We have frequently heard people explain their plan to accumulate retirement assets as follows: I’m putting all of my money into my home. Real estate is appreciating much faster than ordinary investments. When I retire, I’ll sell my large home for a huge profit, move to a smaller, less expensive home, and live on the difference. This probably worked for a few people, but, in most cases, people who sold their large homes bought a smaller home that ended up costing them as much or more. Further, by making one asset the basis for retirement saving, they violated an important rule of investing: diversification. Now, we see why diversification is important and using your home as your principal investment asset is a mistake. Home prices have stopped rising in most areas of the country, and we have seen significant declines in real estate values. And there is no reason to think this will not continue for some time in the future. So the rate of return on residential real estate will be negligible or negative for the next several years. If those are the years in which you plan to retire, you’ll face a serious problem.

The fact is, just watching your home appreciate was too easy a way of building a retirement nest egg, and, like most things that are too easy, it usually doesn’t work.