Buy that house — your retired self will thank you

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 percent, 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 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.

Even before the pandemic, about 55 percent of rental households headed by someone age 65 and over were cost-burdened, meaning more than 30 percent of their income went to housing costs, data from Harvard’s housing center shows.

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 percent of households headed by those age 50-64 in the U.S. owned a home. That number was just 75 percent 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.