Since when did people start to question the usefulness of 401(k)? Scott Burns from MSN Money thinks if you happen to live in a state with high home price appreciation, you don't have to stash too much cash to 401(k) accounts while still having enough money at retirement.
To explain Scott's calculation, let's take California as an example. First, OFHEO reported a 102% property price appreciation in the last five years. Scott assumes average property sells at three times annual income, so the appreciation earns you 3.07 years of income in 5 years (actually, even more in California). For 401(k), Scott assumes people save 6% in 401(k) plan, receive 50% company match, and earn 9% on 401(k) investments. The result? It takes 17.6 years to earn 3.07 years income from the 401(k) approach.
Using this calculation, even people in moderately appreciating Texas (24% home price appreciation in five years) will fare better in home investment.
Yes, real estate investing made too many average-joe millionaires in the last few years, but before you buy into Scott's claim and jump to the real estate investing bandwagon, make sure you understand the holes in his analysis:
First, the comparison is not apple-to-apple. Why? The 401(k) approach only asks you to save 6% from your income. Can you service your home with 6% of your income? In our "ownership society," it is not uncommon that people stretch their affordability and end up with commiting 40% or more monthly income to big houses. What if you save the same amount in 401(k)?
Second, this is typical rear-mirror view. Do you realistically think there is a guarantee that California will continue to see property price to double every five years until your retirement? Think again. In the long run, home price only marginally beats inflation.
I'm not saying real estate investing is bad. I myself am benefitting (modestly) from my house appreciation in the last two years. Nevertheless, I don't see my house as an investment per se, and really don't count on it for a quick and easy retirement. Nothing prohibits you from placing the bets on both sides, and this is what I am doing -- keeping servicing my house and moving more to 401(k) every month.