Sometime back I ran a poll to check on what are investor’s biggest financial priorities in life. The results have led me to ask another critical question – whether investors should save for retirement or buy a house with money that they have today.
Saving for retirement or buying a house were the top two most important priorities as polled over the last 3 months when I ran this poll.
As of writing, some 400 people have already participated in this poll as you can see below. If you haven’t contributed, here is your chance.
But the question still remains – which is more important ?
Save for retirement or buy a house – the latter is more investor friendly !
When a person begins to earn a decent amount of salary and has idled and whiled away his time cochi-cooing and finally settling down, the need for a roof above his head hits him hard. This is when he begins to hunt for a house. A lesser number of smart investors begin to save for this much much before as they are aware of goal based investing concepts.
A house, in today’s world is a mammoth buy. RBI has just indicated that stamp duty and registration need to be kept out of the home loan and if that is the case, you are looking at around 30% of down payment to buy the house. A 2 bedroom will easily cost around Rs 40 lakhs to Rs 50 lakhs today. 30% of that is around Rs 12 – Rs 15 lakhs.
So a young investor wanting to purchase a property begins to save every ounce of his net take home for this down payment. Needless to say, he does not think about retirement. It takes him probably some years to accumulate this money and buy the house. By that time, the cochi-cooing takes a different level of ecstasy and the family has a few additions. Expenses increase, the EMI begins to kick in, a car finds its way into the household and lo and behold – there is not much left to save.
The goal of save for retirement is put on the back burner till a very late point in life when the reality hits hard that time is running out.
The fact is that practically we buy homes but do not necessarily save for retirement.
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Other goals like children’s education take priority over retirement planning
It really is a no brainer as to which among these two should you go for. While I will come to the answer in a bit, a house is really needed for everyone. It helps you build an asset and you don’t have to cough up money as rent that is eventually lost.
The famed Peter Lynch once said that the first investment that a person should make is to buy a house.
Many people expect their children to support them during retirement. But in today’s world where more and more children are stepping out of the house and going far far away to earn and reside, one cannot trust and assume that during retirement, the kids will take care of parents.
The Indian society has become westernized to a great extent. Gone are the days when parents could expect their children to either fund them during retirement or provide any, apart from moral, support.
Given this, saving for your retirement suddenly becomes important. If you think wisely for a moment and let emotions be on the side, you might be better off planning for two mandatory goals for each child – higher education after the twelvth standard and getting him or her married.
Anything beyond that, say higher education in the US, can be funded by the child himself. This will allow you to channelize that money that you would have spent on your child’s higher education for your retirement.
One of my clients’s learnt this the hard way when he began to do his retirement planning. We realized that he had funds that would last him only for some 7 years and that all the money he should have saved for his retirement were spent on educating his two kids who were now settled in western countries. The poor chap does not even know whether they will fund him.
Luckily for him, he has a decent retirement home to go to which he finds as an acceptable option. But will all of us be as lucky?
So while as a good parent you plan for your children’s goals, ensure you keep saving and investing for your retirement as well.
So between the two goals, both are important and one needs to ensure that he/she can save enough each month to invest for these goals.
The best part of buying a house is that, should you run short of funds during retirement, you can enable reverse mortgage on your house to live peacefully till you die.
You can achive both if you start early and have faith in the power of compounding and in long term investing.