Most people focus on their investment portfolios in deciding whether they can retire. Yet by doing so, they often ignore their most valuable possession: their home.
Where the money is
It's natural for people to pay more attention to their investments. After all, you have a lot more control over financial assets: You can buy, sell, or trade one asset for another as often as you want. There's also instant feedback on your actions: You can check your portfolio value several times a day and constantly monitor your progress toward your financial goals.
In contrast, your home may not seem like an exciting investment. Even with companies like Zillow and HouseValues (NASDAQ:SOLD) providing up-to-the-minute estimates of your home's valuation, buying or selling a personal residence isn't exactly as easy as clicking the trade button on your broker's website. Yet according to statistics from the Federal Reserve, the average family has about 60% of its total assets locked into residential real estate, as opposed to about 35% in financial assets like stocks, bonds, and mutual funds. For the typical household, your home isn't just your castle -- it's your piggybank as well.
Meanwhile, concerns about falling home prices are having an impact on stocks in a number of related sectors, including homebuilders like Toll Brothers (NYSE:TOL) and Pulte (NYSE:PHM), mortgage lenders like Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C), and home-improvement retailers like Home Depot (NYSE:HD) and Lowe's (NYSE:LOW). If you're not careful, you may be doubly exposed to a continued decline, as both your investment portfolio and the value of your home may leave you with losses in years to come. You can't afford to make the wrong choice with your biggest asset.
Should you count your home?
Many financial experts disagree on how you should treat the equity in your home in your retirement planning. As our own Mrs. Riches discussed last month, decisions about whether or not to sell the family home go beyond mere financial considerations. You may like your home, but worrying about increasing needs for maintenance and upkeep may not be how you'd like to spend your retirement years.
Of course, if you're dead set on selling your home immediately when you retire, then you can simply wait until you cash in and then add the sale proceeds to your investment portfolio. Figuring out what to do if you want to stay in your home during some or all of your retirement years, on the other hand, presents a greater planning challenge.
Asset allocation and your home
Most investors are comfortable with the concept of asset allocation. Yet it isn't immediately obvious how to treat the equity in your home in a typical asset allocation model. Although a residence is similar to a bond in that it provides a constant stream of value (by saving you from having to pay rent), the average home also appreciates in value over time like a stock. So how should you treat it?
In this month's issue of Rule Your Retirement, the Fool's retirement planning service, Foolish expert Robert Brokamp goes through several options for incorporating your home into your financial plan for retirement. He analyzes the investment component of home prices over time in order to help you make the proper adjustments to your overall asset allocation. You can get the full scoop risk-free with a 30-day trial subscription, which will also let you read past issues and special discussion groups. You can even use our unique planning tool that will help you make a financial plan you can use to enjoy your retirement years in style.
Control your retirement destiny
Amid all the complexity of this topic, one thing is certain: No single answer is right for everyone. By considering all your options, including reverse mortgages, personal residence trusts, and even selling your home to your children, you'll be able to make the choice that's right for you.
Fool contributor Dan Caplinger made his first mortgage payment yesterday, but he's hoping for more equity in a few years. He doesn't own shares of the companies discussed in this article. HouseValues is a Hidden Gems recommendation, while Home Depot is an Inside Value pick. The Fool's disclosure policy always helps you.
