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Jonathan Clements: In Retirement, A Big House Can Lead To The Poor House
“If you’re going to buy an $800,000 house, the real cost is close to $2 million,” he says. “You have to ask yourself whether you can afford it. It’s a tough one to fight against, because people still have this perception that a home is a good investment. But most of the time, it’s a money pit.”
Clements has clearly run out of good investment related ideas to talk about. Adding compounded interest from a 30-year mortgage to the actual "cost" of a home in an attempt to shock us grossly oversimplifies and distorts the equation.
It's an elementary consideration to start with. School children should understand the concept of compounding and how it may work both for and against us. However, at today's historically low rates, taking on a 30-year fixed-rate mortgage might well be viewed as a smart move. Does he bother to mention that? Or does his affection for fixed-income investments blind him to the possibility? If you're as smart an investor as I suspect most here are, your portfolio's growth (even after taxes) over those 30 years should well exceed the cost of that mortgage.
There are other glaring omissions from the analysis. Clements conveniently overlooks mortgage related tax deductions. Or the fact that over time housing has proven to be an excellent investment which has appreciated along with the cost of living. Here he might do well to compare the cost of home ownership with that of renting over the same period. As far as retirement goes (seems to be the crux of the article), a fixed-rate mortgage has much to offer from a financial planning standpoint. Think about it. Your monthly mortgage payment is "locked-in" for the length of the loan. How many other monthly budget expenses can you say that about? As your (possibly tax-sheltered) investments grow over that period, your income stream should increase, making those monthly mortgage payments progressively smaller in real-dollar terms.
What's next from Clements? Don't splurge on too big a yacht or too luxurious an auto? Do you really need that pool or jacuzzi? How about those expensive cruises (talk about a non-productive investment)? ... Not to belittle the virtues of frugality, living within one's means and making prudent budget decisions. They deserve to be discussed here in the off-topic forum. But, if you're going to throw-up 25-30 or more links a day, how about some selectivity?
WSJ is pretty good though not as good as in years past. Yes I do know they are all under the Dow Jones umbrella. That doesn't make things better in of itself.
@hank, Actually MW runs numerous articles on yachts, luxury automobiles, vacations, etc. They have so many filler pieces you have to dig to find anything financial or market related and those are generally vanilla pieces.
It's more like People magazine than it is anything market related.
Comments
It's an elementary consideration to start with. School children should understand the concept of compounding and how it may work both for and against us. However, at today's historically low rates, taking on a 30-year fixed-rate mortgage might well be viewed as a smart move. Does he bother to mention that? Or does his affection for fixed-income investments blind him to the possibility? If you're as smart an investor as I suspect most here are, your portfolio's growth (even after taxes) over those 30 years should well exceed the cost of that mortgage.
There are other glaring omissions from the analysis. Clements conveniently overlooks mortgage related tax deductions. Or the fact that over time housing has proven to be an excellent investment which has appreciated along with the cost of living. Here he might do well to compare the cost of home ownership with that of renting over the same period. As far as retirement goes (seems to be the crux of the article), a fixed-rate mortgage has much to offer from a financial planning standpoint. Think about it. Your monthly mortgage payment is "locked-in" for the length of the loan. How many other monthly budget expenses can you say that about? As your (possibly tax-sheltered) investments grow over that period, your income stream should increase, making those monthly mortgage payments progressively smaller in real-dollar terms.
What's next from Clements? Don't splurge on too big a yacht or too luxurious an auto? Do you really need that pool or jacuzzi? How about those expensive cruises (talk about a non-productive investment)? ... Not to belittle the virtues of frugality, living within one's means and making prudent budget decisions. They deserve to be discussed here in the off-topic forum. But, if you're going to throw-up 25-30 or more links a day, how about some selectivity?
Regards,
Ted
WSJ is pretty good though not as good as in years past. Yes I do know they are all under the Dow Jones umbrella. That doesn't make things better in of itself.
It's more like People magazine than it is anything market related.