My husband and I own a house in a city with a very high cost of living and expensive real estate. We bought the house at a very good price because while it was structurally sound it needed (still does) some aesthetic renovations. We currently have a lot of money saved up, and we’re debating what to do with it. My question is basically: are we naive to think that putting in new windows, finishing our basement, and upgrading some insulation would be good investments? We put money into TIAA-CREF every month and our universities match our contributions, but we’re hoping that in 20 years we could sell our home, buy something smaller or outside the city, and use our profit for retirement. Do you think real estate is a reliable investment? Homes in our neighborhood are currently in high demand and often sell within a few weeks (sometimes with cash offers!), but I worry that the real estate market is too fickle and unreliable for retirement plans. Any advice?
Investing in a single property is a high risk potentially high reward proposition. No, it is not a reliable investment. Sometimes you get lucky and sometimes you don’t. In addition, everywhere outside of California, increasing home value leads to increasing property taxes which make the cost of ownership more expensive. So no, don’t rely on a single house in a single real estate market as a big part of your retirement (most people who have retirement wealth have that from their house, but that’s because they don’t have any other wealth). It might work out but it might not. It is far more risky than a diversified portfolio of index stock and index bond funds.
If you’re talking 20 years time, then most of the renovations you’re talking about will be out of date and not worth as much in the market at that point anyway. Possible exceptions for things that tend to have a high return, like adding a second bathroom.
That doesn’t mean you shouldn’t renovate if you can afford to do so and want to. Insulation and new windows can cut your energy costs (which is a form of investment depending on the break-even point). Finishing your basement can increase the usefulness of your house. But you shouldn’t consider them investments in the same way that your 403b portfolio is invested. For the most part, these renovations will be consumption.
In terms of how much should you save for retirement, you should aim for at least 15% of your income, and more if you have catch-up savings to do.