umfundi wrote:dkturner wrote:
Help me out here.
Two identical twin brothers turn 65 at the end of the year and plan on retiring in January 2013. Twin A lives in a $500,000 house with no mortgage and has a $500,000 investment portfolio. Twin B lives in an apartment and also has a $500,000 investment portfolio. The annual outlay in housing costs is $15,000 for each twin (living in an expensive house with no mortgage ain't cheap). In addition to Social Security income they both calculate they will need an additional $20,000 per year for living expenses.
For retirement planning purposes are these twins still identical (as the OP is inquiring, do they both have the same resources available for retirement)?
In my opinion, you cannot do this without looking at both sides of the ledger (current and future assets and liabilities, including things like leaving a legacy). Even then, you need to look at different options and scenarios, Plan A, Plan B, ... There is no one answer.
The problem with "Net Worth" is that it is only one side of the ledger, an incomplete picture. On the face of it, Twin A has a higher net worth, but in fact he has no more useful assets than Twin B from which to draw living expenses. For the OP question, the twins are the same.
But Twin A may have a plan B, where he sells his house, netting $400,000 after taxes and expenses, and moves into an apartment like his brother has. In terms of funding retirement expenses, he is now substantially better off than his brother.
Keith
You aren't helping out Keith, you're muddying the waters.
If Twin A wants to sell his house he isn't going to owe any federal income taxes on the sale proceeds, so he's probably going to net more like $450,000. If he can't get $500,000, less selling expenses, from the sale it isn't a $500,000 house, is it? But I digress. In any event, the income generated from such a sale would greatly enhance the cash available for A's future living expenses. He will have to rent an apartment, but his $15,000 in annual rent (rember, he's an identical twin) is simply a replacement for the annual $15,000 of housing related expenses (that went away when he sold his house) he no longer has to pay.
Twin A can ignore the value of his house and supplement his income with a reverse mortgage if he wishes. This alternative also produces real, cash-in-the hand, income which he can spend.
Twin A is either (1) going to live better than Twin B, or (2) leave a bigger legacy than Twin B, or (3) some combination of (1) and (2). Any any way you cut it, Twin A has considerably greater resources available for retirement than his, less well off, twin brother.