<p>Ignoring the current turmoil in both the real estate and equity markets, which would you say is the better investment: (a) a 401(k) account into which you contribute the annual maximum and your employer matches 25% of your contribution and throws in an extra 3% of your salary, OR (b) home ownership? I’m having this discussion with my colleagues and my office is more or less evenly divided (I’m with the bunch that says the 401(k) is the better deal). In answering, please consider this strictly from the perspective of return on investment.</p>
<p>Why does it have to be one or the other? You have to live somewhere, and buying is generally better than renting for a lifetime.</p>
<p>But if you insist on choosing one or the other, I’m going with the 401K. Because at retirement time, it’s hard to live on the income on your house.</p>
<p>I agree that both is best, but the office discussion is theoretical – one or the other. Surprisingly, one of my best friends, who is a CPA, says it’s the house, hands down. I suppose she’s thinking of the home mortgage interest deduction, but I would still think that the 401(k) wins given that (a) your entire contribution is subtracted from your gross income and, thus, tax deferred, (b) tax deferred compounding, and (c) the carrying costs (other than account fees) are far less than those associated with a home.</p>
<p>You get an instant 25% return on your 401(k) investment via your employer’s match. Where else do you get that kind of return?</p>
<p>I agree with BunsenBurner.</p>
<p>hard to say. You can not ignore the possibility of turmoil in either the housing or security sectors. Turmoil is the reason for making investments of either kind. </p>
<p>I am favoring 401k because of flexibility. Two cases of extremes: 1) If you needed money in 3 days, where could you get it? 2) If you are 85 years old, if need money to repair your home and you have a 401k, where could you get the money?</p>
<p>401k (why can’t that be 10 characters)</p>
<p>It depends. There are several variables to consider.</p>
<p>The 401K gives you free money from your employer but if you don’t invest it well you might not get a great rate of return over the long haul. Investing in a single or few stocks could cause you to lose almost everything (think Bear Stearns or Enron), investing very safely yields a smaller return, investing in good funds can yield a good return but there’s some risk. </p>
<p>The housing market could be great or not so good depending on what happens where you buy and you need to live somewhere anyway. Buying in Detroit isn’t going to be the same as buying in Southern California. </p>
<p>You should be able to analyze it easily by picking the real estate area and a medium 401K fund and looking at the past performance for the last 20 years or so. </p>
<p>If you’re really going to do it though, do both.</p>
<p>Both. It would be a mistake to focus ones attention on just one or the other.</p>
<p>401k is important because it should form the basis of ones retirement savings. </p>
<p>House is important because it forms a solid asset and, if done intelligently, represents a much more economical living situation than renting (where you get zero investment return or equity for your monthly payments).</p>
<p>If done properly both the House and 401k represent excellent investments and a healthy combination of both is better than throwing all your eggs into just one or the other. </p>
<p>However, neither are foolproof. If the 401k is not well diversified or you overextend yourself on house payments on more house than you can afford then both can end up causing more trouble than gain. Some folks recently justified the latter by believing the myth that bricks and mortar never decrease in value… but those idiots in some markets that took out interest only mortgages on a McMansion to only find out that it’s now worth 20% less than they paid found out the hard way that this isn’t always true.</p>
<p>The comparison must include the cost of rent. While a home (after expenses) returns roughly what a good bond fund would. You can’t live inside a bond fund. </p>
<p>Every thing has a ying and a yang.</p>
<p>401k is free money. Let me say that again, 401k is FREE MONEY! You should always max it out.</p>