Small house versus big house strategy

Homes: Why Buying Bigger Is No Guarantee of a Rich Retirement
by Jonathan ClementsWednesday, December 20, 2006

This is one tab the house won't pick up. It's among today's most popular retirement-savings strategies: Buy the big house, hope the real-estate boom continues and then trade down at retirement, thus freeing up home equity that will pay for years of early-bird specials. Sound appealing? Trouble is, you will fork over a heap of dollars -- and you'll end up with a surprisingly small nest egg.

To understand why, imagine you are age 35, have a $400,000 home with a $300,000 mortgage and are looking to retire at age 65. What's the best way to build yourself a nest egg?

You might stick with your current home, pay down that mortgage over the next 30 years and stash your spare cash in stock and bond mutual funds. Call this the "small-house strategy" (though, in many parts of the country, a $400,000 home wouldn't be exactly small).

Alternatively, you could opt for the "big-house strategy" -- trading up to a $1 million home and aiming to pay down the resulting $900,000 mortgage between now and retirement. At age 65, you would then cash in a big chunk of your home equity by swapping back to the equivalent of a $400,000 home.

Which strategy would leave you richer?

Read here:

Forget the Mansion: Why Buying Bigger Doesn't Guarantee a Rich Retirement

Result:

The small-house strategy would give you not double the spending money, but triple.

"The killer is the expenses on the big house," Mr. Farrell says. "It's costing you a lot to carry this $1 million investment. That money is just going out the window, while the small-house guy is investing the money."

There is, however, an upside to buying the bigger home. For the next 30 years, you would live in a grander place. But that just highlights what this is all about. Buying a bigger house isn't an investment. Rather, it is a lifestyle choice -- and it comes with a brutally large price tag.

-----

MONEY PIT
Buying, selling and owning real estate isn't cheap.

• Baby-boomer homeowners spent an average of $2,200 on home improvements in 2003.
• On a $200,000 mortgage, closing costs will typically cost you around $3,000.
• In 2004, home sellers paid real-estate brokers an average of 5.1% in commissions.

Sources: Bankrate.com; Harvard's Joint Center for Housing Studies; REAL Trends