Why a Comfortable Retirement Depends on Your Real Estate Choices

When you are just starting out in life, you get your first job, move out and get your own apartment, take on responsibilities; you're probably not really thinking much about retirement. But that is a big mistake! Savings and investments generally grow in value over time, so the earlier you start putting money aside for retirement, the higher your likelihood will be of having an early and comfortable one.

Early on, those savings should be primarily earned on financial assets like contributing to your company’s 401(k) plan and IRA, or separate savings in a stock or bond mutual fund. This is because saving $100 per month, inflated at 5% per year with average long-term investment returns of 7% ends up being $155,000* (updated) after 40 years. In fact, if you can save $200 per month, that’s $310,000* when you retire, and saving just $300 per month will be $465,000* when you retire. As you can see, a small amount of monthly savings can grow to substantial sums over long periods of time.

But an even bigger component of your retirement will probably be your real estate situation when you stop working. This could be, hopefully, a paid-off home, some retirement properties, or maybe both. Now, this doesn’t mean you have to start your real estate endeavors right away (here’s some guidance on that) . However, the sooner you get started on making smart choices, the higher the likelihood will be that you’ll enter retirement in good financial shape.

Most retirees today earn about $25,700 per year, according to U.S. News & World Report . On average, $15,000 of that comes from Social Security. That isn’t a lot of money for paying all the health bills, food, utilities, and housing, especially if no additional income is being earned. But if you start real estate ownership in the next few years, it will better the chances that you’ll have a very low monthly retirement housing expense, or even better rental property income by the time you call it quits on the job front.

The most important thing you should realize is that even an average person can earn decent real estate wealth by making good property choices. The number one course of action is to buy real estate and keep ownership of it as long as possible, preferably for your lifetime. As a function of owning the property, over time, the value should go up and that’s pure equity growth into your net worth. As your mortgage is paid off, your retirement housing expense picture will look pretty bright. You'll still have expenses along the way, like for new roofs, kitchens, flooring, etc. that will reduce your net worth, but over the long haul, the equity increases should overcome the costs of renovations, monthly housing expenses, and repairs. But here's the wild card — if you buy moderately priced properties that fit your financial wherewithal, you should come out net positive in the long run. But if you overindulge with fancy, high end, high monthly housing cost properties, your financial picture will suffer.

But with that being said, you still don’t want to rush on buying real estate until you are ready to be a little more settled in life. The personal residences you buy should be places where you envision yourself living for a minimum of five years, though you should really live there for at least 10 years to earn some equity. Also, if you buy as a personal residence with plans to keep it and turn it into a rental property later on, that is a great way to go! In fact, that is the best way to go.

If want to start buying and owning properties for the sole purpose of renting them out, that is also a good move. However, rental properties are not for everyone because they are hard work, time consuming, and can be stressful. Make sure the landlord lifestyle is for you before buying properties to rent. Talk to real estate owners for more insight into the issues, problems, and rewards of owning real estate. After all, real estate is not like stocks or bonds — you have to handle property and tenant issues, even if you have a real estate firm do the property management.

Retirement is coming faster than you may believe, and the choices you make when you are young will impact your retirement income, wealth, and comfort. Start early and make good real estate choices and you’ll pat yourself on the back down the road when your retirement future looks bright!

* These figures have been updated from the original article posted on 4/4/12.