How much do I really have for retirement?

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How much do I really have for retirement?

Postby EternalOptimist » Tue Dec 11, 2012 4:46 pm

When there is discussion of what one needs/has for retirement, is the primary residence's equity fully part of that? For instance, if I have $500,000 in investable assets and a house worth $500,000 (no mortgage), how much am I considered to have? I know my net worth is $1 million...are they given equal weight for one's future :confused
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Re: How much do I really have for retirement?

Postby zotty » Tue Dec 11, 2012 4:52 pm

it may require money to sell. similar: 500K in tax deferred 401K is something different than 500K in a roth, or in taxable. Granted, you may be able to manage taxes, but it's still an unknown liability. For houses, it's more about how much money it would take to get it sell-worthy (if any), and how much you'd actually net out of it after fees, etc, and of course, the real selling price.

right? if you have a reasonable idea of the cash value after all that, it counts. You can sell it and pocket that money. you have to live somewhere, but 150K buys a good house in many parts of the country.
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Re: How much do I really have for retirement?

Postby NYBoglehead » Tue Dec 11, 2012 4:54 pm

Ideally your house will increase in value as time passes. That certainly should be a consideration for retirement planning. While obviously houses can take some time to sell and the market is cyclical, it would be a shame for someone in their 70s to live as if they ran out of their retirement funds when they've got a fully paid for house that can be sold to pay for the remaining years.
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Re: How much do I really have for retirement?

Postby nodenuff2 » Tue Dec 11, 2012 4:57 pm

Rick F would probably say you can't count your house as an asset as it is not very liquid an asset. Looks good on paper for your net worth but until you sell it you can't spend it . A lot of folks got in trouble in the last 10 years trying through HELOC's. that did not work out too well.
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Re: How much do I really have for retirement?

Postby NYBoglehead » Tue Dec 11, 2012 5:00 pm

nodenuff2 wrote:Rick F would probably say you can't count your house as an asset as it is not very liquid an asset. Looks good on paper for your net worth but until you sell it you can't spend it . A lot of folks got in trouble in the last 10 years trying through HELOC's. that did not work out too well.


HELOCs are loans that need to be paid back and need to be treated as such. Quite different than selling a house, using the proceeds to purchase a smaller home and pocketing some cash or getting the whole cash amount and renting a reasonably priced apartment/house.
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Re: How much do I really have for retirement?

Postby bengal22 » Tue Dec 11, 2012 5:03 pm

equity in home is definitely an asset and should be counted toward your retirement plan.
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Re: How much do I really have for retirement?

Postby ruralavalon » Tue Dec 11, 2012 5:11 pm

You have to live someplace, if you sell you must use some or all of the proceeds to purchase or rent another place to live.

So don't count your home as an asset agsainst which you can apply the "4% rule" which many use to calculate safe withdrawals.
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Re: How much do I really have for retirement?

Postby NYBoglehead » Tue Dec 11, 2012 5:14 pm

ruralavalon wrote:You have to live someplace, if you sell you must use some or all of the proceeds to purchase or rent another place to live.

So don't count your home as an asset agsainst which you can apply the "4% rule" which many use to calculate safe withdrawals.


You said it much more eloquently than I. If you can sell the house for 500k, calculate how much of that is actual gain for retirement spending purposes vs. the replacement costs to rent/buy something smaller.
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Re: How much do I really have for retirement?

Postby Cut-Throat » Tue Dec 11, 2012 5:41 pm

Personally, I never include the house. I only use Investable assets. I look at the house as a 'Plan B' reverse Mortgage situation, if things go very south with Plan A.
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Re: How much do I really have for retirement?

Postby Grt2bOutdoors » Tue Dec 11, 2012 5:50 pm

My neighbors would disagree with you regarding the use of a paid off home as a retirement asset. It's like saying I own a CDO free and clear - great, now try and sell it, mortgage it, etc. when you are retired. It's like Mr. Potter saying he'll buy your shares of the Bailey Building and Loan for fifty cents on the dollar - Cash! :oops: So, for the fellow who stated they have $500K in home equity - you don't have it until all of it is in your hands. I wouldn't count on it except as a place to reside that is it.
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Re: How much do I really have for retirement?

Postby Woodshark » Tue Dec 11, 2012 5:51 pm

We own two homes, one being our primary residence and the other a lakeside weekender. I include the value of the lake home as an asset but not the house we actually live in. I know it has value but you have to live somewhere right?
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Re: How much do I really have for retirement?

Postby bengal22 » Tue Dec 11, 2012 5:59 pm

I cant help but believe that the retirees that has his 500K house paid off is better off than the retiree that has a 400K mortgage. I count the equity in my house because once I sell the house I have that money and my rent or whatever is an expense. That is my opinion and how I count it. I dont see how you cant.
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Re: How much do I really have for retirement?

Postby EternalOptimist » Tue Dec 11, 2012 8:21 pm

I'm of the belief that the home's value is a strong asset and can certainly be used for retirement. While it may take a bit of time to realize, three options come to mind==HELOC, reverse mortgage or sell and downsize. They offer cash, you can't just say that a $500k home has no value in retirement planning/spending. I feel like I have plenty of options!!
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Re: How much do I really have for retirement?

Postby nisiprius » Tue Dec 11, 2012 9:04 pm

My view: equity in the home isn't an asset, because you have to live somewhere. It's the other way around: shelter you need but haven't fully paid for is a liability, to the extent of your debt.

Equity in the home certainly matters, but it figures into your retirement planning on the expense side. If you haven't paid off the mortgage, your expenses are taxes, maintenance, and mortgage payments. If you've paid off the mortage, your expenses are just taxes and maintenance. The right way to think about this is not that your home equity = savings, it's that you need less in savings, because you have reduced a major element in your foreseeable future expenses--your plans now require meeting fewer mortgage payments.

Some other things that don't count as retirement savings: your health; your spouse; and the clear blue sky.
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Re: How much do I really have for retirement?

Postby bottlecap » Tue Dec 11, 2012 9:11 pm

It is not a retirement asset. You can't eat it or spend it.

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Re: How much do I really have for retirement?

Postby fundtalker123 » Tue Dec 11, 2012 9:16 pm

A typical retirement strategy in CA has been to buy house 30-40 years ago for 20k, sell for 2000k, move
to another state and live like a king (albeit in worse weather)
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Re: How much do I really have for retirement?

Postby Johm221122 » Tue Dec 11, 2012 9:26 pm

Would it not depend on your plan? If you plan to moving and downsizing ,yes its an asset.If you plan on staying there to you die ,it's a liability
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Re: How much do I really have for retirement?

Postby chocolatemuffin » Tue Dec 11, 2012 9:40 pm

I count primary home as an asset, but also charge myself a "rent" as an expense.
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Re: How much do I really have for retirement?

Postby bengal22 » Tue Dec 11, 2012 9:43 pm

bottlecap wrote:It is not a retirement asset. You can't eat it or spend it.

JT


You cant eat a mutual fund but you can sell it and buy food with that. You cant spend a mutual fund but you can sell it and spend the proceeds. A house is not as liquid but it is an asset that you can use if needed. I count my house equity as an asset and factor it in for retirement.
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Re: How much do I really have for retirement?

Postby Professor Emeritus » Tue Dec 11, 2012 10:26 pm

Living in your own home is a form of tax free income. Economists call it imputed income. http://conversableeconomist.blogspot.co ... using.html
you have imputed income and equal housing expenditure. but you pay no taxes on the expenditure.
The normal question is whether your "expenditure" on housing is reasonable considering your income . A person I know has a cash income of $50,000 and lives in a million dollar house. The imputed income on such a house is about 40,000
That person is spending a rather high 45% of income on housing. E.g. the person is "house poor" but for a person with 100,000 in retirement income it is closer to a reasonable 30% The higher the tax bracket the greater the value of tax free income from living in your own home. House prices of course have inflated over the years due to this favorable tax treatment.
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Re: How much do I really have for retirement?

Postby dbr » Wed Dec 12, 2012 9:54 am

Of course a home is an asset, but it has to be accounted for in a plan where the options are either not to have access to the asset to withdraw income (pending such things as HELOC, reverse mortgage, etc.) while having to sustain the expenses of maintaining the home or that one sells the home and has to consider what replaces it and what expenses have to be sustained to provide a residence with the net proceeds of the home now being part of the investment portfolio from which withdrawals can be taken. I guess I really do not understand the question in the OP.
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Re: How much do I really have for retirement?

Postby FinancialDave » Wed Dec 12, 2012 9:58 am

fundtalker123 wrote:A typical retirement strategy in CA has been to buy house 30-40 years ago for 20k, sell for 2000k, move
to another state and live like a king (albeit in worse weather)


Unless of course you moved to Maui and downsized considerably :sharebeer
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Re: How much do I really have for retirement?

Postby bottlecap » Wed Dec 12, 2012 10:03 am

bengal22 wrote:
bottlecap wrote:It is not a retirement asset. You can't eat it or spend it.

JT


You cant eat a mutual fund but you can sell it and buy food with that. You cant spend a mutual fund but you can sell it and spend the proceeds. A house is not as liquid but it is an asset that you can use if needed. I count my house equity as an asset and factor it in for retirement.


Yes, but you are not currently using your mutual fund as a place to live. It's weird that I have to explain this, but you can't eat your house and live in it at the same time. You can sell you housing to eat while you live on the street, but that's not what most people view themselves doing in retirement.

If you live in a 5,000 square foot house now and plan to downsize in retirement to a 1,500 square foot house, now I guess you can count that extra 3,500 square foot as an asset you will live off of in retirement. Assuming you're not going to want to live somewhere more expensive in retirement.

For almost everyone, however, comparing a home to a mutual fund asset that can be spent down in retirement doesn't make any sense.

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Re: How much do I really have for retirement?

Postby FinancialDave » Wed Dec 12, 2012 10:08 am

dbr wrote:Of course a home is an asset, but it has to be accounted for in a plan where the options are either not to have access to the asset to withdraw income (pending such things as HELOC, reverse mortgage, etc.) while having to sustain the expenses of maintaining the home or that one sells the home and has to consider what replaces it and what expenses have to be sustained to provide a residence with the net proceeds of the home now being part of the investment portfolio from which withdrawals can be taken. I guess I really do not understand the question in the OP.


I should let the OP speak, but it seems the struggle was with how to use the home equity in the retirement equation.

While certainly a person with a million dollar net worth is better off and has more options than one with $500,000, in retirement the only thing that really matters is your net income, so unless you somehow convert the house into income it does NOT affect your retirement calculation. If you need $1000 a month to live your lifestyle, that is what you need, and it must come from investments that can deliver that in a reliable and almost risk free fashion (depending of course if you really need the $1000 a month, or it is just something "nice to have.")

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Re: How much do I really have for retirement?

Postby dbr » Wed Dec 12, 2012 10:28 am

FinancialDave wrote:
dbr wrote:Of course a home is an asset, but it has to be accounted for in a plan where the options are either not to have access to the asset to withdraw income (pending such things as HELOC, reverse mortgage, etc.) while having to sustain the expenses of maintaining the home or that one sells the home and has to consider what replaces it and what expenses have to be sustained to provide a residence with the net proceeds of the home now being part of the investment portfolio from which withdrawals can be taken. I guess I really do not understand the question in the OP.


I should let the OP speak, but it seems the struggle was with how to use the home equity in the retirement equation.

While certainly a person with a million dollar net worth is better off and has more options than one with $500,000, in retirement the only thing that really matters is your net income, so unless you somehow convert the house into income it does NOT affect your retirement calculation. If you need $1000 a month to live your lifestyle, that is what you need, and it must come from investments that can deliver that in a reliable and almost risk free fashion (depending of course if you really need the $1000 a month, or it is just something "nice to have.")

fd


It is certainly not the case that the only thing that matters in retirement is your net income. Your expenses also matter. Owning a home affects your retirement calculation because the cost of maintaining the home together with covering the necessity for shelter is an input to calculating the needed income. Also, it is certainly the case that many people in fact do convert the house into income at some time in retirement by selling the home and moving to a cheaper home or renting, including the possibility of a step into assisted living or a nursing home. A retirement plan is also about what the anticipated situation will be in the future, what expenses there will be, and how income will be provided under different scenarios regarding how an asset such as a home is managed in the plan. It is even possible that a person with a large portfolio would be at advantage to use some of the investment assets to buy a home. Such things have even include buying a home and sharing it with family or a caretaker.
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Re: How much do I really have for retirement?

Postby PaddyMac » Wed Dec 12, 2012 11:06 am

Cut-Throat wrote:Personally, I never include the house. I only use Investable assets. I look at the house as a 'Plan B' reverse Mortgage situation, if things go very south with Plan A.


ditto. We'll only use the equity if we need to late in life.
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Re: How much do I really have for retirement?

Postby ziszew » Wed Dec 12, 2012 12:06 pm

FinancialDave wrote:I should let the OP speak, but it seems the struggle was with how to use the home equity in the retirement equation.

<snip>

fd


Everyone seems to have their own way of doing it, for my planning purposes I consider it an "investable asset" with the following characteristics:

Purchase Fee: ~2.5% (stamp duty, closing costs, etc)
Expense ratio: ~3-4% (property tax % + ~1-2% maintenance/repair/upgrade)
Redemption Fee: ~5% (professional fees, closing costs, etc)

Trade settlement time from sell order: ~180 days (local market average)

Expected annualized gross real return: ~0.4% (using inflation adjusted CS index)
Expected annualized real return net of expenses: ~(-3%) excluding purchase/redemption fees

Plug in your own numbers and get as specific as you like, but I don't consider it a particularly well performing investment. It is, however, a great home.
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Re: How much do I really have for retirement?

Postby FinancialDave » Wed Dec 12, 2012 1:02 pm

ziszew wrote:
Everyone seems to have their own way of doing it, for my planning purposes I consider it an "investable asset" with the following characteristics:

Purchase Fee: ~2.5% (stamp duty, closing costs, etc)
Expense ratio: ~3-4% (property tax % + ~1-2% maintenance/repair/upgrade)
Redemption Fee: ~5% (professional fees, closing costs, etc)

Trade settlement time from sell order: ~180 days (local market average)

Expected annualized gross real return: ~0.4% (using inflation adjusted CS index)
Expected annualized real return net of expenses: ~(-3%) excluding purchase/redemption fees

Plug in your own numbers and get as specific as you like, but I don't consider it a particularly well performing investment. It is, however, a great home.


I think your numbers are pretty "spot on" based of course on the length of time you hold the asset and how many times you refinance it along the way -- buy the way where are the carry costs for the mortgage?
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Re: How much do I really have for retirement?

Postby ziszew » Wed Dec 12, 2012 1:33 pm

FinancialDave wrote: <--snip-->
buy the way where are the carry costs for the mortgage?


I think it depends on the specifics:
-Marginal tax bracket and how much the deduction affects your AGI and phaseouts for other incentives (as long as the mortgage deduction remains)
-The taxable equivalent rate of the mortgage given the above added to the expense ratio, or the difference to the TEY of appropriate bonds (can be positive or negative but usually positive, as in it adds to the expense ratio) added to ER if you don't have to borrow the money.

That first part can get fairly complex if the deduction starts letting you "back in" to a lot of incentives and you can take advantage of them, otherwise it's fairly straightforward. Right now our carry cost is slightly negative with the expectation it will go more so in a few years which led us to take as much mortgage money as we could (80%). If the deduction rules change significantly then it will go positive and we'll act accordingly ::shrug:: Can't predict the future...

For us all the numbers add up to be just slightly in favor of buying over renting recently (which we have), compared to 2005/2006 where it was shockingly in favor of renting (which we did). Even if the numbers were slightly in favor of renting we'd buy anyway; there is mental/emotional value for us in ownership compared to renting.
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Re: How much do I really have for retirement?

Postby chocolatemuffin » Wed Dec 12, 2012 2:18 pm

ziszew wrote:
FinancialDave wrote:I should let the OP speak, but it seems the struggle was with how to use the home equity in the retirement equation.

<snip>

fd


Everyone seems to have their own way of doing it, for my planning purposes I consider it an "investable asset" with the following characteristics:

Purchase Fee: ~2.5% (stamp duty, closing costs, etc)
Expense ratio: ~3-4% (property tax % + ~1-2% maintenance/repair/upgrade)
Redemption Fee: ~5% (professional fees, closing costs, etc)

Trade settlement time from sell order: ~180 days (local market average)

Expected annualized gross real return: ~0.4% (using inflation adjusted CS index)
Expected annualized real return net of expenses: ~(-3%) excluding purchase/redemption fees

Plug in your own numbers and get as specific as you like, but I don't consider it a particularly well performing investment. It is, however, a great home.


This is assuming the house doesn't appreciate? It seems reasonable to assume the house value to keep pace with inflation over a long period of time? There's no guarantee of course, but there's no guarantee for stock neither. I live in the Bay Area, where houses are expensive relative to rent, but I still expect a small positive real rate of return over the long haul.
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Re: How much do I really have for retirement?

Postby Padlin » Wed Dec 12, 2012 2:46 pm

Whatever happened to keep it simple.
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Re: How much do I really have for retirement?

Postby ziszew » Wed Dec 12, 2012 3:36 pm

chocolatemuffin wrote:
ziszew wrote:<--snip-->
Expected annualized gross real return: ~0.4% (using inflation adjusted CS index)
Expected annualized real return net of expenses: ~(-3%) excluding purchase/redemption fees


Plug in your own numbers and get as specific as you like, but I don't consider it a particularly well performing investment. It is, however, a great home.


This is assuming the house doesn't appreciate? It seems reasonable to assume the house value to keep pace with inflation over a long period of time? There's no guarantee of course, but there's no guarantee for stock neither. I live in the Bay Area, where houses are expensive relative to rent, but I still expect a small positive real rate of return over the long haul.


(emphasis added)

Yes, on price alone you will see a return of inflation or slightly above depending on your market. San Francisco's has been a bit negative over the last decade according to CS. see: http://goo.gl/h9WDs

Once all the carrying costs are added in (financing, taxes, maintenance, repairs, improvements, insurance, etc) along with the "purchase and redemption fees," it's most likely a negative real return for most of the investment period depending on the value of equivalent rent (which would offset those expenses and is more volatile).

This is all, of course, just the math. The subjective value of "owning" your home is worth something, how much is dependent on the individual.
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Re: How much do I really have for retirement?

Postby EternalOptimist » Wed Dec 12, 2012 4:20 pm

Well, I bought my house in 1981 for $125k and it is now worth ~$600k (no mortgage)--not a bad return. I just retired and feel that my home is a huge asset for me both financially and psychologically. I already have a sizable HELOC (so my access to cash is already there) plus no capital gains if I sell, tax deductions for my property taxes. I see :moneybag all over for my retirement. But then again I am an EternalOptimist. :wink:
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Re: How much do I really have for retirement?

Postby Rodc » Wed Dec 12, 2012 4:48 pm

A paid for house is certainly part of the funding you have for retirement.

You can sell and rent a cheap apartment, move in with family or split a place with a friend or two, buy a smaller house (maybe) or move to a cheaper location (maybe). You can take the proceeds and move into continuing care retirement community. Lots of options.

This is no different from someone who chose to spend their life as a renter who has $1M in stocks and bonds. Would we say, well if he owned a home he might only have $500K in stocks and bonds so he should consider he has only saved $500K?

Seems like a lot of mental accounting.

Sure a house may be illiquid, but one can get a home equity loan or a reverse mortgage (pros and cons of course). A house can be more home than you need.

But what you have to live on is your net worth in total. Unless for some reason you are bound and determined to starve rather than sell or otherwise tap your equity.

Would you rather face retirement with $500K and no house, or $500K and a paid for house? Now, follow up question, is a paid for house part of your assets that can be taped for retirement or not? (you may not want to tap, some people also try very hard to never tap stocks or bonds either).
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: How much do I really have for retirement?

Postby umfundi » Wed Dec 12, 2012 6:07 pm

EternalOptimist,

I suggest you take a shot at calculating your housing expense. What would it cost to rent your house? What investment return on your equity would it take to pay the rent? (including repairs, maintenance, taxes ...)

Do you need to tap the money now locked in your home equity? Do you intend to move or downsize? Take a look at this from different views. It will help to frame your mental accounting.

In the OP example, you implied the house is 50% of the net worth, if you were to count it. That is way out of whack, IMHO.

Personally, I have never counted the value of the equity in our house as part of our net worth, but that's my mental accounting. But also, it's now only about 8% of our net worth.

How is "net worth" a useful number? Is it everything that could be quickly turned into cash if you get hit by a truck? Is it the assets you can tap as "retirement savings"? Knowing the purpose should help you decide what is in and what is out.

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Re: How much do I really have for retirement?

Postby ziszew » Wed Dec 12, 2012 6:10 pm

EternalOptimist wrote:Well, I bought my house in 1981 for $125k and it is now worth ~$600k (no mortgage)--not a bad return. I just retired and feel that my home is a huge asset for me both financially and psychologically. I already have a sizable HELOC (so my access to cash is already there) plus no capital gains if I sell, tax deductions for my property taxes. I see :moneybag all over for my retirement. But then again I am an EternalOptimist. :wink:


Inflation adjusted to 2012 thats 318k purchase price. Quick and dirty that seems to be about a 1.02% real CAGR (gross) on the price over 31 years; you did quite well, more than double the US average of 0.4%. Expenses are going to move that down to varying degrees for everyone.

As I said, tax treatment can help (or hurt) the expenses and the mental/emotional value is different for everyone; not a particularly good investment, but a great home...

Congrats on the house and retirement, enjoy :sharebeer
Last edited by ziszew on Wed Dec 12, 2012 6:18 pm, edited 1 time in total.
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Re: How much do I really have for retirement?

Postby chocolatemuffin » Wed Dec 12, 2012 6:15 pm

ziszew wrote:
EternalOptimist wrote:Well, I bought my house in 1981 for $125k and it is now worth ~$600k (no mortgage)--not a bad return. I just retired and feel that my home is a huge asset for me both financially and psychologically. I already have a sizable HELOC (so my access to cash is already there) plus no capital gains if I sell, tax deductions for my property taxes. I see :moneybag all over for my retirement. But then again I am an EternalOptimist. :wink:


Inflation adjusted to 2012 thats 318k purchase price. Quick and dirty that seems to be about a 1.02% real CAGR (gross) on the price over 31 years; you did quite well, more than double the US average of 0.4% real inflation adjusted return. Expenses are going to move that down to varying degrees for everyone.

As I said, tax treatment can help (or hurt) the expenses and the mental/emotional value is different for everyone; not a particularly good investment, but a great home...

Congrats on the house and retirement, enjoy :sharebeer


The expenses will likely be offset by the imputed rental income. In most cases, the imputed rental income should be more than the expense, even in the more expensive areas.
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Re: How much do I really have for retirement?

Postby bengal22 » Wed Dec 12, 2012 7:01 pm

bottlecap wrote:
bengal22 wrote:
bottlecap wrote:It is not a retirement asset. You can't eat it or spend it.

JT


You cant eat a mutual fund but you can sell it and buy food with that. You cant spend a mutual fund but you can sell it and spend the proceeds. A house is not as liquid but it is an asset that you can use if needed. I count my house equity as an asset and factor it in for retirement.


Yes, but you are not currently using your mutual fund as a place to live. It's weird that I have to explain this, but you can't eat your house and live in it at the same time. You can sell you housing to eat while you live on the street, but that's not what most people view themselves doing in retirement.

If you live in a 5,000 square foot house now and plan to downsize in retirement to a 1,500 square foot house, now I guess you can count that extra 3,500 square foot as an asset you will live off of in retirement. Assuming you're not going to want to live somewhere more expensive in retirement.

For almost everyone, however, comparing a home to a mutual fund asset that can be spent down in retirement doesn't make any sense.

JT


I share your frustration in not being able to explain a simple concept. Having a lot of equity in your house gives you a lot of options toward your retirement plan. All assets vary in liquidity, volatility, and function but they all should be considered in our overall financial plan. At least for me, that makes perfect sense.
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Re: How much do I really have for retirement?

Postby Rodc » Wed Dec 12, 2012 7:36 pm

bengal22 wrote:
bottlecap wrote:
bengal22 wrote:
bottlecap wrote:It is not a retirement asset. You can't eat it or spend it.

JT


You cant eat a mutual fund but you can sell it and buy food with that. You cant spend a mutual fund but you can sell it and spend the proceeds. A house is not as liquid but it is an asset that you can use if needed. I count my house equity as an asset and factor it in for retirement.


Yes, but you are not currently using your mutual fund as a place to live. It's weird that I have to explain this, but you can't eat your house and live in it at the same time. You can sell you housing to eat while you live on the street, but that's not what most people view themselves doing in retirement.

If you live in a 5,000 square foot house now and plan to downsize in retirement to a 1,500 square foot house, now I guess you can count that extra 3,500 square foot as an asset you will live off of in retirement. Assuming you're not going to want to live somewhere more expensive in retirement.

For almost everyone, however, comparing a home to a mutual fund asset that can be spent down in retirement doesn't make any sense.

JT


I share your frustration in not being able to explain a simple concept. Having a lot of equity in your house gives you a lot of options toward your retirement plan. All assets vary in liquidity, volatility, and function but they all should be considered in our overall financial plan. At least for me, that makes perfect sense.


And many spend down a house while living it via home equity loans for reverse mortgages. These of course are not perfect solutions, they come with costs and risks. But if you are 80 years old and need to generate income so you can stay in your house (for example) you can get a reverse mortgage to spend down 50% of your equity and you can't lose the house (your heirs may take a hit, hey, no free ride).

Bold above added: Kind of silly to talk about selling to live on the street. Many of my former neighbors who bought in the 1950s have sold their homes. Many because keeping up a house got to be a burden, though some for the need for cash. Funny thing is though, they all had their cash reserves go up and none live on the street. They live in condos, apartments, retirement communities, or adult children. I have not done a poll, but I suspect they all agree that home equity is a real source of cash to support retirement needs.
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Re: How much do I really have for retirement?

Postby freebeer » Wed Dec 12, 2012 9:42 pm

Home equity was in 2010, after the crash, over 70% of median household net worth ($55,000 of $77,200), it would be pretty silly not to count it ( http://blogcritics.org/politics/article ... ehold-net/ ).

It is also in the US a pretty common way to (indirectly) buy a good education for your kids to move into a good school district, paying the higher price for housing and resulting higher taxes. So the "downsizing" that often happens isn't just literally that... it's also the artifact of the disincentive to over-pay once the kids are no longer in school.
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Re: How much do I really have for retirement?

Postby lawman3966 » Wed Dec 12, 2012 10:49 pm

There are clearly many views on the subject, and any could be right so long as you apply the withdrawal formula to the right set of expenses. The home equity is part of your net worth either way. The question is whether to count it within the assets available to spend down in retirement.

If you plan to continue living where you are when you retire, it's more effective to not count your home as an accessible financial asset. You can then apply your withdrawal formula, either 4% or other, to paying off liabilities other than rent or a mortgage, such as food, transportation, health care, etc. However you will still have to include property taxes, maintenance, etc and other costs not covered by the fact of owning the home. For the sake of simplicity, I'm omitting the possiblity of getting a reverse mortgage in the above.

If you plan to move, you should certainly count the value of your home among your retirement assets, since your residence cost is now a variable you have control over. You may well conclude that you need only a one bedroom condo in Florida, in which case you may need far less than $500K to buy it, and less than 4% of 500K per year to rent it.

Unless it is a goal of yours to die with $500K (or the appreciated value of your home upon your death) in unspent capital in the form of home equity (which is fine if you have heirs who want the home), it seems perfectly legitimate to count this amount among the assets available to spend down in retirement.
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Re: How much do I really have for retirement?

Postby Watty » Wed Dec 12, 2012 11:19 pm

A paid off house should only be counted as an asset if you also include the equivalent rent you are not paying as an expense since you could rent the house out if you were not living in it. If you do not do both of these then you are double counting the value of house. It will not be exactely the same but leaving both of these out of your calculations is roughly the same.

My Mom was raised during the depression and had an interesting way of looking at her paid off house.

She always said that having a paid off house was her long term care insurance policy and that if she had to go to a nursing home that we were to sell the house and to use the money to pay her nursing home costs. She also made sure that we had all the right paperwork to be able to do this if we needed to. She did not live in a real expensive area but between the home equity and her social security that would have been enough to pay for at least five years in a nursing home if it had been needed.
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Re: How much do I really have for retirement?

Postby umfundi » Wed Dec 12, 2012 11:38 pm

The last two posts, Lawman and Watty, have it correct.

Start from the possible (or probable) end states and work backwards.

If you plan never to sell your home but to will it to the local historical society, don't count it. If you have no heirs, plan to sell your home and move to a retirement community in another state, absolutely count it. And the all possibilities in between, that may lead you to count some of it.

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Re: How much do I really have for retirement?

Postby bottlecap » Wed Dec 12, 2012 11:54 pm

Rodc wrote:
bengal22 wrote:
bottlecap wrote:
bengal22 wrote:
bottlecap wrote:It is not a retirement asset. You can't eat it or spend it.

JT


You cant eat a mutual fund but you can sell it and buy food with that. You cant spend a mutual fund but you can sell it and spend the proceeds. A house is not as liquid but it is an asset that you can use if needed. I count my house equity as an asset and factor it in for retirement.


Yes, but you are not currently using your mutual fund as a place to live. It's weird that I have to explain this, but you can't eat your house and live in it at the same time. You can sell you housing to eat while you live on the street, but that's not what most people view themselves doing in retirement.

If you live in a 5,000 square foot house now and plan to downsize in retirement to a 1,500 square foot house, now I guess you can count that extra 3,500 square foot as an asset you will live off of in retirement. Assuming you're not going to want to live somewhere more expensive in retirement.

For almost everyone, however, comparing a home to a mutual fund asset that can be spent down in retirement doesn't make any sense.

JT


I share your frustration in not being able to explain a simple concept. Having a lot of equity in your house gives you a lot of options toward your retirement plan. All assets vary in liquidity, volatility, and function but they all should be considered in our overall financial plan. At least for me, that makes perfect sense.


And many spend down a house while living it via home equity loans for reverse mortgages. These of course are not perfect solutions, they come with costs and risks. But if you are 80 years old and need to generate income so you can stay in your house (for example) you can get a reverse mortgage to spend down 50% of your equity and you can't lose the house (your heirs may take a hit, hey, no free ride).

Bold above added: Kind of silly to talk about selling to live on the street. Many of my former neighbors who bought in the 1950s have sold their homes. Many because keeping up a house got to be a burden, though some for the need for cash. Funny thing is though, they all had their cash reserves go up and none live on the street. They live in condos, apartments, retirement communities, or adult children. I have not done a poll, but I suspect they all agree that home equity is a real source of cash to support retirement needs.


Yeah, if you read the second half of my post, I address this. "Living on the street" is a rhetorical device to point out that a home, which provides housing, is not at all the same as a mutual fund, which serves no other purpose than to invest money so that it can be spent down.

There was an article in the WSJ this week about folks who thought of their home as a retirement asset because they planned to downsize and how it many times doesn't work out that way.

JT
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Re: How much do I really have for retirement?

Postby Rodc » Thu Dec 13, 2012 9:48 am

There was an article in the WSJ this week about folks who thought of their home as a retirement asset because they planned to downsize and how it many times doesn't work out that way.


Like people who had stocks in 1929, 1970's, 2001, 2008...

So don't hold stocks because something it does not work as well as hoped?

This is why we diversify.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: How much do I really have for retirement?

Postby letsgobobby » Fri Dec 14, 2012 1:14 am

I'd count the home but only inasmuch as its free and clear ownership reduces your annual expenses and by extension your portfolio size requirement.
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Re: How much do I really have for retirement?

Postby umfundi » Fri Dec 14, 2012 2:06 am

letsgobobby wrote:I'd count the home but only inasmuch as its free and clear ownership reduces your annual expenses and by extension your portfolio size requirement.

Yes, if you count the house you own as an asset and your rent as zero, that is double counting.

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Re: How much do I really have for retirement?

Postby celia » Fri Dec 14, 2012 5:14 am

The discussion so far has been whether to count the house (or not) as part of your retirement assets. I would, instead, like to comment on the topic listed as: "How much do I really have for retirement?".

If you have any traditional (deductible) IRAs, you should not count their full value as part of your retirement assets, since you have not yet paid taxes on them. Unless you know your tax rate will be 0 at the time you withdraw from them (when they are subject to being taxed), you should think of them as being partially owned by the IRS and possibly a state (if your state has an income tax on withdrawals).

Roths can be considered 100% yours.
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Re: How much do I really have for retirement?

Postby Bounca » Fri Dec 14, 2012 7:14 am

The question is whether to count it within the assets available to spend down in retirement.


I agree with Lawman. Here is a real life situation with my parents.

77 yrs old, just moved into a retirement/assited living apartment. They retired around 65 and are selling their home which is payed off for. Dad purchased the rancher for (I think) $22,000 in 1971. He built a small addition in 1980. Its listed for $169,000 and after negotiating and closing I think it will go for $145,000 within a ~180 day window.

Now they are well off in that the $145,000 WILL BE around %15 of their retirement assets. That %15/$145,000 need not be ignored, nor was it in his retirement planning.

Correct me if I'm wrong. Equity - with all the nuances mentioned - is still ultimately a retirement asset in my book.
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Re: How much do I really have for retirement?

Postby Grt2bOutdoors » Fri Dec 14, 2012 9:00 am

Bounca wrote:
The question is whether to count it within the assets available to spend down in retirement.


I agree with Lawman. Here is a real life situation with my parents.

77 yrs old, just moved into a retirement/assited living apartment. They retired around 65 and are selling their home which is payed off for. Dad purchased the rancher for (I think) $22,000 in 1971. He built a small addition in 1980. Its listed for $169,000 and after negotiating and closing I think it will go for $145,000 within a ~180 day window.

Now they are well off in that the $145,000 WILL BE around %15 of their retirement assets. That %15/$145,000 need not be ignored, nor was it in his retirement planning.

Correct me if I'm wrong. Equity - with all the nuances mentioned - is still ultimately a retirement asset in my book.


It is an asset, and if realized as in your case by selling it, then I would consider it as part of the portfolio. If one owns a home outright, has no intention of selling because they need a place to live then would you include it in retirement planning? I say no. Perhaps others have a different view of it but my retirement portfolio exists to provide me with an income stream in the future, my home does not offer that, in fact it is an ongoing expense to maintain its useful life.
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