How much do I really have for retirement?

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

Post by YDNAL »

EternalOptimist wrote: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 an asset 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
First, I struck the word "house" because the very first mention of this word creates all of this other conversation.

Second, despite you haven't asked specifically, what you do with $500K in investable assets for retirement should be influenced by your ability and need for risk, after taking into consideration your complete financial picture and your personal circumstances. In retirement, you could actually spend $1 million (that's another discussion), if necessary.

Third, a $500K other asset has an "opportunity cost of capital" - your $500K at 2% annually represents $10,000 before tax (if applicable). Don't forget that when doing financial what-ifs and comparisons.

I hope that helps.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
Rodc
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Re: How much do I really have for retirement?

Post by Rodc »

then I would consider it as part of the portfolio.
That seems to me to be a slightly different issue.

When I think of portfolio I think of things that are more liquid, something I can rebalance, etc. I guess I don't have hard and fast rules as to what is in and what is out. An annuity provides income and is clearly part of retirement assets, but is not part of the portfolio; it simply reduces the income I need to generate.

I do think of home equity as part of retirement assets, and one that is more flexible than an annuity because I can sell and rent, sell and downsize, get a reverse mortgage, etc. But until sold and it turns into cash, I don't think of it as part of the portfolio. By having and living in the house, it does reduce the income stream I need to generate.
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.
letsgobobby
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Re: How much do I really have for retirement?

Post by letsgobobby »

Grt2bOutdoors wrote:
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.
yes but in order to realize the cash they had to substantially increase monthly expenses.
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HomerJ
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Re: How much do I really have for retirement?

Post by HomerJ »

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.
This. Just because you have $500k equity doesn't mean you have $500k more to spend...

If you sell the house to get at the $500k, then you're going to have to buy another house or start paying rent.

My house is paid off, but I don't consider it when doing retirement planning. If things go terribly wrong, it's nice that I have a buffer there... I can always sell it and go live in a 1-bedroom condo or in a trailer out in the country. So the money is real, and available if things go really bad... but my goal is to stay in the house, and NOT use any of its value for retirement.

For me, the value of the paid-off house is accounted for by having less expenses in retirement. So I already am getting the value for my equity because I only need to generate $5000 a month in retirement instead of $7000.

Addingthe value of my house to my "retirement portfolio" would be incorrect, unless I also increased my required expenses per month calculation.
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HomerJ
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Re: How much do I really have for retirement?

Post by HomerJ »

YDNAL wrote:
EternalOptimist wrote: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 an asset 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
First, I struck the word "house" because the very first mention of this word creates all of this other conversation.

Second, despite you haven't asked specifically, what you do with $500K in investable assets for retirement should be influenced by your ability and need for risk, after taking into consideration your complete financial picture and your personal circumstances. In retirement, you could actually spend $1 million (that's another discussion), if necessary.

Third, a $500K other asset has an "opportunity cost of capital" - your $500K at 2% annually represents $10,000 before tax (if applicable). Don't forget that when doing financial what-ifs and comparisons.

I hope that helps.
But a house is not just an "asset"... Sure that $500,000 at 2% annually represents $10,000 before tax... Too bad if you sell the house, you have to start paying for an apartment that costs $12,000 a year. No other "asset" increases your expenses when you sell it. A primary residence IS different from other assets.
dbr
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Re: How much do I really have for retirement?

Post by dbr »

HomerJ wrote:
But a house is not just an "asset"... Sure that $500,000 at 2% annually represents $10,000 before tax... Too bad if you sell the house, you have to start paying for an apartment that costs $12,000 a year. No other "asset" increases your expenses when you sell it. A primary residence IS different from other assets.
Yes, I was pointing out the same thing. I really don't think it is that hard to recognize a house as being an asset and an investment while also understanding that as either it has significant differences from other assets and investments, such as a portfolio of stocks and bonds. People seem to be trying to follow some exotic pro-forma word based paradigm where just common understanding of relatively simple things gets the job done.
dkturner
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Re: How much do I really have for retirement?

Post by dkturner »

HomerJ wrote:
YDNAL wrote:
EternalOptimist wrote: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 an asset 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
First, I struck the word "house" because the very first mention of this word creates all of this other conversation.

Second, despite you haven't asked specifically, what you do with $500K in investable assets for retirement should be influenced by your ability and need for risk, after taking into consideration your complete financial picture and your personal circumstances. In retirement, you could actually spend $1 million (that's another discussion), if necessary.

Third, a $500K other asset has an "opportunity cost of capital" - your $500K at 2% annually represents $10,000 before tax (if applicable). Don't forget that when doing financial what-ifs and comparisons.

I hope that helps.

But a house is not just an "asset"... Sure that $500,000 at 2% annually represents $10,000 before tax... Too bad if you sell the house, you have to start paying for an apartment that costs $12,000 a year. No other "asset" increases your expenses when you sell it. A primary residence IS different from other assets.
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)?
foxfirev5
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Re: How much do I really have for retirement?

Post by foxfirev5 »

Woodshark wrote: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?
Likewise we have both. I don't count the lake house. However it is one of my plan B options.
JW-Retired
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Re: How much do I really have for retirement?

Post by JW-Retired »

EternalOptimist wrote:Well, I bought my house in 1981 for $125k and it is now worth ~$600k (no mortgage)--not a bad return.
That's a 5% annualized return, not counting any taxes & expenses along the way. Not really all that great an investment. Putting $125k in VFINX in 1981 would now be worth $3.1M (also not counting tax drag).

Agree owning a long ago paid for house is a good thing and deserves some consideration. It's part of your net worth..... but what real use is that number?

Seems some people posting in this thread are really "counting" the house as an asset to boost the investment principal they apply their 4% withdrawel type formula to. That seems fraught with peril to me. You have a $600K investment nest egg and a $600K house so you draw an inflation adjusted 4% on $1200k , $48k/year, from what? If just from the nest egg part, the retirement calculator I use says it has a 34% chance of being all gone in 16 years. Then what? You can sell the house, but now you need an even larger income because you have to pay rent. Reverse mortgage? How long could that produce the (now inflation adjusted) $48K/yr?

You could start out taking half from the nest egg and the other half from a HELOC, but before too long the ever increasing HELOC interest would be a big deal. How would this actually work safely? Can any posters who are "counting" the house give us more insight into any specific plan they are following?
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umfundi
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Re: How much do I really have for retirement?

Post by umfundi »

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

Post by YDNAL »

HomerJ wrote:
YDNAL wrote:
EternalOptimist wrote: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 an asset 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
First, I struck the word "house" because the very first mention of this word creates all of this other conversation.

Second, despite you haven't asked specifically, what you do with $500K in investable assets for retirement should be influenced by your ability and need for risk, after taking into consideration your complete financial picture and your personal circumstances. In retirement, you could actually spend $1 million (that's another discussion), if necessary.

Third, a $500K other asset has an "opportunity cost of capital" - your $500K at 2% annually represents $10,000 before tax (if applicable). Don't forget that when doing financial what-ifs and comparisons.

I hope that helps.
But a house is not just an "asset"... Sure that $500,000 at 2% annually represents $10,000 before tax... Too bad if you sell the house, you have to start paying for an apartment that costs $12,000 a year. No other "asset" increases your expenses when you sell it. A primary residence IS different from other assets.
Homer.

1. A house is JUST an Asset.

2. The Asset is "costing you" (real estate taxes, insurance, maintenance and repairs, etc.) perhaps as much as renting an apartment. [edit to add] Your hypothesis and conclusion are faulty.

3. Upon a sale, net proceeds are also available for consumption, annuitization, reverse mortgage, etc.
Last edited by YDNAL on Sat Dec 15, 2012 8:48 am, edited 1 time in total.
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EternalOptimist
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Re: How much do I really have for retirement?

Post by EternalOptimist »

Thank you all for your thoughtful comments. I'm pretty confident that the way my life is going that I will be just fine with what I have. By nature, I am not a worry-wort nor have a lot of fears. Am sure I am much better off than most people on this planet :sharebeer
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dkturner
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Re: How much do I really have for retirement?

Post by dkturner »

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.
umfundi
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Re: How much do I really have for retirement?

Post by umfundi »

dkturner wrote:
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.
The waters were muddy long before I started swimming.

Read my post. You're simply proposing different scenarios, which lead to different conclusions. At one extreme, Twin A decides to will his house to his favorite charity. I do not equate a planned legacy with resources available for retirement.

Keith
Déjà Vu is not a prediction
FinancialDave
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Re: How much do I really have for retirement?

Post by FinancialDave »

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:
Without any expenses figured in - just the increase in equity over 31 years is 5.19%, which is pretty decent as houses go, but about half equity returns over the same time frame.

fd
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Clive
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Re: How much do I really have for retirement?

Post by Clive »

Ancient Talmud text suggested keeping a third in land, a third in merchandise and a third in reserves.

You might consider allowing that to expand/contract within 50% bands i.e. maybe look to rebalance back towards a third each if any one rises to 50% or more, or declines below 16% or less weightings.

In that context 50% in your home is on the borderline upper end of weightings.

For merchandise a stock/bond blend might be the easiest route.

For reserves an equal split between gold, TIPS and CD's/Short Term Treasury perhaps.

Some might opt to not include their home value in their measures and might see their investments more as a 50-50 merchandise and reserves split. Some might dislike stock exposure and perhaps opt for a 30-70 small cap value/safe type allocation.

Provided your assets are reasonably diversified and invested in a tax and cost efficient manner, generally its just a matter of viewing your asset allocation whichever way you feel most comfortable.
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