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Why using your nest as your sole retirement nest egg is a bad idea

Relying on your home as your sole retirement nest egg might be a consideration for many boomers but it’s a very risky proposition in my opinion.  I wouldn’t do this for many reasons.

Reason # 1 – the real estate market, like other markets, is cyclical

In my hometown, the average price of a home in 2011 sold for $344,791.  Compare this to prices in 2007, where the average price of a home in Ottawa sold for $273,058 – a difference of about 26%.  Sure, folks relying on real estate in recent years to pad their portfolio have done very well but I would not want to rely on this great run continuing.  Just like the stock market, what goes up often comes down.  Even if things don’t bottom-out but instead stabilize, who knows for how long.   There are always risks with the unknown.

Reason # 2 – home ownership is not diversification in practice

In a recent Bank of Montreal study, respondents stated they are not confident in their ability to save for retirement.  Because of this, 4 in 10 Canadians are looking at their home to help fund their retirement.  As a boomer, the last thing I’d want to do is put only one egg in my retirement basket.  Using only your home for your retirement nest egg puts too much pressure on one asset class – so you are not diversified.  At some point, retirees will need to transition from their asset accumulation years to their asset withdrawal years and if you only have one asset to withdraw from, that definitely restricts your portfolio options.

Reason # 3 – owning real estate is a privilege, not a right

For 20, 30 and 40-somethings busy with young families or establishing their careers, I don’t think mortgage debt is a huge issue as long as it is being paid down.  I’m probably biased because I’m in this camp myself however my point is receiving the money in the first place to buy a home is a privilege, not a right.  If we were go to back in time, I doubt my wife and I could afford this home at the interest rates of the early ’80s.  We’re ready to withstand borrowing rates of about 6-7% with our current home but it’s really a luxury of first world living to borrow the kind of money we do.

Reason # 4 – who knows what the future holds, home equity included

Related to my previous points home prices have been on a tremendous run over the last decade but nobody knows what the future holds, with interest rates, inflation, the stock market, real estate or anything else.  For this reason, counting on the equity in your home for your sole retirement plan could be disastrous.  For example, if you’re thinking of a reverse mortgage, these products often come along with an age restriction and a cap on the amount of money that can be accessed – that might be very limiting to a retiree on a fixed income.  These products also charge a higher rates of interest.  A Home Equity Line of Credit (HELOC) is an option for boomers, and might be a viable one when interest rates are low, but who knows where rates might be years down the road.  Again, folks might want to refresh themselves on what “normal” interest rates are over a longer trend.

Reason # 5 – just like time the demographics are-a-changing

Demographics may also cause a shift at some point meaning more boomers may be selling than the younger generation is buying.  This will be great for 20- and 30-somethings, who might still be renting and trying to get into the housing market.  This is not so good if you’re a senior competing with other homeowners trying to sell your house and downsize.

I suspect some boomers or seniors nearing retirement will be fine if they only use some real estate assets to fund their retirement, as part of a broader plan.  For others who are focusing on using or leveraging their principle residence to fund retirement – that’s risky game I’m not playing.

Filed in: Houses & Mortgages

8 Responses to "Why using your nest as your sole retirement nest egg is a bad idea"

  1. Mel says:

    Thanks for the great post Mark! I’m renting right now and I’m planning to rent for up to 10 more years while I settle into my career and save money towards a sizable down payment. My goal for home ownership in my retirement is to have a place to live rent-free. The costs of course will be taxes and maintenance instead of rent, but I hope to buy a house in my 40s that will be a house that I can age gracefully in (i.e. mainly on one level, and near some of the more important amenities) and (much) later on in my retirement can sell to help pay for a cushy retirement home :D

  2. I agree that having a mortgage is not a bad start in life or going through life as long as it’s going down. I think having the ability to withstand any interest hikes is very important but I certainly would not rely on the house to fund retirement like many do. Like you mention some people do make a killing over the years but anything can happen. I’d rather spread my wings and know that I am prepared if the walls come crumbling down but that’s just me. Great post Mark. Mr.CBB

  3. Great post! In fact, despite all the bad press he typically conjures, Robert Kyosaki said it best that unless your real estate brings in rental income, it is more a liability than an asset. Hence, I totally agree. Counting on your house as an asset for retirement is a bad idea. Thank you for putting it so clearly.

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