In Part 1 we dealt with retirement plan accounts and how to steer clear of trouble. For many, other than retirement accounts (and human capital), their primary residence may be considered their next largest asset. The problem is, a house is not necessarily an investment asset that can be readily converted to cash for future spending. Let’s look at some of the specifics.
Doing the Math
Many individuals have a somewhat erroneous view of what their house is worth as a starting point. The past half dozen years has dampened this somewhat but we still see clients that think their house is so unique and so special that it will command a significant premium over the current market. We can all hope that proves true but many times it does not.
My wife and I have been blessed to live in the same house for over 25 years. The house is almost 75 years old and we are but the second family to own the house. It indeed has many unique and unusual features. That said, based on Zillow (a website for house prices), our house has appreciated at about 3% per year after subtracting out major improvements. Perhaps the rate of inflation was a bit over 2% for this timeframe, so the house appreciated at the inflation rate plus 1% per year. Not bad, but not the premium returns expected from some other investment assets.