Your Home is a Nest, Not a Nest Egg

A recent headline for an article about property renovation in the UK's Telegraph hits the nail on the head, when it comes to where your home fits in your retirement plan. Your home is a nest. It's not a nest egg.

We've often heard what a “great investment” a home is or that our homes are our largest single “investment.” It’s true that some home values go up over time. When you sell your home, you will sometimes (but not always) get more than you paid for it. But even if you sell for more than your purchase price, people often don’t take into account how much they’ve spent while they owned the home. First there is property taxes and insurance. Then there is the mortgage interest on your home loan that can make the home cost double or triple the purchase price over the life of the loan. Next their is the cost of maintenance. You may have to repair the roof, keep the landscaping looking nice, fix leaky toilets, paint, spruce up the bathroom or kitchen from time to time, etc. Then there are the selling expenses like fees charge by the realtor (often 6% of the sale price) and closing costs. Finally, there’s inflation to consider. The value of many homes doesn’t go up any faster than inflation, so after paying all the mortgage payments, repairs, insurance premiums, taxes, selling expenses etc. you’re actually losing money. And as the current housing crisis has shown us, the value of your home can go down, sometimes substantially.

So while a home is technically an investment, it’s often not a good one, especially if you live in it. Therefore, you should exclude the entire value of your home from your calculations of your net worth and your retirement nest egg, unless you’re renting out rooms (then you can include the present value of the rental income in your calculations) or you have a firm contract to sell your home and not reinvest the proceeds in another home (but then, where will you live?).

But what about reverse mortgages, you ask? It's true that reverse mortgages are available to tap into some of the value of your home (if any). However, I still wouldn’t include the untapped funds available through a reverse mortgage in your net worth calculations. Instead, I’d keep whatever you could borrow with a reverse mortgage in the back of your mind as a catastrophic reserve, in case everything else in your retirement plan goes wrong.