Monday, July 31, 2006

Home Equity Piggy Bank

From Marketwatch:

Many view equity in home as piggy bank

The equity you build up in your home is not a retirement-savings account, although many Americans are tempted to think that it is. But the smartest way to think about home equity, financial planners say, is as a cushion, a spare tire in reserve just in case savings calculations are off or liquid assets run out.

Shelter is a necessity, and so many planners classify the home as a "use asset," a consumer need in the same class as a car or sofa.

"It's a place to live, not a brokerage account," said Sherman L. Doll, a personal financial specialist with Capital Performance Advisors in Walnut Creek, Calif. "But try to convince a Californian of that."
...
recent Securities Industry Association retirement study identified a "wealth effect" that surfaced as homeowners amassed equity in their properties and perceived they had less of a need to save. Factors such as rising interest payments and higher energy prices also pushed Americans to slack off when it came to lining their retirement nest egg, the study concluded.

For many American homeowners, nearly half their net worth is based on the value of their home, the study found. At the same time, the number and percentage of households holding a retirement account such a 401(k) or an individual retirement account have fallen since 2001, and nearly half of American households are not saving at all.
...
"There is value there, but many mistake what that value is. For instance, if a person owns a $500,000 home, they think they have a lot of money saved up," he said. But "the biggest retirement benefit of owning a home is to have it paid off and have the privilege of living there without having to make payments or pay rent."
...
He points to the "liquidification" of real estate value as a problem for many Americans, especially for those who have most of their net worth tied up in their homes.

"If that's all you have, or it's a critical part of retirement income, you shouldn't be spending it before you retire," he said. For some tapping into home equity is akin to "spending retirement savings today," he said.

It's a change from previous generations, when people worked toward paying off the family house so they could hand it down to their children, he said. Future generations would do well to learn from the experience of the boomers and start saving — and early.

1 Comments:

Blogger thatbigwindow said...

I met a guy this weekend who put all his money in "investment condos" and doesnt even contribute to his 401k

ughh

7/31/2006 07:23:00 AM  

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