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That isn’t what I’ve heard but there’s a strong argument to be made for that choice.
Generally a house is not a proper vehicle for retirement savings, and its value will usually appreciate well below market benchmarks, if at all. (The only exception is if you plan on monetizing it somehow, like buying a multifamily house and renting to others, etc.)
Given housing price inflation, homebuyers must lock up an increasingly significant amount of capital in home equity, starting with the down payment.
This means that, in the vast majority of cases, buying a house has significant long term opportunity costs, considering what that capital would be worth when properly invested. So unless you have already maximized a bunch of other superior savings vehicles and still have enough annual surplus to convert to a down payment, it’s going to downsize and/or delay your retirement.
Owning a home can give you a lifestyle and long term control you don’t have renting but, given how compounding interest works, that control will come at an extremely high price.
If people and corporations were not allowed to treat residential housing as an investment, this problem would diminish over time, but here we are. In America, a house is never just a house. It’s an idea.
My dad bought his first house in the seventies for £17k, he just sold his most recent house for £600k and downsized in to a £400k house. Please tell me about the investments I can make that will make me £200k in cash and provide a house that's fully paid for.
I also don't know where you live, but in the UK, typical rent is going to be far more expensive than the monthly repayment on the mortgage of a similar property. I was paying £1000 pcm for a run down three bed flat, my first mortgage was £568pcm for a big three bed detached house.
My dad bought his first house in the seventies for £17k, he just sold his most recent house for £600k. Please tell me about the investments I can make that will equal that return.
Well let’s say he bought £17k of a garden variety S&P500 ETF in 1970. (Just one of the most common benchmark index funds, a simple way to capture market volatility.) That account would be worth £4,913,700 (28,820.92%) today. If that sounds crazy, you’re not alone. Compounding interest is exponential growth.
I also don't know where you live, but in the UK, typical rent is going to be far more expensive than the monthly repayment on a mortgage.
The main things I try to keep in mind are (1) the cost of tied up capital exceeds the monthly price differential in nearly every case because of the compounding mentioned above, and (2) even if it didn’t, the true monthly price differential of a mortgage payment is often smaller in practice due to the numerous potential “hidden” costs of home ownership.
Again I’m not saying people shouldn’t or that it’s irresponsible or something. Deep down I want to own my home too! It’s just that every time I’ve plugged it all into a spreadsheet it isn’t even close to worth the long term cost.
Edit: corrected calculation error
Do you have a source for that £17k becoming over £28M? I'm not being facetious, but it does sound too good to be true.
I currently have a pension pot worth about £70k and it's only forecast to be worth about £500k in thirty years time (when I would retire), and that is including my ongoing contributions. If there's another way to invest that to make myself a multimillionaire in retirement, it'd be a no brainer.
I used the below link and assumed an investment of 17k in 1970 (that's assuming you have the cash to buy out right, rather than just the deposit required to start paying a mortgage) and it only came up in the low six figures.
https://accuratecalculators.com/historical-investment-calculator
Do you have a source for that £17k becoming over £28M?
This one looks simple enough, but I assume most use the same historical price index. I just used the annualized dividend-reinvested returns between the two dates: 10.913%
Incidentally, you can use that % to get a feel for how interest compounds. On a calculator, input 17 x 1.10913 then press = for each year since 1970 (usually just repeats last step). At first it will appear nearly constant, but note how the annual returns accelerate over time, especially as you approach recent years.
I currently have a pension pot worth about £70k and it's only forecast to be worth about £500k in thirty years time (when I would retire), and that is including my ongoing contributions.
You may want to check what funds they put you in by default. Often the default allocation is a “target-date” fund, which is an actively-managed (insidiously expensive) fund that begins with a modest volatility asset distribution and periodically redistributes for lower volatility as the target date approaches.
IME these funds invariably suck, mostly due to exorbitant fees but also because they are actively managed. It’s rare for any actively managed fund to consistently beat the market overall or as represented by benchmark indexes. (That may seem counterintuitive but the reason is “market efficiency.”) The only reason for active managed funds IMO is if you need moderate chance of gain paired with minimal chance of loss, which only applies closer to distribution.
If there's another way to invest that to make myself a multimillionaire in retirement, it'd be a no brainer.
With a 30 year timeline, volatility is your friend for quite some time. The simplest way to capture whole-market volatility is to just buy ETF shares tracking either Total Market Index or a benchmark index like S&P500. Most of these ETFs have very low fees. This “naive method” is very difficult to beat. Just make sure dividends are reinvested (usually a checkbox) so you don’t come back later to a pile of cash that hasn’t been working for you.
Then comes the most important step: nothing. Don’t mess with it. Buy and hold. Set and forget. Fucking with it (trying to time the market, panic selling, etc) is basically the only mistake you can make. Avoid that and you can rely on statistical probability.
I used the below link and assumed an investment of 17k in 1970 (that's assuming you have the cash to buy out right, rather than starting to pay a mortgage) and it only came up in the low six figures.
It looks like their figure is inflation-adjusted and assumes dividends are not reinvested. The former can be useful if you want to know comparable value. The latter isn’t, because you should always reinvest dividends. (Also it affects the S&P500 especially since that’s a large cap value index where much of the returns are actual dividends instead of just growth of the stock price.)
I couldn't make heads or tails of your link, maybe it doesn't work in my browser. Maybe you could fill it out with the info and take a screenshot?
I'm aware of how compound interest works, I used the link below to insert an investment of £17k over 55 years at 10.5%apr and still only got £4M, which I admit is nice but it's far off of £28M.
https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php
This still requires that you have the £17k upfront which isn't required as I'm talking about buying a mortgage where you'd only need the deposit.
It's worth noting that the average wage in 1970 was £1,204, so it's not like the average man had 17k to invest anyway, it's the equivalent of having over half a million in investable cash today. (This also leads me to believe that my dad bought quite a while after 1970, because there's no way he would have been able to afford a mortgage that size back then).
Edit: I just asked my dad. He bought in 1981, the house was £18,300 and the deposit on that was £1,300. The average wage that year was £7,296.
Shit, you’re right! Correct number is about £5 million. Apparently missed final step and copied the percent (10.954 ≈ 28e3). My bad.
But yeah even if he bought the house in 1979 at 20% equity and house appreciated that much, effective APY over 45 years would be 1.2%. To check: (2%*(6e5/17e3))-45
Anyway it’s just an illustration I’ve given to friends, especially fellow millennials who often mention how their parents’ or grandparents’ house multiplied in value as their motivation for pursuing a house instead of savings.
It’s to show that there’s a better way to save than home equity, because few of us were taught that stuff and it’s not as daunting as it seems. Long-short usually you want as little money tied up in home equity as possible, so when the typical down payments have risen to hundreds of thousands of pounds, it’s quite difficult to justify over renting and putting more into pension.
Lol, retirement.
How old are you that you think you will get to retire? I'm not being facetious. I will never retire. I've accepted it early so I don't get more depressed when I'm old and tired.
Age of old-woman-man in Monty Python and the Holy Grail. And it’s just a term. Figuring out how to save a little and how to grow it is more about creating a safety net, to know I won’t be unhoused again, won’t need to sell plasma for bread or work for assholes. I don’t intend to actually retire, even if that’s an option.