Traditional financial advice typically tells savers to put retirement first — even before homeownership. That’s because over the long-term, the stock market tends to outpace real estate and there are tax advantages to putting money in a retirement account.
But retired homeowners are in a much better financial position than their peers who have rented. So it might make more sense to encourage younger savers to prioritize buying a home, despite the very real challenges of high home prices and interest rates.
Millennials have higher average 401(k) balances than Generation X did when they were the same age, but they're not any better off financially, says Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute. A lot of that has to do with being less likely to own a home. That doesn’t bode well for later on.
“The benefits of homeownership can't be overstated in retirement,” says Copeland.
For older homeowners and older renters with similar incomes, there’s a significant gap in net wealth. A big portion of that is due to home equity, but homeowners also have more non-housing wealth, too. Homeowners age 65 and over in the highest income quartile had a net wealth of close to $1.3 million compared to $334,150 for renters, according to Harvard University's Joint Center for Housing Studies (and this was based on 2016 data, before the big run-up in home prices).
For the majority of Americans who haven't put enough money aside for retirement, a home has often been their saving grace. The elderly poverty rate is around 10%, but would be much higher without the robust rate of homeownership among older Americans, says Chris Mayer, a real estate professor at Columbia University’s Business School. A home gives you a roof over your head, and you can always sell it if you really need cash.
Then there's the budgeting stress that can come with renting. Studies show that housing accounts for a much bigger chunk of total expenditures for older renters than for owners. This is even more apparent for low- and middle-income households. In turn, older renters tend to have more credit-card and health-care related debt, and less cash savings, than homeowners.
Plus, the unpredictability of rent increases can wreak havoc when retirees are on a fixed income. Sure, homeowners may have to deal with property taxes and maintenance, but those seem relatively minor considering the double-digit jump in rents during the past year. (Some cities, such as New York, offer rent stabilized apartments, but that isn't the norm in much of the country.)
Even before the pandemic, about 55% of rental households headed by someone age 65 and over were cost-burdened, meaning more than 30% of their income went to housing costs, data from Harvard's housing center shows.
No wonder retirees who rent report lower levels of retirement satisfaction.
Given the importance of homeownership to a secure retirement, it's especially worrisome that the homeownership rate among older people has been declining, and even more precipitously among people of color. In 2004, 81.7% of households headed by 50-64 year-olds in the US owned a home. That number was just 75% as of last year, setting this group up to enter retirement age with lower homeownership rates than those of the previous generation at the same age, according to Senate testimony by Harvard's Jennifer Molinsky.
Still, there are some caveats. You need to save at least some money for retirement even while you’re prioritizing a down payment. If your employer offers a 401(k) match, make sure you contribute at least enough to take advantage of that free money.
It's also important to remember that the benefits of homeownership in retirement are greatest for those who have paid off their loans. Homeowners who enter retirement still paying off a mortgage — something more retirees are doing than in previous years — tend to spend more each month on housing costs than renters. (At least it's a fixed expense, provided it’s a traditional mortgage.) So trying to pay off your mortgage before retiring should still be the goal.
But that’s all the more reason to focus on saving that down payment. The typical age of a first-time homebuyer is now 36, the oldest on record, according to the National Association of Realtors. The older you are when you buy, the more years you’re missing out on those home equity gains.
For many prospective buyers, rising mortgage rates and high home prices are delaying homeownership. Given how crucial a home can be to a secure retirement, let's hope today's sidelined buyers don't give up on it completely. Maybe that means buying a smaller home, or even borrowing from your 401(k) — but it'll be worth it.
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ABOUT THE WRITER
Alexis Leondis is a Bloomberg Opinion columnist covering personal finance. Previously, she oversaw tax coverage for Bloomberg News.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
