Monday, June 4, 2007

Saving money for retirement - Part V

As previously stated, due to an uncertain future of tax rates, health insurance costs, college costs for kids, changing government regulations, and increased life expectancies, I believe it is near impossible to predict how much we'll actually need to save for retirement. Therefore, the amount you need is A WHOLE LOT! That's all you need to know - you need A LOT. And if you need a large pile of money for retirement, you need to start saving now. The sooner you make the pile of money "sorta big," the bigger it will be upon retirement.

Here is the fifth pitfall that I believe you need to avoid on your road to retirement:

5. Buying more house than you can afford

Purchasing anything that's more than you can afford is obviously a problem! But purchasing a house that's more than you can afford is a real retirement killer. That runs counter to the idea that your house can actually be a vehicle to drive towards retirement. I argue the opposite - that you should buy a house well within your means, or even below your means, while still meeting your day-to-day needs. Then, as previously espoused, pay your monthly payment each month, do not prepay on principal, and stash the remaining money in the market.

I also have an extensive post on this subject here.

Simply put, it is much more difficult to get your retirement money out of a house than it is a retirement fund. For one thing, to get your retirement money out of your house, you yourself might have to get out of your house! Unless you plan on using a reverse mortgage, you'll have to sell your house and downsize, and I don't think many people understand how that's going to make them feel in the future.

Even I am somewhat guilty of this. We bought a lakehouse back in 2005. A small little place, but still so much fun. With our primary residence and our lakehouse, we're still living below our means and are able to save for retirement each month. But, one of the justifications in my head for the purchase was, "I'm young, I should just do this now. If I get to retirement age and I don't have enough saved up, I'll sell the place." Yeah right, I love that house! I love drinking beer by the lakeside, I love canoeing, playing the bimini ring game I set up, playing ping pong, and on and on. It's a blast - I will post some pictures sometime. Needless to say, I'm going to make damn sure I have enough retirement assets such that I'll never have to sell the place.

I have previously advocated buying a house instead of renting, and I still believe that. But I do not recommend "stretching" when purchasing your house. Find the house that's right for you, that you can fall in love with. But don't overpay, and never live beyond your means.


PF101 said...

I see this a lot and it's unfortunate. I see couples buying 4-5 bedroom houses and struggling to afford them when they aren't even planning on having kids any time soon. Why not get get a smaller house that you don't have to stretch to pay and move your way up as your family grows?

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Easier said than done.