Question for Millionaire Mommy...

[REWahoo]

MMND, I was looking at your blog and saw your piece on how renting a home is financially better than buying. What really caught my attention was the example you used of a retired person age 63. I recognize that using your home as a savings account has some potential drawbacks and agree that renting can be better financially in some cases, but in the comparison you show I have some questions about the real world relevance of some of your assumptions.

Based on a 63 year old renting vs. buying (with cash) a $300,000 house, you show the difference over 30 years is the lost opportunity cost of investing that $300,000 and recognizing a 10% compounded return (7.5% after tax) for 30 years. You show the renter would end up $690,000 better off than buying.

Would it be wise for someone retired in their 60's to invest that $300,000 with an expectation of realizing 10% compounded returns for 30 consecutive years? Yes, the S&P 500 may have averaged something like that in the past, but how realistic is it to project that someone in their 60's would (should) put the $300,000 in an S&P 500 index fund and "let it ride"? Most of us at this age are more interested in making sure we don't run out of money before we croak than trying to run the table and leave our children and our favorite charity a huge windfall. If you polled the members of this forum age 60 or over and asked who would be willing to sell their homes and invest all the proceeds in the stock market, I don't think you'd have too many say yes (contrarians aside ).

When you factor in how a retired person in their 60's should probably be invested (diversified, mixture of stocks, bonds, etc.), it looks to me as if the net return on the invested $300,000 after 30 years would likely be similar to the net return you could expect from the appreciation of the house, which you show as a compounded 4%. In short, not much difference either way.

There are always exceptions (those who have good pensions for example) but it appears to me your rent vs. buy comparison may be more applicable for someone younger and still working. It doesn't seem to offer much when it comes to a retiree such as myself.

Am I missing something?