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Author: GusSmed Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 60066  
Subject: Re: Here's A Good Question Date: 2/2/2007 1:57 PM
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If I bought a condo, I'd only reduce my housing expenses by about $200 month -- $2400 per year. That's less than the $3,000 per year I'd get in interest on the $60,000 in a 5% CD.

But you did indeed reduce your housing expenses with a purchase, and the a 5% return on your money is more than the safe withdrawal rate when adjusted for inflation. Your rent on your apartment will certainly increase in time at roughly the rate of inflation.

If you applied the same line of reasoning to your retirement calculations in general, you could safely retire forever with a 5% withdrawal rate, since CD rates are now 5%. Which you know is not the case.

The 4% rate makes the two decisions equivalent. $2400 a year in reduced expenses, or $60,000 more in funds giving you $2400 more in safe income.

I agree that you have to include property taxes and the like, but I'd further argue that this particular comparison has an artificially high overhead because you are "renting" the swimming pools, tennis courts, etc. with the condo. It's more of a case against purchasing condominiums than purchasing single family dwellings.

- Gus
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