A new study from HelloWallet, a firm that assists employers who want to provide online financial planning services to their staff, is the lightening rod for a fiery debate – are you better off saving for retirement than buying a home?
According to HelloWallet’s research, some 40 million households would do well to just say no to homeownership. Why? The report found that people in those households would have built more wealth by renting and investing their money in retirement vehicles like 401(k) s, IRAs or other tax-advantaged accounts.
Why renting can make sense
Furthermore, the study found that the benefits of homeownership can be hyped, especially when it comes to the tax benefits of buying a home, worse still if you’re in a lower income bracket, the tax benefits can be a mere pittance.
"Saving for retirement, rather than buying a home, is a better investment for a majority of people," says Todd Kading, managing director of LeafHouse Financial Advisors.
He says retirement investments are tax advantaged, thus the same investment amount that an individual could invest in a house could prove more lucrative if it were invested in a 401(k) or IRA, for example.
Secondly, he points out that retirement accounts are more liquid than are houses. "You could feasibly withdraw some or all of your retirement savings income if you wanted, whereas the assets invested into a home are not nearly as liquid."
Kading also likes the fact that retirement savings allow for diversity. Depending on your home to fund your retirement can be a huge mistake. Says Kading, "A house is a lifestyle, not an investment choice."
Renting also allows flexibility. "This is something that is especially impactful in an economic climate where relocating for a job may be helpful or necessary," says Elle Kaplan, CEO and founding partner of Lexion Capital Management.
Before you give up on the American Dream…
You’ll hear strong arguments too, that the study is flawed. "Renting is no silver bullet," says Joseph Ritter, Jr., a certified financial planner with Zacchaeus Financial Counseling.
For sure, "The results don’t mean people should stop buying houses," cautions Kimberly Goodwin, PhD., associate professor, Parham Bridges Chair of Real Estate and the University of Southern Mississippi.
She says that most cities in the U.S. don’t have a supply of rental property which could support such a change. Additionally, a sudden shift in people moving away from buying and toward renting would change the relative price of each option. If people decide to become renters, that is going to cause the cost of renting to increase relative to the cost of buying, then there would no longer be a cost savings from renting, she says.
For many large families, the rental market is not always an affordable option, adds Ritter.
Stacy Covitz says that when she bought her house in Carmel, Indiana, where renting was high in comparison to a mortgage, "We saved about $400 a month and put the extra toward our retirement."
Critics are quick to point out, "The study makes a big assumption -- that people would actually invest the money that they would have been putting toward a home into a retirement account instead. I’m not sure if this strategy would actually work in practice," says Katie Brewer, a certified financial planner with Your Richest Life Planning. Success depends on discipline.
Furthermore, truth is, home buyers can eventually pay off their mortgage and will not have to pay rent or make mortgage payments during retirement. "Renters on the other hand will need to pay rent in perpetuity over the life time," says Matt Rinkey, president of Illumination Wealth Management. A renter with a $1,000 a month rent payment for the rest of their life will need to accumulate $300,000 to $360,000 of additional assets just to support their rental payments during their retirement, says Rinkey. A homeowner with a mortgage paid off has significant financial security in not having that large expense as part of their monthly budget.
The bottom line?
The key if you choose to buy a home is to buy a house that is affordable. Then ideally, you can have your house and have breathing room in your budget to save for retirement too.
As with most financial decisions, says Rachele Bouchand, director of financial planning at Clark Nuber, "It’s best to step back and take a look at your entire financial picture and coordinate your savings between all your goals. The question shouldn’t be is renting better than buying a house, but what is the right answer for your lifestyle and goals? Renting is not necessarily the ‘right’ or ‘wrong’ answer to success in retirement, but it’s just one factor to balance with your other financial choices."