As long as we are alive, we will have expenses. Always.
We need to eat. We need to pay for electricities and/or gas. There is also transportation costs. Things break down and need to be fixed or replaced. Clothing wears out. And many other things.
Expense is unavoidable. So we need income to pay off our expenses.
Some assets can generate income. Some assets cannot, even if it can appreciate in value. So saving for retirement requires a balancing act.
Total asset or net wealth is only one metric and it should not be the only metric we use to save for retirement. We need to know the composition of our retirement savings.
Fixed asset as savings
Savings or wealth that sits in illiquid asset (ie. fixed asset) is not directly spendable.
For example, the house that we live in. Let us hypothetically assume we already paid it off completely by the time we want to retire. But as it is, we cannot withdraw money from it to spend on our expenses.
If this house is the only "savings" we have for retirement, then we are in a situation often referred to as asset-rich cash-poor. Theoretically, we are “rich” but we may not have any money in the bank or in the wallet.
Pre-retirement, the income stream we get from our work provides the cash to pay for our expenses. Upon retirement, many of us may get retirement benefits from government and/or past employer(s). Is that enough to cover all our expenses?
If not enough, then we need to do something. For example, convert some of the fixed assets into something spendable or into income-producing asset, such that we have enough income stream to cover our expenses.
To own or not to own a house
The mortgage industry focuses and advertises based on one perspective only. They always encourages us to buy a house. Which is a nice goal, but we ought to look at the big picture and understand the savings composition we will have upon retirement. We want to avoid being asset-rich and cash-poor.
If we project that upon retirement we have sufficient income stream to cover for our retirement expenses, then it makes sense to purchase a house.
This assumes we will still want to live in the same place when we retire.
But many do not want to stay in the same place upon retirement; we want to move closer to family or to a quieter town or warmer climate, etc. Then there are two options.
Option 1 is to own a house anyway. The desirable outcome would be to be able to sell the house at a higher value than the amount of money we put in. Even better if the value keeps up with the alternative outcome, ie. had we not bought the property and invested the money elsewhere.
Option 2 is to always rent. We save all we can into an investment that will hopefully outperform the potential return of owning a house. Then upon retirement, we terminate our rent and move to a place where we want to retire.
But keep in mind also that the benefit of owning a house does not always translate to financial return. There are non-tangible benefits from owning our own place. We cannot dismiss this either.
Assess and adapt
We are each unique individuals and there is no one magic formula that will satisfy everyone. It all comes back to our ideal retirement.
But even so, we may not be able to choose the option we want due to our financial constraints. Trade off is a fact of life. What is important is that we need to regularly review where we are and where we want to be.
Maybe next year we get a big promotion or another company hires us into better jobs. Or we may have an unplanned big expense and we have to dip into our savings. Etc, etc. Life happens.
Assess and adapt. And repeat. Again and again.
Upon retirement, will our assets produce income (or can convert to regular income) greater than our projected expenses?
If not, then we need to make changes. Change our savings composition or increase the savings (by forgoing current expenses). Or lower our future expenses by changing our retirement scenario. Or do both.
Assess and adapt. Better late than never, but the earlier we know, the better we prepare.
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To recap:
Understand the composition of assets
Adapt as needed to suit life stage
Have a great day.
Disclaimer: Anything I share is not intended as financial advice; I am merely sharing personal opinions and experiences. The information is of general nature and you should only use it as a place to start your own research and you certainly should do your own due diligence. You ought to seek professional financial advice before making any decisions.