Is your house sabotaging your retirement?

Is your house sabotaging your retirement?  This is not the question I was seeking to answer when we first discussed this topic.  I had in mind some rather dull lecturing version of “don’t buy lattes,” and “don’t go out for lunch every day.”  I felt like I was Jack.  You know Jack right?  All work and no play.  But then we got to an interesting set of data.

I find it fascinating that housing costs per square foot are about the same as they were in 1973 (adjusted for inflation of course).  Yet new homes are about 60% bigger and have less people in them. Think about that for a minute.

Figure 1 - Median cost of new homes, people per household & square feet per person from 1973 - 2013.

The blue line is the median square footage per new home.  As you can see, it has grown from about 1,500 square feet in 1973, to almost 2,500 in 2013.  The red line is the number of occupants per household and has fallen from around 3 to almost 2.5 over the same time period.  The net effect is a near doubling of square footage per person, from 500 to almost 1,000 square feet per person.

Now, if you are knocking down a fantastic income and can afford it, that’s great!  Go right ahead and build that mansion.  We would love it if everyone was prosperous and could easily afford large homes.  Yet the average American has far too little saved for retirement.  Could there be a correlation?  

The median price for new homes has ranged from $250,000 to $300,000 for the last few years.1 This number is highly dependent on your location. However, consider that if you were to buy a home for $100,000 less, and have a correspondingly lower mortgage, your payment at current interest rates would be about $475 less.2 That’s just for the mortgage. You are also likely to have smaller payments for your property taxes, insurance, heat, electric, and less expense for repairs to the roof and carpet over the years. It is certainly possible that you could free up $700 per month or more.

Let’s say that you decide to do this and free up the $700 per month, some of which you spend. Let’s also say, however, that you put away $500 of that. If you did that for 30 years earning 7%, you would have $613,545. (Future growth and investment performance are not guaranteed; see additional disclaimers below.3)

Source: "The Importance of Being Earnest", J.P. Morgan Asset Management, 2013.

All this to say – if you have too much house, you might be sabotaging your retirement. Remember, you can control some things, and some things you cannot.  How much you spend and save is more within your control than you might think, but only if you choose to make it within your control.

If you want to have a coffee and debate about how big or small your house should be, give me a call at 920-617-6830.

Patrick Stoa

  1. Source of median and average price of new homes:
  2. The calculation of the mortgage savings was determined using a 30 year, 4% fixed rate mortgage. The monthly payment on a $220,000 mortgage would be $1,050.31, while a $120,000 mortgage would be $572.90, respectively. $1050.31 - $572.90 is a savings of $477.41.
  3. This case study is for illustrative purposes only; it is not a representation of any individual person or situation. The investment return figures represented are not intended to reflect the actual performance of any particular security. Individual cases will vary. Investment yields will fluctuate with market conditions. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.

Housing and household data from the US Census Bureau. 

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