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 or house 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.
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 twelfth 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.
You can save for retirement or house.
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. The money he should have saved for his retirement was spent on educating his two kids. And kids 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- Thats Great! Ensure you keep saving and investing for your retirement as well.
So between the two goals, both are important. 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 Reverse Morgage. If you run short of funds during retirement, you can enable reverse mortgage.
You can achieve both if you start early. Have faith in the power of compounding and in long term investing.
There are many goals in your life. All these things should ideally be part of your goals. Probably, if you ask which one should take the first place, It would be Buying a house at the initial stage of your life and retirement at the later stage.
@Manickkam, This later is what catches everyone unawares. I don’t think it can be later.
You start early, you finish early. Don’t agree ?
@Radhey Sharma, Planning for retirement is like setting aside a amount of money towards it till the age of retirement. Planning for House is in the same way till you get your house.
What I meant was the amount of money towards retirement would be reduced till the first goal planning for house is achieved.
But still, it would get some importance but not as much importance as buying house. So, probably the cashflow should be increased after the house goal is met towards the retirement goal. That is where the later stage is mentioned.
@Manickkam, Ah, thanks for the clarification !
@Manickkam, The problem with planning for the retirement at the later stages of your career is that you will be a conservative investor by then and you become risk averse. You might need to invest more to achieve your retirement corpus since you will be investing more on a low risk investments at this stages of your life. If you start planning for your retirment in the initial stages of your career then you can opt for high risk high return products ( I am refering to quality Equity MFs here) and your monthly outgo will be a very neglegible amount towards the realization of this goal. The Home loan EMI burden might not affect you much from making contributions to your retirement corpus if you begin early.
@Shanil, Agree with Shanil, it is important to start for retirement planning at early stages because you have appetite to invest in equity for long term and it may not be the case at later stages. Equity can help you build a corpus faster than any other instrument.
I also mentioned that buying a house should be part of retirement planning. e.g. if you are looking at a house costing 40 lakhs, you need to plan for 8 lakhs only and rest can be taken as home loan. Then focus should be on building retirement corpus. You can also do tax planning for principal and interest components of home loan [post DTC things might be different].
@Vivek K, Yep, point well taken.
@Shanil, Exactly, you got that bang on. START EARLY is the mantra. !
Excellent article. For me Retirement Planning comes first. I don’t understand why in our country more importance is given to children education. If you see in other countries parents provide basic education to children and then either take loan or work part-time and complete higher education.
Rakesh
@Rakesh, There is excellent bonding between parents and children. For most of them, it is the first choice. Literally short term goals are the first choice. If I am at the stage of my life with a kid and if she is studying in some school, I would want her to get best education, whatever the cost may be. All the other goals may take a backseat and would be achieved in couple of years later.
But still all of them mentioned above will remain as goals.
@Manickkam, Emotional bonding leading to emotional hazard maybe. I think you are right that this is what actually happens.
@Radhey Sharma, This is why India is Still INDIA. 🙂
@Manicckam,
I wouldn’t say excellent bonding but emotional bonding. I have seen many cases wherein parents go to the extent to give their children good/abroad education. And then what happens is they settle overseas and don’t bother about their parents.
Parents spend all their life-savings on their children’s education with the hope that they will look after them when they get old.
Rakesh
@Rakesh, I would agree here.
I think for higher education like MBA and all, I am going to ask my kids to fund it themselves.
@Radhey,
Same here, We can give them loans or act as a guarantor.
Rakesh
@Radhey Sharma, I think that’s the best to go. Even today many young kids are doing like that. They start working after graduation, save some money for 2-3 years and then go for their higher education on their own. Parents can help but to a certain extent. They have to plan for their retirement as well, can’t be dependant on kids forever. It’d be foolish to do that.
@Vivek,
Agree with you. I have seen few kids in my locality, after graduation they took up jobs in call centers and after 2 years quit and did their post-graduation.
This is the way to go……
Not to depend on parents for higher education and parents in turn should plan their own retirement rather than hoping their kids will look after them.
Rakesh
@Rakesh, Yeah but remember that the importance that our parents gave to our education is what is propelling India into a future super power.
Basic education is something which I personally feel parents ought to give to their kids. After that the kids can take a hike and educate themselves.
@Radhey,
I don’t agree that India will be the next future super power. With the current bunch of politicians and scams, India is going no where. Look at Japan, China how have they progressed over the years, we are no where near them. All the tax payers money is going down the drain.
Agree on the basic education part..
Rakesh
@Rakesh, It will become a superpower much much later because of our politicians.
No use comparing to China, its way ahead !
The Karnataka assembly ruckus was unbelievable….
@Radhey,
Yes….
Sometime i feel its not worth living here, in spite of paying taxes regularly we are not getting back anything from the government.
Better to migrate to other countries wherein you pay high taxes but get benefits in return.
Rakesh
@Rakesh, Just because of a few corrupt politicians, one should not leave his/her motherland. If it is troubling you so much why don’t you join politics and do some good to your country?
I don’t mean to offend anyone or making any personal comment but in today’s time all of us just think about our own benefits.
If these things trouble me so much I’d rather die fighting than run away to some other country.
Just think if our freedom fighters had the similar mindset, what our condition would be today?
@Vivek,
It’s easy to write here than going out and facing the real world. I know i am no match so i vent my feelings here.
Inspite of paying taxes year by year what do we get in return, pathetic services. So many governments have come and grown but they have filled their pockets rather than giving it to the people.
Rakesh
@Rakesh, I am quite surprised with such negativity in your comment. You ask what do you get in return, pathetic services? I think you dont want to look into the better side of things. Let me quote a few examples of what services you have got in return: –
– A few years back it was just a mere dream of people to fly but now it has turned into reality because of drastic changes in airfare. Today so many people can afford to fly? How did that happen?
– Mobile services. Every tom, dick & harry is having a mobile phone these days and call rates are dirt cheap. How did that happen?
– Rail fares. I don’t remember when was the last time fares were hiked. The govt have kept it stable for so many years. This year it might change.
– Look what IT boom has done to the middle class families who were struggling to survive a decade ago. The same families are now having one car per person in their family.
– Look what Shiela Dixit has done to the infrastructure of New Delhi.
– Look what Modi is doing for the development of Gujarat. The mighty chinese are impressed with his leadership.
– Look what Nitish is doing in Bihar. So many news channels have awarded him for his efforts to uplift Bihar.
I can keep writing all the good things here but people tend to ignore them and focus only on what they are not getting.
Yes, there are scams, there is corruption but please don’t say you have got NOTHING in return but pathetic services.
The problem with our country is that it is so densly populated that it is not easy to give everything to everyone. The problem is not just with the govt, the problem is the country’s population and the attitude of people. To add fuel to the fire, we are surrounded with negative media, who I dont remember when was the last time they broadcasted any positive news in their prime time.
Let’s try a practical scenario here. Please go to your neighbours on the weekend and propose an idea to segregate the household waste and utilise it in a better way. Tell me how many people agree to this and start doing it religiously. This is for our own good, isnt it? So, we should do it but I am sure you wont get a positive response from more than 20% people, thats also if you are lucky. As a govt representative [which for the record i am not] I can also say that i get pathetic cooperation from public and the blame game will go on and on and on. Who will suffer? The country and its people.
So please Do what you can, with what you have, where you are and for Gods sake stop complaining.
@Vivek K, Hmmm. I guess we should park this discussion here as its leading to a bit of discomfiture.
Each person thinks differently and is right/wrong.
Let’s get back to the personal finance space guys 🙂
@Vivek K, Hey Vivek good one.
Yes, the good/positive things may overrun the bad/negative things in our country but as always & as everywhere everybody (mostly) criticize/find fault with rather than to praise/to recognize the worth or importance.
Moreover, the root cause of all the negative affairs in the coutry is the rapid growth of population for which we have none other to blame than ourselves. And then the rising population begins the vicious circle of lack of basic necessities including poor health-illiteracy-unemployment-crime/corruption-lack of Government relief programs-continue increase in population.
Save for retirement or buy a house?
In my opinion both are equally important, buying a house should be a subset of planning for retirement.
My goal is to retire in my own house with a good corpus for me and my wife to survive with our present lifestyle.
Hey Radhey good topic & again a good article.
Also, you have posted it at the right time; I’m looking for an affordable home in Pune & simultaneously planning for investment for retirement & other goals.
Though buying a home asap is essential (if you are based out of your native) if you are planning to settle there but we should also heed for saving for our retirement as the early we begin the less we will have to invest to build a consirderable corpus for retirement.
@Sudip D, Where in Pune can you find an affordable home anymore ? All the best with your goals Sudip.
@Radhey Sharma, Lol. That’s a good question. 😛
Hi Radhey, just a suggestion: why don’t you run a poll on a finance topic every week, say every Monday or Friday? This will keep things interesting and we can know the buzz of the crowd as well. What do you think?
@Vivek K, Got you sir. though every Monday/Friday is a huge frequency, I will keep once a fortnight to begin with.
The level of financial literacy in India is very low.Most people invest in all possible asset classes without any clear cut objective.Concept of time horizon of investment is not clear to many.Which investment to make for which goal is not known.The knowledge of the amount of risk involved in investments is missing.People just tend to make some investments and withdraw money as and when needed.Financial planning is completely lacking.
@ANIL KUMAR KAPILA, You are so right Kapila. Welcome to TheWealthWisher. Your contribution on TLFGuide is amazing.
I read your comments and am honored to have you here.
@Radhey Sharma,
So far I have been active on One Mint and TFL only.Hopefully, I will be able to remain in your contact too.I will go through your other posts shortly.
@ANIL KUMAR KAPILA, We will wait for your comments sir.
@Radhey Sharma,
I agree with most of what you have said but for me planning for retirement gets the highest priority.Since this is probably the last goal of life, the planning for it should start at the earliest to get early bird advantage of compounding.We must not forget that with improved healthcare the average life span of Indians is increasing every year.In my family the average age of females is 90 plus whereas in the case of males it is around 80.So the ageing males have to provide for their wives also who may out live them.
Most financial planners take the age as 80 years while doing retirement planning.I think it needs to be revised upwards to be on the safe side.
When a person lands his first job, his expenses are not much as he has normally no dependents and in many cases he lives with his parents.This is the right time for him start his investments for his retirement.As long as he is not married he can put a major portion of his savings in investments meant for his retirement.He does not need a house or a car during his bachelor days.He can easily manage with a bike/scooter.He can think of buying a small car when he gets married and has kids.But house or big car can still wait.So he can manage without any kind of debt.Credit card debt which is financial poison has to be avoided at all costs.
He should think of owning a house only when he turns 40.By this time he should have sufficient funds for down payment of the house.Loan taken for the house must be fully paid by the time he turns 50.After 50 contributions towards retirement kitty must increase drastically.
@ANIL KUMAR KAPILA, Well said Kapila. Thanks for your contributions here. I can confirm that financial planner should take a higher age of life expectancy, only then will they be on their safer side.
On you thoughts of starting early, while the idea is wonderful, I think there are very few ealry starters. The realization dawns on people too late.
What do you think should we do to increase that realization ?
@Radhey Sharma,
Financial literacy is the key.As soon as a young person starts earning he must be made aware about his risk appetite and the capacity to take risk,his financial goals, his investment horizon as well as the options of investment available to him to meet his short term, medium term and long term objectives.He has to be told about the hazards of credit card debt.He has to be motivated to save and invest.
@Radhey Sharma,
I had given my comment which does not seem to have appeared here.
@ANIL KUMAR KAPILA, It shoudl now.
@ANIL KUMAR KAPILA, Hi Anil, We meet again, small world, eh? 🙂
I don’t know if you remember we had a good discussion on Fidelity fund house moving out of India over one of the TFLguide’s article.
@Vivek K,
Yes, Vivek I do remember you.I think you must have read the article mentioned by me.
@ANIL KUMAR KAPILA, Yes Anil, I indeed read the article and it was helpful to know the position of mutual fund houses.
Thanks for your assistance and I look forward to more healthy discussions and advise from you. 🙂
@Anilji,
Good to see your post here, i too have read your posts in TFL.
Hope to gain more knowledge from you here.
Welcome Sir.
Rakesh