Daily Gains Letter

Relying on Housing Recovery for Your Retirement? You Shouldn’t

By for Daily Gains Letter | Mar 8, 2013

DL_Mar_8_2013_MoeWhen it comes to retirement planning, there isn’t a one-formula-fits-all approach; rather, a plan that changes according to economic conditions with a long-term focus in mind may prove to be the best one—it adapts to the changes, and acts accordingly.

With that in mind, consider Ameriprise Financial’s recent finding. The leader in financial planning found through its “Retirement Check-In Survey” that almost half of working Americans between the ages of 50 and 70 expect to pay for their retirement expenses with equity in their homes. (Source: New York Times, February 5, 2013.)

This may sound like a normal scenario for some, but what’s troubling is that the housing market in the U.S. economy still hasn’t recovered since the housing slump of 2007–2008—nowhere close to providing equity to the home owners. Look at the chart of S&P Case-Shiller 20-City Home Price Index below.

dl_03082013-image001Chart courtesy of www.StockCharts.com

The most-quoted index of the residential housing market in the U.S. is still below the level it was in during the housing boom. It was above 205 in early 2007, and currently staying around 146—which shows that the housing market is still underwater by almost 30%.

Those who bought at the peak of the housing boom, their home prices on average will have to go up more than 42% to just break even—that’s no equity in home and no loss.

If you fall in the category of retirement planners who are banking on their homes to pay for retirement expenses, then the question arises: should you worry? The answer is simply, “no.” It is certainly true that the housing market in the U.S. economy isn’t anywhere close to where it was before housing downturn, but there are still other ways to save for retirement.

The idea behind retirement planning is to focus on the long run, and not letting the downturn discourage you.

If you rely on the housing market, it can take some time to recover and for you to break even. In 2012, the S&P Case-Shiller Index increased from 136 to 146—a 7.3% increase. If we assume the housing market continues to go up at this pace, then it can still take roughly another seven years for you to get to the breakeven point—a significant number of years.

In the meantime, instead of waiting for the housing market to completely recover, those who are planning for retirement can make some changes to their lifestyle; cut some expenses and save a portion of your income, and look to invest in cash-paying assets.

A good point to start may be real estate investment trusts (REITs) or dividend-paying blue chip stocks. Why? The reasoning is very simple: cash-paying assets can help investors increase their savings. As I have previously discussed this concept in these pages, dividends add to savings and they can make up for lost time.

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