For many Americans, their nest egg is their house. But real estate isn’t a great investment if you’re saving for retirement. Neither are annuities or reverse mortgages.
The average American is more likely to own a home than to have saved enough money for retirement. In fact, for many Americans, their house is their retirement plan: They’re counting on the value of that nest egg to fuel their golden years. But while real estate can be a good investment, it isn’t wise to rely on a house to fund your retirement. To explore why, Barron’s spoke with Teresa Ghilarducci, the Irene and Bernard L.
I recommend that only for very high-income people who have a lot of flexibility. I am not a fan of the reverse mortgage industry. The industry [knows that] a portion of people will default and have to give their house wholesale to the reverse mortgager. They could foreclose on you and kick you out. It’s not good to plan on a reverse mortgage.Annuities can be hard to understand and hard to swallow. The annuities on the private annuity market are too expensive for individuals.
A better option is to just follow a structured withdrawal [from your investment accounts]. The rule of thumb has been 4% every year. If you just withdraw 4% and live on that, you’ll be OK for the rest of your life. Well, returns have fallen a little bit, so [now] 3 1/2% withdrawal is a good rule of thumb. So you can create your own annuity without having to pay an insurance company a huge amount of money.
Well, you probably will. As you move your assets into safer and safer accounts, they probably will just give you maybe 2 1/2%. If you don’t have a bequest motive, like you want to leave all of your principle to your kids or the charity down the street, you’re going to want to eat into your principle a little bit. So plan your withdrawals at 3%, maybe a little bit more if you’re older and you still have a good nest egg. But try to eat into your principle as well as just living off the interest.
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