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Your Home as an Investment: Nest or Nest Egg?
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Most people regard their home as their biggest asset. But should you consider that asset as part of your retirement nest egg?
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A few things to think about:
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1. Something can only be an investment if you're willing to sell it. So unless you're planning to move into less expensive accommodations, your home can't boost your retirement income.
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2. Even if you do plan on selling your house, a drop in real-estate prices could cause it to lose value quickly. And it could take years before your home recovers its value. This happened in 2006, when housing prices started to decline after prices peaked in 2005. That decline continued into 2010 and led to widespread foreclosures. The decline was a devastating setback for those nearing retirement who were expecting to use the equity in their homes to finance their retirements.
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3. Repairing and maintaining your home can be expensive, so your investment might not be earning you as much as you think.
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Still, the IRS has made it nice to invest in your own place. For starters, you can usually deduct the interest you pay on your mortgage from your taxes. On top of that, you typically don't have to pay any taxes on the first $250,000 you make from selling your home ($500,000 for a married couple), as long as you've lived in it for two out of the past five years.
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The overall lesson here: Don't spring for a really expensive house just because you think it might be a good investment. Instead, buy a home that fits your living needs and invest the extra funds elsewhere, such as in mutual funds. In most cases, a home rarely matches the long-term returns of stocks and other investments.
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