Don’t mistake your nest for a nest egg

Posted by Shelly Eweka.
It may be your biggest asset—but your home shouldn’t form the backbone of your retirement plan.
When I needed to cross the Atlantic recently, I didn’t rent a speedboat for the job. Similarly, as I plan my journey towards retirement, I won’t be using my home as a retirement vehicle.
Call me old-fashioned, but I don’t like the idea of using a financial vehicle for purposes other than what it was designed for. The 403(b), the 401(k), the IRA…these are powerful tools, sleekly designed and refined to perform a specific function—to help you save as much as you can for retirement. Your home, on the other hand, was designed to be lived in.
Invest in the nest
I recently read that more than 75% of Americans age 65 or above are homeowners. This doesn’t surprise me: For many retirees, a home of one’s own represents emotional security and even social status. And funneling money into home improvements, landscaping and maintenance are all ways to invest in the nest.
However, rather than viewing one’s home as a secure nest, there has been a tendency in recent decades—possibly due to the rise of home equity lines of credit (HELOCs) and easy, reverse mortgages—towards viewing it as yet another financial asset or investment. And this is deeply problematic. As they hoard most of their wealth in the form of bricks and mortar, many retirement-unready Americans are eyeing their houses not only as homes but potential sources of income, to be tapped in the event of calamity.
Based on the latest U.S. Census Bureau data (from 2011), for Americans aged 65-69, the median net worth per household was $194,226. But excluding home equity, Americans in this same age group were worth just $43,921. Which is why, when I think about my net worth, I don’t generally factor in the value of my home.
There’s little doubt that millions of us homeowners will move into a smaller, more manageable property one day. But if most of your net worth is invested in your home, you may have no choice but to downsize long before you’re ready to do so. You can’t just draw money from it, as needed, like you would with a savings account. An expensive medical emergency might force you to liquidate the entire thing and, given that the housing market is cyclical, you may find yourself in a down market where you’ll need to sell it while it’s devalued.
The reality of real estate investing
The idea of building up a property portfolio appeals to our territorial instincts—and collecting rent on a second, third or fifth property may seem effortless. But using your real estate as a retirement fund is neither cost-free nor straightforward; it is something you need to consistently reinvest in to yield any returns. Unlike the assets you own in a 403(b) or IRA portfolio, home equity requires constant reinvestment. Houses can be expensive to maintain, and property taxes need to be accounted for when looking at annual returns. They need to be adjusted not only for inflation but for all those maintenance costs, taxes and other fees associated with homeownership (including property management fees, if you’re not physically maintaining the home(s) yourself).
And even if the property is kept in tip-top condition, you’re not guaranteed continuous income; there may be long gaps between tenancies, and there may be issues getting tenants to pay on time or with tenants who refuse to pay or need to be evicted. The risks cannot be overstated.
Owning a single home, or even several units in the same building, does not offer much in the way of diversification. What if the neighborhood goes to the dogs, causing home prices to plummet? This kind of overconcentration of proverbial eggs in one basket can be minimized when you diversify your investments. For example, a mutual fund can sell you a slice from each of the biggest companies in the U.S. stock market across a broad range of sectors.
Don’t get me wrong: I think people should pay down their mortgages aggressively, but never as a substitute for maxing out their retirement accounts. Homeownership undoubtedly offers security—but consider home equity as a slice—rather than the bulk—of a well-diversified portfolio.
Teachers Insurance and Annuity Association of America has sponsored Ask the Expert posts for informational purposes only. Many of the experts are unaffiliated with Teachers Insurance and Annuity Association of America, College Retirement Equities Fund, and their affiliates and subsidiaries (collectively TIAA), and TIAA makes no representations regarding the accuracy or completeness of any information on the posts or otherwise made available by the experts. Statements of external featured experts are solely their own and are not endorsed or recommended by TIAA.
Responses from experts to questions posed by Woman2Woman community members are intentionally general in nature and are not intended to give personal, financial, or specific advice. Some strategies are complex, and more information is often needed to determine the personal needs of a community member. We strongly recommend that you consult with a financial advisor before taking any action based on an expertʼs opinion or other information you obtain from the Woman2Woman: Financial Living site so that all of your personal circumstances can be taken into consideration. Participation in the site does not render the member a client of the expert or of TIAA.
This site is not designed to accept or respond to requests or complaints regarding specific TIAA accounts, products or services. If you wish to discuss an issue of that nature, please contact TIAA at 800-842-2252. TIAA is not responsible for any opinions provided by members of this site. TIAA is not responsible for the content or privacy policies of third-party sites to which you may link.
The TIAA group of companies does not offer tax or legal advice. You should consult an independent tax or legal advisor for advice based on your own particular circumstances.
The material and responses are for informational or educational purposes only and do not constitute a recommendation or investment advice in connection with a distribution, transfer or rollover, a purchase or sale of securities or other investment property, or the management of securities or other investments, including the development of an investment strategy or retention of an investment manager or advisor. The material and responses do not take into account any specific objectives or circumstances of any particular individual, or suggest any specific course of action. Investment decisions should be made in consultation with an investorʼs personal advisor based on the investorʼs own objectives and circumstances.
Experts may not have medical or scientific training. Any information related to physical or emotional health is not intended to be used in place of a consultation with a physician.
TIAA is not responsible for the statements of community members. We may link to posts made by community members only to direct you to topics that may be of interest to you. This does not mean that we agree with the opinions of these community members. Their statements are solely their own and are not endorsed or recommended by TIAA.
June 30, 2017