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How do you [handle home equity in retirement calculators]

Posted: Tue Jan 29, 2013 1:04 pm
by EternalOptimist
Hi, when using a retirement calculator which determines how long your assets will last, I'm trying to figure out what you all typically do. Let's say you have equity in your home which is at least equal to your portfolio value. When the calculator asks how long do your assets need to last and let's say you put in '20 years'. That's not totally correct because you have substantial value in your home equity that you can tap into. I'm curious how you all handle this? Thanks.

Re: How do you do this?

Posted: Tue Jan 29, 2013 1:14 pm
by mhc
I do not count the equity in my home. My home equity is only about 10% of the final number I am shooting for. Also, I consider my home equity to be within the noise of the calculations.

For you, 50% is not in the noise. If your home equity is 50% of your net worth at retirement and you plan to use that equity for living costs, then you should account for it.

Re: How do you do this?

Posted: Tue Jan 29, 2013 1:16 pm
by damjam
EternalOptimist wrote:Hi, when using a retirement calculator which determines how long your assets will last, I'm trying to figure out what you all typically do. Let's say you have equity in your home which is at least equal to your portfolio value. When the calculator asks how long do your assets need to last and let's say you put in '20 years'. That's not totally correct because you have substantial value in your home equity that you can tap into. I'm curious how you all handle this? Thanks.

Using FireCalc there is the ability to have a lump sum added to the portfolio in a future year. So you could assume sale of the house in a future year, however you will also have to account for the potential increase in spending for rent. FireCalc allows you to do that as well.

Re: How do you do this?

Posted: Tue Jan 29, 2013 1:17 pm
by YDNAL
EternalOptimist wrote:Hi, when using a retirement calculator which determines how long your assets will last, I'm trying to figure out what you all typically do. Let's say you have equity in your home which is at least equal to your portfolio value. When the calculator asks how long do your assets need to last and let's say you put in '20 years'. That's not totally correct because you have substantial value in your home equity that you can tap into. I'm curious how you all handle this? Thanks.

IF you "tap this Asset"
1. By selling the Asset, you must pay Rent and increase expenses.
2. By borrowing, you must pay interest, and increase expenses.

In either instance, you can't consider the Asset without changing/updating expenses. There is no ONE shoe fits all.

Re: How do you do this?

Posted: Tue Jan 29, 2013 1:24 pm
by FrugalInvestor
I take a very conservative approach with any tool like this. It's really an estimator, not a calculator. There are many unknowns and I want the negative surprises to have positive cushions to cover them. I would not include my home's value even knowing that I could potentially get a reverse mortgage on it or sell it and downsize in a real pinch. I'd much rather avoid the pinch in the first place.

Re: How do you [handle home equity in retirement calculators

Posted: Tue Jan 29, 2013 3:20 pm
by EternalOptimist
Thanks all, was just wondering how some of you handle this...good ideas. House is worth a rather large sum so I didn't want to just ignore it. I know that it's better to be safe than sorry. :)

Re: How do you do this?

Posted: Tue Jan 29, 2013 3:40 pm
by boknows
damjam wrote:
EternalOptimist wrote:Hi, when using a retirement calculator which determines how long your assets will last, I'm trying to figure out what you all typically do. Let's say you have equity in your home which is at least equal to your portfolio value. When the calculator asks how long do your assets need to last and let's say you put in '20 years'. That's not totally correct because you have substantial value in your home equity that you can tap into. I'm curious how you all handle this? Thanks.

Using FireCalc there is the ability to have a lump sum added to the portfolio in a future year. So you could assume sale of the house in a future year, however you will also have to account for the potential increase in spending for rent. FireCalc allows you to do that as well.


When using FireCalc, I typically will do a back-of-the-envelope calculation on how much my home with be worth in a certain amount of years, and how much I expect to still owe on the mortgage, and use that number as a lump sum addition to my portfolio. Though, I also take into consideration that I'm going to move to a cheaper home/area, so I just call it a net 25% decrease in equity (cash out).

Re: How do you do this?

Posted: Tue Jan 29, 2013 3:43 pm
by Rodc
damjam wrote:
EternalOptimist wrote:Hi, when using a retirement calculator which determines how long your assets will last, I'm trying to figure out what you all typically do. Let's say you have equity in your home which is at least equal to your portfolio value. When the calculator asks how long do your assets need to last and let's say you put in '20 years'. That's not totally correct because you have substantial value in your home equity that you can tap into. I'm curious how you all handle this? Thanks.

Using FireCalc there is the ability to have a lump sum added to the portfolio in a future year. So you could assume sale of the house in a future year, however you will also have to account for the potential increase in spending for rent. FireCalc allows you to do that as well.


These sorts of what ifs are good.

And you could put in a substantial increase in rent to look at what happens if you need assisted living for a good long stretch. This is one of the bigger wild cards in planning.

Re: How do you [handle home equity in retirement calculators

Posted: Tue Jan 29, 2013 3:46 pm
by Boglenaut
I do not include it.

However, having no mortgage reduces the amount I say we need to live.

Re: How do you [handle home equity in retirement calculators

Posted: Tue Jan 29, 2013 3:52 pm
by boknows
Boglenaut wrote:I do not include it.

However, having no mortgage reduces the amount I say we need to live.


Which means, if you intend on staying put, you are sort of including it.

Re: How do you [handle home equity in retirement calculators

Posted: Tue Jan 29, 2013 8:45 pm
by ThePrune
As has already been pointed out, you should only incorporate the portion of "home equity" that you could reasonably expect to extract for spending. After reviewing LOTS of calculators (refer to Retirement calculators and spending in the Wiki) I've discovered that only 2 methods of extracting home equity are regularly incorporated into retirement calculators:

(1) Home Equity extracted by downsizing to a considerably smaller local home or by buying a house in a considerably cheaper part of the country.
(2) Home Equity extracted using a Reverse Mortgage on your current house (see Advisers Reverse Thinking on Reverse Mortgages from the Wall Street Journal).

Neither of these actions will come close to extracting all your home equity.

Re: How do you [handle home equity in retirement calculators

Posted: Tue Jan 29, 2013 10:44 pm
by thegarv
What about a home equity loan?

I don't include home equity when I run retirement calculations, but it occurred to me that in years in which the market is down very significantly, I would probably be able to take out a loan to help pay for expenses, instead of having to sell my stock funds while they're low. Then, assuming that the market eventually rebounds, I can pay back the loan more aggressively.

Does anyone have any comments or concerns about this approach?

Re: How do you [handle home equity in retirement calculators

Posted: Wed Jan 30, 2013 2:05 am
by G-Money
Garv,

Sounds like you'd be significantly increasing your risk profile at a time when you have a lower ability to take risk (little to no human capital, shorter investing horizon).

Buy, hold, and rebalance would be much more prudent, IMO. There's no rule that says equity markets need to snap back once they go down.

Re: How do you [handle home equity in retirement calculators

Posted: Wed Jan 30, 2013 8:46 am
by Grt2bOutdoors
EternalOptimist wrote:Thanks all, was just wondering how some of you handle this...good ideas. House is worth a rather large sum so I didn't want to just ignore it. I know that it's better to be safe than sorry. :)


Many early retiree and pre-retirees downsize. If your plan is to downsize the home, I'd count the equity if any that would be realized net of the amount you need to either rent or purchase a smaller abode.

Re: How do you [handle home equity in retirement calculators

Posted: Wed Jan 30, 2013 8:50 am
by Grt2bOutdoors
thegarv wrote:What about a home equity loan?

I don't include home equity when I run retirement calculations, but it occurred to me that in years in which the market is down very significantly, I would probably be able to take out a loan to help pay for expenses, instead of having to sell my stock funds while they're low. Then, assuming that the market eventually rebounds, I can pay back the loan more aggressively.

Does anyone have any comments or concerns about this approach?


Don't count on home equity credit. At the height of the storm, the very first thing the banks did was to call home equity lines - either by eliminating the credit, downsizing the available line or stop underwriting. Home equity loans or lines of credit sits secondary to the primary lien on the home, many banks did not want to be lending money when the value of the asset was far below the value of loans against the home. It is not safe and sound banking practice to do so.

Many, many families were relying on home equity lines of credit to pay for college tuition - they found out the hard way. Use that example and plan accordingly.

Re: How do you [handle home equity in retirement calculators

Posted: Wed Jan 30, 2013 11:45 am
by EternalOptimist
Grt2bOutdoors wrote:
thegarv wrote:What about a home equity loan?

I don't include home equity when I run retirement calculations, but it occurred to me that in years in which the market is down very significantly, I would probably be able to take out a loan to help pay for expenses, instead of having to sell my stock funds while they're low. Then, assuming that the market eventually rebounds, I can pay back the loan more aggressively.

Does anyone have any comments or concerns about this approach?


Don't count on home equity credit. At the height of the storm, the very first thing the banks did was to call home equity lines - either by eliminating the credit, downsizing the available line or stop underwriting. Home equity loans or lines of credit sits secondary to the primary lien on the home, many banks did not want to be lending money when the value of the asset was far below the value of loans against the home. It is not safe and sound banking practice to do so.

Many, many families were relying on home equity lines of credit to pay for college tuition - they found out the hard way. Use that example and plan accordingly.



I'm retired and already have a HELOC that I took out when I was employed---just in case. No plans to use it

Re: How do you [handle home equity in retirement calculators

Posted: Wed Jan 30, 2013 11:59 am
by Grt2bOutdoors
EternalOptimist wrote:
Grt2bOutdoors wrote:
thegarv wrote:What about a home equity loan?

I don't include home equity when I run retirement calculations, but it occurred to me that in years in which the market is down very significantly, I would probably be able to take out a loan to help pay for expenses, instead of having to sell my stock funds while they're low. Then, assuming that the market eventually rebounds, I can pay back the loan more aggressively.

Does anyone have any comments or concerns about this approach?


Don't count on home equity credit. At the height of the storm, the very first thing the banks did was to call home equity lines - either by eliminating the credit, downsizing the available line or stop underwriting. Home equity loans or lines of credit sits secondary to the primary lien on the home, many banks did not want to be lending money when the value of the asset was far below the value of loans against the home. It is not safe and sound banking practice to do so.

Many, many families were relying on home equity lines of credit to pay for college tuition - they found out the hard way. Use that example and plan accordingly.



I'm retired and already have a HELOC that I took out when I was employed---just in case. No plans to use it


Have you borrowed against it yet? Are you aware the lending bank can "cancel" the line at any time, at their discretion? What will you do if needed access to cash and that is your only means of getting it? This is why it is important to have a backup plan.

Re: How do you [handle home equity in retirement calculators

Posted: Wed Jan 30, 2013 3:27 pm
by EternalOptimist
Grt2bOutdoors wrote:
EternalOptimist wrote:
Grt2bOutdoors wrote:
thegarv wrote:What about a home equity loan?

I don't include home equity when I run retirement calculations, but it occurred to me that in years in which the market is down very significantly, I would probably be able to take out a loan to help pay for expenses, instead of having to sell my stock funds while they're low. Then, assuming that the market eventually rebounds, I can pay back the loan more aggressively.

Does anyone have any comments or concerns about this approach?


Don't count on home equity credit. At the height of the storm, the very first thing the banks did was to call home equity lines - either by eliminating the credit, downsizing the available line or stop underwriting. Home equity loans or lines of credit sits secondary to the primary lien on the home, many banks did not want to be lending money when the value of the asset was far below the value of loans against the home. It is not safe and sound banking practice to do so.

Many, many families were relying on home equity lines of credit to pay for college tuition - they found out the hard way. Use that example and plan accordingly.



I'm retired and already have a HELOC that I took out when I was employed---just in case. No plans to use it


Have you borrowed against it yet? Are you aware the lending bank can "cancel" the line at any time, at their discretion? What will you do if needed access to cash and that is your only means of getting it? This is why it is important to have a backup plan.



As I said, this is for an emergency, it cost me nothing to get, so why not have it. As I age, I suspect it will be more difficult to get one.