Home Equity When Estimating Savings for Retirement

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jhl
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Home Equity When Estimating Savings for Retirement

Post by jhl » Wed Sep 02, 2015 1:38 pm

I'm wondering if most people here do or do not include their home equity when figuring out a savings rate in order to retire. I was taking a look at this simple calculator:

http://www.vox.com/2014/7/31/5882885/re ... -do-i-need

I live & own a condo in NYC, and have seen dramatic price increases over the years. I'm inclined to exclude home equity entirely when planning for retirement savings because it seems to skew the results so dramatically. Curious how others take this into account when determining a savings rate % for retirement.

I realize the recommendation here is generally to max out retirement accounts as much as possible, but sometimes it would be nice to have a little bit more cash flow in the present :)

Thanks in advance for any thoughts/comments.

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Meaty
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Re: Home Equity When Estimating Savings for Retirement

Post by Meaty » Wed Sep 02, 2015 1:43 pm

I don't given I'll need a place to live in post-retirement and, if I tap the equity or sell, then I'll have a monthly payment. Unless you have a large home now that you plan to sell/downsize then I'd advocate leaving it out
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Re: Home Equity When Estimating Savings for Retirement

Post by cheese_breath » Wed Sep 02, 2015 1:47 pm

I wouldn't for the same reason Meaty gives.
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Re: Home Equity When Estimating Savings for Retirement

Post by NoVa Lurker » Wed Sep 02, 2015 1:54 pm

Right, we don't count home equity at all. We might downsize a bit in retirement, especially because we currently live in a relatively high-priced metro area, but we don't want to depend on that.

However, we do assume that our mortgage will be fully repaid. As a result, our projected expenses in retirement include property taxes, insurance, and maintenance/repairs, but they do not include mortgage principal or interest payments.

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Re: Home Equity When Estimating Savings for Retirement

Post by Sidney » Wed Sep 02, 2015 1:58 pm

I have never counted anything that isn't a liquid asset. So, no home, no rental property, no personal property.
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Re: Home Equity When Estimating Savings for Retirement

Post by MrNewEngland » Wed Sep 02, 2015 2:07 pm

I count it towards my net worth but don't consider it as part of my retirement. As mentioned above I will need to live somewhere when I retire. Hopefully it'll be paid off. And I doubt I'll be able to downsize much as it's a pretty modest place. I could see someone counting some home equity in their retirement if the plan is to sell it and buy small or move to an area with cheaper housing.

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ResearchMed
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Re: Home Equity When Estimating Savings for Retirement

Post by ResearchMed » Wed Sep 02, 2015 2:08 pm

We were ignoring the home equity, which is such a rough estimate anyway.

However, it's gotten high enough, in all likelihood, that it's harder to ignore.

We are assuming that we'll be moving to a place where we can avoid home ownership maintenance/problems, and also where we can get more "assistance", which could be to a (rented) luxury condo to an assisted living facility or maybe even full continuing care.

We've got two sets of staircases (and a garage that is attached but *not* direct entry, meaning ice/snow/slipping), so there really isn't any meaningful chance that we'll age in place here.

Thus, we'll have sold the house and not purchased another at that point.

So we've started gently considering something like half the equity, but we don't plug it into any of the "retirement calculators"... yet.

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sfchris
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Re: Home Equity When Estimating Savings for Retirement

Post by sfchris » Wed Sep 02, 2015 2:10 pm

For those of you who say do not count home equity as part of your total value (for asset allocation calculation purposes) how would you handle my situation?

I rent in San Francisco. If I were ever to buy a house in the SF Bay area, immediately about a million dollars of my portfolio would go into the house. I don't know if I will, and if I do it will be in 10-15 years.

Should I take a million of my portfolio out of my total net worth when calculating my asset allocations (eg if I am 60/40, it would be .6*(total value-$1MM) for stocks? Then put that million in something like bonds or CDs?

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Re: Home Equity When Estimating Savings for Retirement

Post by dbr » Wed Sep 02, 2015 2:14 pm

Home equity is not the same as [liquid assets] saved for retirement. One reason, as mentioned, is that if/when one sells then one must take into account the new expense structure. That said, one certainly does take it into account in terms of the plan one might form and in particular the contingency that one will sell the home and then pay rent in some form. One may find that the asset added is far more than enough to manage the change in costs or far less, depending on what one anticipates.

Retirement calculators, by the way, usually provide for an addition to assets and a related addition to expenses, if indeed the new expenses are more.

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Re: Home Equity When Estimating Savings for Retirement

Post by dbr » Wed Sep 02, 2015 2:16 pm

sfchris wrote:For those of you who say do not count home equity as part of your total value (for asset allocation calculation purposes) how would you handle my situation?

I rent in San Francisco. If I were ever to buy a house in the SF Bay area, immediately about a million dollars of my portfolio would go into the house. I don't know if I will, and if I do it will be in 10-15 years.

Should I take a million of my portfolio out of my total net worth when calculating my asset allocations (eg if I am 60/40, it would be .6*(total value-$1MM) for stocks? Then put that million in something like bonds or CDs?
No You realize that at a point in time the situation has changed and other changes must be put in place accordingly.

Also, yes, if you recognize the different timelines for the house money and the retirement money, but I think a simple minded set aside as bonds would be overkill.

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Re: Home Equity When Estimating Savings for Retirement

Post by bigred77 » Wed Sep 02, 2015 2:20 pm

jhl wrote:I'm wondering if most people here do or do not include their home equity when figuring out a savings rate in order to retire. I was taking a look at this simple calculator:

http://www.vox.com/2014/7/31/5882885/re ... -do-i-need

I live & own a condo in NYC, and have seen dramatic price increases over the years. I'm inclined to exclude home equity entirely when planning for retirement savings because it seems to skew the results so dramatically. Curious how others take this into account when determining a savings rate % for retirement.

I realize the recommendation here is generally to max out retirement accounts as much as possible, but sometimes it would be nice to have a little bit more cash flow in the present :)

Thanks in advance for any thoughts/comments.
I would only include Home Equity in my retirement planning if you plan to move and either rent or buy something substantially less costly. Then i don't see anything wrong with including a portion of home equity in my planning.



sfchris wrote:For those of you who say do not count home equity as part of your total value (for asset allocation calculation purposes) how would you handle my situation?

I rent in San Francisco. If I were ever to buy a house in the SF Bay area, immediately about a million dollars of my portfolio would go into the house. I don't know if I will, and if I do it will be in 10-15 years.

Should I take a million of my portfolio out of my total net worth when calculating my asset allocations (eg if I am 60/40, it would be .6*(total value-$1MM) for stocks? Then put that million in something like bonds or CDs?
If you plan to retire and stay in San Francisco than I would not count the Home Equity in your retirement planning. If you bought a house your net worth remain unchanged (or decrease by the transaction costs) but your retirement portfolio would take a big hit.

I would not adjust my current portfolio to reflect potentially buying a house until your plans are more concrete. if you decide you definitely want to buy a house in 5 years I would remove any amount I am earmarking for a down payment from my portfolio and put it in something very low risk (MM, Short Term Bond Fund, etc) and then rebalance the remaining funds to my desired asset allocation.

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Re: Home Equity When Estimating Savings for Retirement

Post by Dandy » Wed Sep 02, 2015 2:45 pm

Nope - never did - having home equity is great. Take that into account when setting your allocation but it is better not to rely on it. You may end up staying in your house until you are 90. If/when you sell it you will have to live somewhere - another home, assisted living, a rental, nursing home, so you will probably need the equity for those expenses.

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Re: Home Equity When Estimating Savings for Retirement

Post by sfchris » Wed Sep 02, 2015 3:01 pm

Dandy wrote:Nope - never did - having home equity is great. Take that into account when setting your allocation but it is better not to rely on it. You may end up staying in your house until you are 90. If/when you sell it you will have to live somewhere - another home, assisted living, a rental, nursing home, so you will probably need the equity for those expenses.
The problem I have with the "do not count it" argument, particularly in HCOL areas, is that people DO derive a big benefit from home equity. For example, they can take a reverse mortage in their retirement years. This means that in the back of their mind they know they can fall back on that equity if needed, even if they don't admit this. This means that when they talk about or recommend a 70/30 allocation, their allocation is actually less risky than that, since there is some cash available in the house. Someone who says on there that they are 70/30 on here, but actually has $800k in home equity, may really be taking on the equivalent of 40/60 risk when compared to someone like me who has no real estate.

This messes up the discussions on this forum about asset allocations and appropriate risk.

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Re: Home Equity When Estimating Savings for Retirement

Post by DaftInvestor » Wed Sep 02, 2015 3:13 pm

sfchris wrote:
Dandy wrote:Nope - never did - having home equity is great. Take that into account when setting your allocation but it is better not to rely on it. You may end up staying in your house until you are 90. If/when you sell it you will have to live somewhere - another home, assisted living, a rental, nursing home, so you will probably need the equity for those expenses.
The problem I have with the "do not count it" argument, particularly in HCOL areas, is that people DO derive a big benefit from home equity. For example, they can take a reverse mortage in their retirement years. This means that in the back of their mind they know they can fall back on that equity if needed, even if they don't admit this. This means that when they talk about or recommend a 70/30 allocation, their allocation is actually less risky than that, since there is some cash available in the house. Someone who says on there that they are 70/30 on here, but actually has $800k in home equity, may really be taking on the equivalent of 40/60 risk when compared to someone like me who has no real estate.

This messes up the discussions on this forum about asset allocations and appropriate risk.
But if tapping home equity isn't part of a retirement plan then why count it as part of your AA? To me whether or not you own is more about what your monthly expenses will be in retirement versus changing asset allocations to account for home equity. If you own when you retire your expenses include home maintenance/taxes. If you plan to rent into retirement your expenses have to account for rent (and increases thereof) - which will be higher than ownership costs (thus you will need more to retire with). I don't plan on tapping home equity so don't count it - I suppose you could call it an unaccounted-for emergency cushion but I prefer to think of it as an asset that will be inherited by heirs. Thus it is not part of my retirement savings.

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Re: Home Equity When Estimating Savings for Retirement

Post by protagonist » Wed Sep 02, 2015 3:23 pm

HOme equity is critical, since for many it is a major (if not THE major) portion of their assets.

It's not a question of whether you WANT to tap into it, any more than it is a question of whether you want to tap into your stocks rather than save them for your heirs- they are still part of your investment portfolio. The fact is that you CAN tap into it. If you own a million dollar home and everything hits the fan, you can sell and live a VERY long time in a $1000 or $2000 or $4000/month apartment with the proceeds.

Plus it provides diversification vs stocks and bonds. The value can shrink or grow. It could be the major part of your portfolio.

Look at it this way:

Person #1 retires at 65 with $10K in stocks, $10K in bonds, nothing else, and is paying rent.

Person #2 retires at 65 with $10K in stocks, $10K in bonds, and owns a $10 million home.

Whose retirement is more secure?

And is person #2's portfolio 50/50? Should Person #2 consider investing in REITs for the sake of diversification?

The fact that people ignore this elephant in the room when discussing asset allocation, ability to retire, etc. is beyond me, despite all the arguments to the contrary that I have tried in vain to understand.

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jhl
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Re: Home Equity When Estimating Savings for Retirement

Post by jhl » Wed Sep 02, 2015 4:11 pm

Thanks for all the responses, a lot to take in. I think for the time being I'm not going to take it into account, at least not in terms of savings %. The main reason being that retirement is a long way off & I have absolutely no clue what my living situation will be at that time, and what the related expenses will be. If it were sold and moved to lower cost of living area, that would of course be different as it is converted to liquid asset. But remaining in NYC seems to be a wash to me.

One interesting point that I'm interested in pursuing is how people consider it as part of their investment portfolio, and if they do or do not adjust their investment allocations as a result. To put this in perspective, home equity at this point is about 2x what I have saved for retirement. So it is a big "elephant in the room", in that sense. Given a high % of real estate value in overall net worth, how do people adjust other investments? For the most part, I have stuck close to the "age in bonds" approach. With some regretted tweaking towards more bonds post 2008 crash. Wondering if I should re-evaluate that given that a large % of net worth is now real estate value.

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Re: Home Equity When Estimating Savings for Retirement

Post by Dandy » Wed Sep 02, 2015 6:51 pm

The problem I have with the "do not count it" argument, particularly in HCOL areas, is that people DO derive a big benefit from home equity. For example, they can take a reverse mortage in their retirement years. This means that in the back of their mind they know they can fall back on that equity if needed, even if they don't admit this. This means that when they talk about or recommend a 70/30 allocation, their allocation is actually less risky than that, since there is some cash available in the house. Someone who says on there that they are 70/30 on here, but actually has $800k in home equity, may really be taking on the equivalent of 40/60 risk when compared to someone like me who has no real estate.
I don't see that as a problem. They aren't stupid - they know they have a substantial amount of equity. So they have a nice real estate investment that is way in the black and a stock/fixed income that is at their comfort level. Maybe the have a pension, coin collection and a new car. All those are nice assets to have. Assets, health, age, other income streams all should go into how you want to allocate your stocks/fixed income. I don't like counting on other assets when making my investment allocation.

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Re: Home Equity When Estimating Savings for Retirement

Post by corn18 » Wed Sep 02, 2015 7:06 pm

I don't count it anywhere, but I do use it when I decide what drop in my portfolio I am willing to live with. If I had $1M in home equity, I might take a bit more risk in my retirement savings vs. if I didn't have any or very little. I do the same thing with my military pension. That sucker would cost me $1.2M to buy as an annuity, but I don't include that in my asset allocations. I do include the comfort of having that into my risk tolerance. As a result of these two items (equity and pension) I decided 65/35 was a tolerable AA for me at age 50. I want to retire at 55. If I did not have those two things, I would probably pick 50/50 or even 40/60 as I am generally risk averse when it comes to investing.
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Re: Home Equity When Estimating Savings for Retirement

Post by LowER » Wed Sep 02, 2015 7:19 pm

I count it 1/2 toward retirement because I plan to sell and buy half (or less) of the current house when the teens are out.

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Re: Home Equity When Estimating Savings for Retirement

Post by indexonlyplease » Wed Sep 02, 2015 7:51 pm

Our house is paid for and no I don't count it toward retirement. But it is nice to know that when I retire, I plan to downsize and put the other half in saving. Living is South FL houses in my neighborhood have again increased to prices before the crash (hard to believe we learned nothing).


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Re: Home Equity When Estimating Savings for Retirement

Post by bhsince87 » Wed Sep 02, 2015 8:11 pm

I don't count it, but I do consider it as a back up form of longevity insurance as an annuity replacement.

Reverse mortgages have become much more attractive in the last few years (IMO) since government agencies have become more involved.

If you have no desire to leave legacy to heirs or others, in some cases, home equity could fund a significant portion of your living expenses.
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Re: Home Equity When Estimating Savings for Retirement

Post by OffGridder » Wed Sep 02, 2015 8:25 pm

Included in Net Worth but excluded retirement savings until we sold and downsized putting net proceeds in retirement funds to draw from. If you know your going to downsize or move to a lower cost housing area within say 5 years, then I see no problem projecting a conservative net equity into your retirement fund pool on which will draw from during retirement.
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Re: Home Equity When Estimating Savings for Retirement

Post by sfchris » Wed Sep 02, 2015 10:03 pm

Dandy wrote:
The problem I have with the "do not count it" argument, particularly in HCOL areas, is that people DO derive a big benefit from home equity. For example, they can take a reverse mortage in their retirement years. This means that in the back of their mind they know they can fall back on that equity if needed, even if they don't admit this. This means that when they talk about or recommend a 70/30 allocation, their allocation is actually less risky than that, since there is some cash available in the house. Someone who says on there that they are 70/30 on here, but actually has $800k in home equity, may really be taking on the equivalent of 40/60 risk when compared to someone like me who has no real estate.
I don't see that as a problem. They aren't stupid - they know they have a substantial amount of equity. So they have a nice real estate investment that is way in the black and a stock/fixed income that is at their comfort level. Maybe the have a pension, coin collection and a new car. All those are nice assets to have. Assets, health, age, other income streams all should go into how you want to allocate your stocks/fixed income. I don't like counting on other assets when making my investment allocation.
My frustration is that it makes talking about risk and asset allocation meaningless on this board if there is no such standard.

Again, if you have 800k in equity and are not including it at all, and I have none, and we are both 70/30, we have substantially different risk profiles. I live in an area where many many people have 800k-1 million in equity, and if I were to buy, I would probably need to put close to a million down.

Most of the advice I see on this board (and even from Bogle) about asset allocation does not seem to apply to me since I have no equity.

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Re: Home Equity When Estimating Savings for Retirement

Post by Dandy » Wed Sep 02, 2015 10:57 pm

My frustration is that it makes talking about risk and asset allocation meaningless on this board if there is no such standard.
There really is no way to set a standard that would address your concern. If you think you have one you should offer it. In a way I've felt your pain:

When I was still in school I made an acquaintance with the man who had a wealthy father,famous and rich sister. He thought he was a real risk taker and thought I should be. He never factored in that if he failed his kids would still go to college, he would still have health insurance and a roof over his head. Not all of us have such a security blanket I certainly didn't.

People have rich families, large home equities, inflation protected pensions, longevity genes, their kids get scholarships, etc. You have to look at the investment risk you are taking with your assets or lack there of -- can't look at other peoples allocation. Some "rich" people might take a lot of risk because they can and others little risk because they don't have to.

A fee only financial planner is often the right choice to get a specific allocation that takes into account your personal financial situation.
Hang in there and good luck.

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Re: Home Equity When Estimating Savings for Retirement

Post by protagonist » Wed Sep 02, 2015 11:16 pm

jhl wrote: One interesting point that I'm interested in pursuing is how people consider it as part of their investment portfolio, and if they do or do not adjust their investment allocations as a result.
In my case, the last time I checked ( February), I was about 50/50 in stocks/fixed investments. But when I included the value of my real estate, I was 40/40/20 stocks/fixed income/real estate. I'm retired. If it were not for the real estate, I would probably have a smaller stock allocation...maybe 40/60. The real estate provides me with added security if the stock market tanks. Not only because I would have the option to sell (which I do not plan to do), but also because I have the security of a roof over my head. And I feel more diversified.

I think that, to some extent, asset allocation is guesswork, and a large factor is risk tolerance. Owning my home allows me to be more risk tolerant- if all my other investments crash I still have that.
Last edited by protagonist on Thu Sep 03, 2015 8:15 am, edited 1 time in total.

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Re: Home Equity When Estimating Savings for Retirement

Post by FiveK » Wed Sep 02, 2015 11:44 pm

jhl wrote:I'm wondering if most people here do or do not include their home equity when figuring out a savings rate in order to retire. I was taking a look at this simple calculator:

http://www.vox.com/2014/7/31/5882885/re ... -do-i-need
A "how soon can I retire?" analysis can be seen as a constrained optimization problem. The more constraints, the longer it will take. But if those constraints are real (enough), don't ignore them.

In other words, if you want to stay in retirement where you are now, don't include the house value. If you are willing to downsize, you might include the difference between what you could get for the current place and what you expect to spend for a new place.

As far as simple calculators go, you might try http://networthify.com/calculator/early ... awalRate=4.

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Re: Home Equity When Estimating Savings for Retirement

Post by Artsdoctor » Wed Sep 02, 2015 11:58 pm

I don't count it but I'm aware of it. You have to live somewhere and it's an expense. In the worst case, you can liquidate but it's hard to factor that situation into asset allocation. I have friends that use their house as their legacy and will spend everything else--not unreasonable.

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Re: Home Equity When Estimating Savings for Retirement

Post by JiveTurkey » Thu Sep 03, 2015 4:15 am

Since we plan to live in the house forever, I keep in mind the lowered expenses post-mortgage pay-off, which factors into our cash needs in retirement.

The equity doesn't factor into our portfolio, though it is a part of our net worth.
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Re: Home Equity When Estimating Savings for Retirement

Post by vested1 » Thu Sep 03, 2015 7:57 am

Planning to downsize by selling your home and moving to a lower COL area, and actually doing it are two different animals. Plans change when you age as you begin to realize there is "value" in things other than investing, such as grandkids and cherished family. I "plan" on doing this but who knows if that will come to fruition when the time comes?

That's one of many reasons why, IMHO, home equity should be considered for net worth calculations or for prospective loan possibilities, but not for AA determination. Who knows what your situation will be in the distant future? I also believe that treating non-liquid assets as liquid assets can lead to a flawed investment plan.

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Re: Home Equity When Estimating Savings for Retirement

Post by protagonist » Thu Sep 03, 2015 8:20 am

FiveK wrote:
In other words, if you want to stay in retirement where you are now, don't include the house value.

That's like saying, "If you want to leave a million dollars that you have in stocks and bonds for your kids when you die, don't include that as part of your portfolio".

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Re: Home Equity When Estimating Savings for Retirement

Post by nisiprius » Thu Sep 03, 2015 8:24 am

To me, and to most people, the function of a home is not an investment, it's shelter. We own a home because we need somewhere to live.

If you live in an apartment and make money by flipping real estate, then to you homes are an investment.

I have never included home equity in any quantitative sort of way. It's in the back of my mind in a non-quantitative way. It influenced my retirement decision in the sense that someone who owns a home has some extra wiggle room in the future, compared to someone who doesn't. For example, the fact that reverse mortgages exist, the fact that good, bad, or indifferent there is an easy way to convert what you have and don't need (permanent home ownership) into what you might need and not have (enough income in the last years), certainly helped me shrug and say "let's go ahead, with reverse mortgage as a possible plan B."

Quantitatively, no, no, a thousand times no. The equity in your home is not a savings account. Realtors like to talk "building equity" because it is a good way to overcome your sales resistance (and legitimate fear) of a very expensive purchase. Jewelry and car salespeople like to use business and financial terms to discuss your diamond jewelry or Infiniti as an "investment," too.

You dare not think of your home equity as a savings account. Just because you put $X thousand into a house does not mean you can get $X thousand out when you need it, and by all measures of risk one specific single home is riskier than, e.g. stocks. You cannot sell a small portion of it. You cannot rebalance it. You cannot buy groceries with the "imputed income," the rent that you, as tenant, pay to yourself every month as landlord.

If 2006 taught us anything, it should be that a home equity line of credit is not the same thing as money.

A house is not liquid, any appraisal of its value is a guess, you can't execute a sell order and have the money in your account at the market value three days later. The value of your home is what one individual willing buyer who has money to buy and wants to buy a house in your neighborhood is willing negotiate with you in a mano-a-mano bargaining session. And it is not liquid because you are not using your home as an investment, you are using it as shelter, and your family may have strong opinions about moving out before the kids are into college.
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Re: Home Equity When Estimating Savings for Retirement

Post by protagonist » Thu Sep 03, 2015 8:34 am

FiveK wrote:
In other words, if you want to stay in retirement where you are now, don't include the house value.

That's equivalent to saying, "If you want to leave a million dollars that you have in stocks and bonds for your kids when you die, don't include that as part of your portfolio".

I also believe that treating non-liquid assets as liquid assets can lead to a flawed investment plan.
Your home may be less liquid than stocks or bonds, but it is still liquid. Just as you can dump a CD at any time if you are willing to pay the early withdrawal penalty, I could probably sell my house tomorrow if I was willing to take enough of a hit (and where I live that would not be much). You can also take home equity loans and second mortgages.
just like the vaguely businesslike talk about diamond jewelry or a fancy car as an "investment." You dare not think of your home equity as a savings account. Just because you put $X thousand into a house does not mean you can get $X thousand out when you need it,
Unlike stocks, bonds and real estate, diamonds and fancy cars are almost guaranteed to lose money over time (unless you buy a classic car as an "investment", as one might buy art, stamps/coins, gold, etc). One hopes that one's home will increase in value, just as one hopes that one's stocks and bonds will increase in value. Like with the stock market, if you put $x thousand in, it does not mean you can get $x thousand out when you need it. I would have done much better financially if I sold my house in 2009 than if I sold my stocks.

With all due respect, I suspect the only reasons home equity is not typically included in asset allocation recommendations and in financial modeling are:

1. That it adds another layer of complexity that the professionals don't know how to deal with. Stocks and bonds are complicated enough. It's easier to ignore the elephant in the room, even when the elephant is the key to financial security for a huge number of Americans. And, perhaps more relevant,

2. Though this may seem cynical, financial advisors, money managers and brokers make their living selling stocks and bonds, not real estate.

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Re: Home Equity When Estimating Savings for Retirement

Post by 22twain » Thu Sep 03, 2015 8:58 am

protagonist wrote:
FiveK wrote:In other words, if you want to stay in retirement where you are now, don't include the house value.
That's like saying, "If you want to leave a million dollars that you have in stocks and bonds for your kids when you die, don't include that as part of your portfolio".
I've occasionally seen the advice here that people who have more than they need for their own retirement expenses and expect to leave a lot of it to heirs or charity, should consider investing it (at least the excess) aggressively in a fashion appropriate for an extended time horizon, because that money really "belongs" to the beneficiaries.
My investing princiPLEs do not include absolutely preserving princiPAL.

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Re: Home Equity When Estimating Savings for Retirement

Post by tennisplyr » Thu Sep 03, 2015 10:40 am

I'm 65, retired and home equity represents one-half of my net worth. It's nice to know I can tap into it and it's value isn't as volatile as the equity market. I might be selling soon and couldn't if it wasn't for my home equity. Also currently have a nice HELOC which has come in handy.
Those who move forward with a happy spirit will find that things always work out.

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Re: Home Equity When Estimating Savings for Retirement

Post by kaudrey » Thu Sep 03, 2015 1:00 pm

Like many others, I count it when I keep track of our NW, but don't count is as part of our retirement money for withdrawal % calculations.

We have 3 properties right now, and our intention is to sell all 3 and use the equity to pay cash for the home we move to in retirement (we aren't planning to stay where we are). Since we are still 11 years away from retirement, I really have no idea if the equity from the properties will fully cover the next place, or if we'll have money left over. So for now, I'm treating it as a wash, and ignore it completely in my cash flow projections.

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FiveK
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Re: Home Equity When Estimating Savings for Retirement

Post by FiveK » Thu Sep 03, 2015 1:23 pm

protagonist wrote:
FiveK wrote: In other words, if you want to stay in retirement where you are now, don't include the house value.
That's equivalent to saying, "If you want to leave a million dollars that you have in stocks and bonds for your kids when you die, don't include that as part of your portfolio".
Well, yes and no. Yes, in the sense that you can put whatever constraints you want on the problem and those are both examples of constraints.
No, in the sense that the house, if not sold, will not contribute anything other than a place to live. That million dollars, however, will contribute returns that can be used for other expenses.
Thus, if you are so inclined, set $1 million as the lower bound on your investable portfolio but do include that amount when calculating portfolio returns.

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Re: Home Equity When Estimating Savings for Retirement

Post by Phineas J. Whoopee » Thu Sep 03, 2015 2:04 pm

Like several others, I don't count home equity as part of my retirement portfolio, but I do, of course, count it as an asset when looking at net worth (as would a corporation in calculating shareholders' equity, except it would use depreciation to reduce the reported value).

A home can't be marked to market like a stock or a treasury bond. I carry it on my books at the purchase price from eight years ago, because I have no other good estimate of its value now. Arguably I should discount the number by 6%, to account for a future real-estate commission, but I don't think I know what it's worth even to within 30%, so adjustments 1/5 that size would be meaningless.

I do count my cash flow advantages from homeownership to estimate the size my portfolio needs to be. Some new owners have worse cash flow. I have better, compared to where I was before the purchase.

In that way, and I'm just riffing in this paragraph, the apartment is in some respects like a single-premium immediate annuity with residual value. The reduction in outgo is equivalent, because arithmetic is arithmetic, to an increase in after-tax income. The latter could come from an SPIA. The apartment will still have residual value, in all likelihood, when I'm finished using it.

In fact, that thought was one of the things that convinced me to start looking into ownership in the first place. As I've posted before, my all-in cost, including the purchase price, closing costs, interest, furniture, carpeting, mini-blinds, moving my possessions, all the way to the taxes I paid on capital gains I realized raising the money to buy the place, was $X. My cash-flow improvement is $Y. I priced inflation-protected SPIAs paying enough that after taxes I would retain $Y. The least expensive cost approximately $4X. In effect, I bought an inflation-adjusted SPIA at a 75% discount. Plus, it came with a free apartment.

Break-even on cash flow alone is four years out.

My home may or may not be an example of the ill-defined term investment, but it sure is of financial benefit. I'll take the numbers, thank you. If somebody else wants to debate what the name should be, that's up to them. I probably won't participate.

PJW

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Re: Home Equity When Estimating Savings for Retirement

Post by Artsdoctor » Thu Sep 03, 2015 3:29 pm

If you do decide to factor home equity into your savings for retirement and you're living in a part of the country where real estate is extremely expensive, then you need to be meticulous with your cost basis records. I can't count how many colleagues have viewed their large homes as their retirement portfolio only to be absolutely shocked at the capital gains tax (federal and state) they have to pay after a sale. If you bought your home in many parts of LA in the 1960s, it's easy to think you're sitting on a cash cow. You are, but Washington and Sacramento will take part of it if you're not careful.

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Re: Home Equity When Estimating Savings for Retirement

Post by vested1 » Thu Sep 03, 2015 5:29 pm

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Re: Home Equity When Estimating Savings for Retirement

Post by vested1 » Thu Sep 03, 2015 5:30 pm

vested1 wrote:
I also believe that treating non-liquid assets as liquid assets can lead to a flawed investment plan.
By Protagonist: Your home may be less liquid than stocks or bonds, but it is still liquid. Just as you can dump a CD at any time if you are willing to pay the early withdrawal penalty, I could probably sell my house tomorrow if I was willing to take enough of a hit (and where I live that would not be much). You can also take home equity loans and second mortgages.

You can't live in a stock or bond. Neither can you live in a house once you've sold it. Willingness to take "a hit" equates more to shortsightedness than to realistic planning. Home equity loans and second mortgages are liabilities, not assets.

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Re: Home Equity When Estimating Savings for Retirement

Post by sfchris » Thu Sep 03, 2015 5:42 pm

vested1 wrote:
vested1 wrote:
I also believe that treating non-liquid assets as liquid assets can lead to a flawed investment plan.
By Protagonist: Your home may be less liquid than stocks or bonds, but it is still liquid. Just as you can dump a CD at any time if you are willing to pay the early withdrawal penalty, I could probably sell my house tomorrow if I was willing to take enough of a hit (and where I live that would not be much). You can also take home equity loans and second mortgages.

You can't live in a stock or bond. Neither can you live in a house once you've sold it. Willingness to take "a hit" equates more to shortsightedness than to realistic planning. Home equity loans and second mortgages are liabilities, not assets.
You can live in a house with a reverse mortgage. Home equity as a financial safety net is very real. In HCOL areas it is like a million dollars real.

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Re: Home Equity When Estimating Savings for Retirement

Post by reneeh63 » Thu Sep 03, 2015 6:04 pm

I include the expenses in terms of property tax and upkeep but nothing on the equity side because I don't plan to sell it. I will if I end up in a nursing home but it'll go for healthcare at that point - otherwise it'll be sold as part of my estate. It's a small bit of insurance for when I'm in poor health but I'm not counting on it for anything.

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Re: Home Equity When Estimating Savings for Retirement

Post by john94549 » Thu Sep 03, 2015 6:15 pm

Unless one is prepared to go the "reverse mortgage" route (or sell one's abode), it's best not to include presumed "home equity" in one's retirement portfolio. A few days ago, I read an interesting article in the New York Times about homes in Yokosuka which were essentially valueless. "Today a peacock, tomorrow, a feather duster".

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Re: Home Equity When Estimating Savings for Retirement

Post by protagonist » Thu Sep 03, 2015 8:00 pm

john94549 wrote:Unless one is prepared to go the "reverse mortgage" route (or sell one's abode), it's best not to include presumed "home equity" in one's retirement portfolio.
And if you don't plan on selling stock or taking a loan on margin, should you include your stocks in your portfolio?

The best laid plans of mice and men often go astray (or is it aglay or some such thing???)

The beauty of a home is that it is BOTH an investment AND something you can live in and appreciate on a daily basis (unlike a stock). As well as a diversification tool with little (if any) correlation with stocks or bonds.

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Re: Home Equity When Estimating Savings for Retirement

Post by Leemiller » Thu Sep 03, 2015 8:10 pm

I count our equity since we have a good amount and live in a HCOL area. Since I know how much cheaper I could buy a place in Florida and how much I'd rather live there, I count it.

I think some of the difference in thinking is because some people live in LCOL areas and so the amount isn't as much or they live in a HCOL area and think it is their "forever" home.

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Re: Home Equity When Estimating Savings for Retirement

Post by john94549 » Thu Sep 03, 2015 8:36 pm

protagonist, the problem with including one's presumed "home equity" is that it is both uncertain and (to a degree) illiquid. Equities, bonds, cash, all are of a different breed. For good or ill, they have a market value. And are liquid.

Example: we own a home in Northern California. While we have earthquake insurance, our house could be devastated by the next "big one". We also have a condo in Maui, which is vulnerable to tsunamis. Arguably, half our "net worth" is tied to those two properties, but I don't count the equity we have in either when calculating our "retirement" accounts.

While the loss of either or both properties would be unpleasant (understatement), we'd survive.
Last edited by john94549 on Thu Sep 03, 2015 8:42 pm, edited 1 time in total.

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Re: Home Equity When Estimating Savings for Retirement

Post by ResearchMed » Thu Sep 03, 2015 8:41 pm

protagonist wrote:
john94549 wrote:Unless one is prepared to go the "reverse mortgage" route (or sell one's abode), it's best not to include presumed "home equity" in one's retirement portfolio.
And if you don't plan on selling stock or taking a loan on margin, should you include your stocks in your portfolio?

The best laid plans of mice and men often go astray (or is it aglay or some such thing???)

The beauty of a home is that it is BOTH an investment AND something you can live in and appreciate on a daily basis (unlike a stock). As well as a diversification tool with little (if any) correlation with stocks or bonds.
"The best laid schemes o' Mice an' Men,
Gang aft agley"


Robert Burns
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john94549
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Re: Home Equity When Estimating Savings for Retirement

Post by john94549 » Thu Sep 03, 2015 8:50 pm

ResearchMed wrote:
"The best laid schemes o' Mice an' Men,
Gang aft agley"


Robert Burns
Yup, just ask the house flipper who bought my (deceased) Mom's house a year and a half ago, poured over $100K into repairs and upgrades, and finally sold it for no profit. In a real estate market which was hot, no less.

Problems: (1) roof; (2) drainage; (3) basement flooding; (4) ugly exterior; (5) ugly interior. The roof repair was red-tagged half-way through by the city, had to be torn off and re-done. The new drainage in the back apparently was under-sized, which led to (3) basement flooding. Not helpful to show a house when you have water in the basement, compounded by (4) trying to save money by not re-painting the house. Final point (5) he really could have used some help on the interior.

As my wife noted, it was a totally dated 1950's house from the outside, and a trendy SoHo loft from the inside. In a word, "jarring".

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