an easy addition to your retirement savings.