At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

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phxjcc
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by phxjcc »

Easy peasy.

$1.2 MIL NW; $600,000 income.

20% down gives $600k down.
Which leaves $2.4 MIL mortgage, 30 YR FIXED
Which gives about $16,000 PITI

16/50 gets through underwriters @ 33%
Assuming total DTI < 40%.

Yes, this is NOT the average BH answer.

But I am the guy that started in RE with a 50% DTI on net pay.
amitb00
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by amitb00 »

Interesting question. I will do at 7.5 m asset. This will leave 4.5 m still with me.
SnowBog
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by SnowBog »

For me personally, I couldn't fathom spending that much on a house - ever - for any reason. But then again, I clearly don't live in a VHCOL area. When I think of what you are looking for near my area, you would probably be well below $0.5M - so I'm mentally stuck in paying > 600% more for a specific location...

But, one of your assumptions was staying in that area to be near family...

Not sure if this helps, but here's how I'm thinking for myself, and maybe you can apply this to your scenario...
  • Currently live in your desired house (size, lot, bedrooms, etc) - but in a much cheaper part of country (and same age)
  • House is paid off
  • Nearly FI (hopefully 1-2 years) with plans to retire in 5-7 years
  • Exploring either renovating current house or buying a new house
  • While we could probably afford more - I can't get my head past more than 20% of net worth (inclusive of selling current home), which would require about 10% of investment portfolio withdrawn/financed (and that likely would make me consider working even longer... But admitted, I'm very conservative... )
So if I apply that to your $3M house, I'd be thinking $15M of net worth (inclusive of home equity).

Not sure that "scales" accurately, as that feels excessive for a VHCOL area. Presumably it's far more common there to have far more of your net worth tied up in your house. But based on the housing costs near me, and how I'm thinking in my own situation, that's what I come up with...
av111
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by av111 »

SnowBog wrote: Fri Dec 03, 2021 12:01 am
So if I apply that to your $3M house, I'd be thinking $15M of net worth (inclusive of home equity).
Beyond a certain point, net worth is basically useless for most people. Say you want to spend 100k per year for next 30 years and you have put your money in a 60/40 portfolio. 2.5 M is enough. What do you do with the remaining 12.5m? You spend it whichever way you choose to or you leave it for the heirs. Would you throttle back spending if someone else on internet thinks it is wasteful and they would never do it
AV111
CloveLeaf
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by CloveLeaf »

If I am already retired or within 5 years of retirement, 11M net worth. If I am more than 5 years away from retirement, 9M will do
SnowBog
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by SnowBog »

av111 wrote: Fri Dec 03, 2021 12:26 am
SnowBog wrote: Fri Dec 03, 2021 12:01 am
So if I apply that to your $3M house, I'd be thinking $15M of net worth (inclusive of home equity).
Beyond a certain point, net worth is basically useless for most people. Say you want to spend 100k per year for next 30 years and you have put your money in a 60/40 portfolio. 2.5 M is enough. What do you do with the remaining 12.5m? You spend it whichever way you choose to or you leave it for the heirs. Would you throttle back spending if someone else on internet thinks it is wasteful and they would never do it
As I said, I'm not sure my view scales to VHCOL... As you accurately note, that much isn't likely needed...

But again, for myself - not being accustomed to VHCOL house prices, I can't fathom having a house ($3M) be worth more than my combined retirement savings ($2.5M in your example). Especially when I know I could move elsewhere and essentially retire in 1/2 the time.

But I understand that isn't an option for OP. And frankly, we wouldn't move away from family as well - even though there are better places we could live on less (and a lot less taxes). So I "get" it to some extent... But my mind is operating from a different "world" as it relates to housing prices...
scguy613
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by scguy613 »

I would never spend that much on a house. We own a 2650, 3 br/3 ba home near a nice downtown area. The house was built in the 1920’s, but we completely gutted it and remodeled. We have $600k in it and the value is $900k. We can walk to the grocery store, bank, pharmacy, post office, hardware store and ten restaurants, etc. we don’t need or want anything more.

On another subject, I wonder what Jed Clampett’s house in Beverly Hills would go for now. You know, the one with the cement pond in the back yard.
audioaxes
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by audioaxes »

for me I'd say atleast 1MM in easily liquidable assets and atleast 800K/year in sustainable income
A very nice primary home is something both my wife and I put a high priority on but I cant see us spending that much. We live in SoCal but are perfectly fine in the more inland areas where you get like a 50+% discount on your homes compared to LA and OC.
gips
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by gips »

i’m 65, my wife 58, both retired in nyc. i did some analysis and decided our net worth needed to be btw 8 and 10mm to spend $3mm, basically leaving us a 5-7mm portfolio. i guess that sounds conservative but we are 40-60 eq to fi and would like to resume extensive travel once the pandemic ends.

best,
Aged Maduro
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by Aged Maduro »

Firemenot wrote: Thu Dec 02, 2021 6:02 pm
Aged Maduro wrote: Thu Dec 02, 2021 6:00 pm There isn't a net worth large enough for me to pay $3,000,000 for a 2,200 square foot house with 4 bedrooms and 2 bathrooms. I live in a nice, upper income neighborhood in the northeastern U.S. and could buy a house like that for about $400,000.
So if your current house happened to cost $3 million and you had a net worth of $50 million, you wouldn’t buy it?
No, i would never pay 3 million dollars for my current house because it simply is not worth that much. In the same way, i would not overpay for a car or any other good just because i had more money. The only way i would consider paying 3 million dollars for a 2,200 square foot property is if it were a trophy asset, such as a luxury condo in midtown Manhattan.
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JoeRetire
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by JoeRetire »

000 wrote: Thu Dec 02, 2021 5:11 pm
runner3081 wrote: Thu Dec 02, 2021 5:06 pm Honestly, never. Excessive price for a house, no matter where it is, in my opinion.
I agree, especially given only two people and 3-4 bedrooms. Like, those are for the kids....
We purchased a house that happened to have 4 bedrooms. One is the master bedroom. One we use for a home office. One is for the grandkids. The last is a guest bedroom.

We were only looking for a 3 bedroom home, but this one was in the right location, at the right price point. The 4th bedroom is a nice luxury. We wouldn't have paid extra for it.

I personally cannot conceive of a situation where I would pay $3M for a house.
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by tvubpwcisla »

An expensive home is one thing; however, the maintenance costs are another. I can afford to purchase my dream car, but I don't because I cannot afford the maintenance if it breaks down. I would go middle of the road or more to the lower end of what you are capable of. Just my opinion.

Best of luck to you and your family with whatever you decide to do.

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Leesbro63
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by Leesbro63 »

$3M homes are bought with 3%ish mortgages. About $7500 per month (on $3M...ok, I get it that there will be some down payment that will make this payment less). What happens when mortgage rates rise to 4% or 5%? Or more? Who will buy that house from you?

Maybe I’m just too conservative/risk adverse, and in the end this will pay off, bigtime, and inflation will make the $3M home owner richer. But this seems to be gambling, not investing in a place to live.
Last edited by Leesbro63 on Fri Dec 03, 2021 7:12 am, edited 2 times in total.
z3r0c00l
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by z3r0c00l »

lazybones18 wrote: Thu Dec 02, 2021 10:05 pm
z3r0c00l wrote: Thu Dec 02, 2021 5:12 pm If I had about $12 million (e.g. won the lotto) I might consider spending about $3 million on a home, that is a perfectly reasonable price to pay in NYC for a nice place, but the real question is about income. I would also buy a $3 million home if I made $500K a year and only had a million saved up.
$500k income is extremely low for a $3million house in my opinion. im in this scenario (california) and i will basically be house poor if i do this
I think a person making $500K a year can afford to spend $150K a year on housing if they want to. Calling that house poor is saying a person who makes $50K a year can't afford to spend $15K a year on a home. I might suggest saving for 50% down first, but this is not unreasonable.
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bluegill
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by bluegill »

phxjcc wrote: Thu Dec 02, 2021 10:58 pm Easy peasy.

$1.2 MIL NW; $600,000 income.

20% down gives $600k down.
Which leaves $2.4 MIL mortgage, 30 YR FIXED
Which gives about $16,000 PITI

16/50 gets through underwriters @ 33%
Assuming total DTI < 40%.

Yes, this is NOT the average BH answer.

But I am the guy that started in RE with a 50% DTI on net pay.
What do these initials mean ???
tioscrooge
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by tioscrooge »

[/quote]

I was trying to approach it differently in the hopes of getting more useful data. If I had said, I have $XXMM then I suspect the replies would have been more along the lines of "yes" or "no" as opposed to specific number cutoffs.
[/quote]

I think that in order to remove the “shock” of 3M / 5M house, if you posted for a 300k/500k house and added a zero in your mental math, you may get different answers, and more to your question without being sidetracked in ways you did not want.

I live in an earthquake prone zone. The premium for 3M property are upwards of 10-15k depending on coverage / coinsurance deductible.
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cbs2002
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by cbs2002 »

My first thought is it's about cash flow going to housing, not NW. the carrying costs of a $3MM property would vary wildly depending on location, size and construction. Seems impossible to generalize.

The only way I'd buy a property that costly is if I could afford to lose, say, $1MM dollars and not look back. Ready for anything. Good luck.
Independent George
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by Independent George »

z3r0c00l wrote: Fri Dec 03, 2021 6:33 am
lazybones18 wrote: Thu Dec 02, 2021 10:05 pm
$500k income is extremely low for a $3million house in my opinion. im in this scenario (california) and i will basically be house poor if i do this
I think a person making $500K a year can afford to spend $150K a year on housing if they want to. Calling that house poor is saying a person who makes $50K a year can't afford to spend $15K a year on a home. I might suggest saving for 50% down first, but this is not unreasonable.
At $500k income, you're looking at probably $300k after taxes - and much less in CA. So right away we're talking about 50% of income going to housing. If you want a six-month emergency fund, you're looking at holding around $1M in cash, on $150k/year net income. Then there's the matter of children - besides the fact that you'd be paying full sticker price at that income level, you're also going to be clothing them on a middle-class salary amidst their extremely wealthy peers. You might say that's irrelevant, but I guarantee it won't be to them. Want to save for retirement? Well, you need your nest egg to cover maintenance & taxes on a $3M home, and you've only got $150k before living expenses to save with.

All of this also assumes that $500k income lasts forever, which is not at all guaranteed (especially since most people earning that salary get their in their mid-40s at the earliest).

I agree with lazybones that $500k income is not enough income unless you're paying cash for the home - which then gets us right back to the original question of how much net worth is appropriate for a $3M home. The people who actually answered the question seems to hold a consensus of at least $10M (30% of net worth sunk in the home).
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Nate79
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by Nate79 »

This is a meaningless question. You need to define a plan with clear goals. If buying this house helps, or doesn't deter you from the plan then it is ok. If it hurts your plan then you either need to rethink your plan (i.e. maybe it means working longer before you can retire) or buy less house.
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by Nestegg_User »

bluegill wrote: Fri Dec 03, 2021 7:14 am
phxjcc wrote: Thu Dec 02, 2021 10:58 pm Easy peasy.

$1.2 MIL NW; $600,000 income.

20% down gives $600k down.
Which leaves $2.4 MIL mortgage, 30 YR FIXED
Which gives about $16,000 PITI

16/50 gets through underwriters @ 33%
Assuming total DTI < 40%.

Yes, this is NOT the average BH answer.

But I am the guy that started in RE with a 50% DTI on net pay.
What do these initials mean ???
PITI ==> Principal, Interest, Taxes, and Insurance

DTI ==> Debt to Income
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by calmaniac »

Can you give us an idea of the location? Silicon Valley?
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BrooklynInvest
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by BrooklynInvest »

I can appreciate the question. I spent a lot on my house and I enjoy it every day. I'd do it (adjusting for inflation, I did do it) with a lot less in my pocket than some of the suggestions here. But the key question for me isn't the net worth, it's ongoing earnings and the exact meaning of "moderate desire to quit..."

But for the sake of argument, if you were gonna quit tomorrow here's a back of envelope thought -

- $3 million (whether you pay cash or not) +

- 1.5x Estimate of renovation/decoration costs +

- $1.2 million (4% of which is your annual tax and insurance bill) +

- Whatever you think your quitting' number is for your retirement portfolio, which includes your other expenses

Granted, all of these lower if you stay working OR you have the opportunity to go back to work should need arise, but for me I wouldn't make that adjustment.

Good luck OP! I can see the appeal of living close to family... not what I'd do but you haven't met my family ;-)
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by forevernaive »

I think about this differently. There is no easy ”multiple of x” equation heuristic between home value and net worth. Instead your invested NW should be total NW minus house price (and similar non income-producing assets), times expected withdrawal rate, and then that should be compared to expected living expenses.

So we began by totaling up our expenses for the lifestyle we want in retirement. One bucket is house tax and another is home maintenance; another could be mortgage in other circumstances.

Some bogleheads hear $3M house and think mansion, with attendant mansion scale expenses. That isn’t necessarily true.

We have a ~2k sf home in a HCOL/VHCOL location, which also happens to be in a VHQOL (Very High Quality Of Life) location.

Because the dirt is worth more than the house (per the insurance company’s cost to rebuild), maintenance costs are a lot less than expected using a “percent of home value” heuristic. Taxes are also lower on the dirt than the structure, as they are calculated here anyway. Point is: there is no easy “multiple of x” to rely on there either.

We just set our investable NW goal to support our lifestyle, health, etc. expenses. That number is mostly independent of the amount of our NW tied up in the house. Hence, the total NW we needed to retire comfortably is just not a multiple of house price.

Personally I’d rather live in a VHQOL area than stay in fancy hotels and live in a community I don’t like or is far from friends and family. I don’t value fancy hotels a few times a year; I value being so close in that I am mostly able to walk to outdoor recreation, shops, restaurants and culture every day, and having people nearby to enjoy those with.

But isn’t about me. Figure out what you value about location, and about the rest of your lifestyle, and do the math.
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grogu
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by grogu »

I’m going to give you a lower number than most others, based on the assumptions you asked us to follow:

$60k baseline annual expenses (OP’s assumption) + $36k property taxes (OP’s assumption) + $9k insurance (OP’s (conservative) assumption) + $20k healthcare costs (my assumption) + $10k additional maintenance costs (my (possibly low) assumption) = $135k annual expenses. $135k / 3% perpetual withdrawal rate = $4.5M in assets

$4.5M to cover costs + $3M house purchase price = $7.5M.

Notably, my calculation assumes no income from job. If you’re going to work, you could adjust down $7.5M accordingly--potentially significantly.

Not saying I would do this (or plan on $60k in annual expenses given the other assumptions), but I think it is doable.
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by Leesbro63 »

grogu wrote: Fri Dec 03, 2021 8:36 am I’m going to give you a lower number than most others, based on the assumptions you asked us to follow:

$60k baseline annual expenses (OP’s assumption) + $36k property taxes (OP’s assumption) + $9k insurance (OP’s (conservative) assumption) + $20k healthcare costs (my assumption) + $10k additional maintenance costs (my (possibly low) assumption) = $135k annual expenses. $135k / 3% perpetual withdrawal rate = $4.5M in assets

$4.5M to cover costs + $3M house purchase price = $7.5M.

Notably, my calculation assumes no income from job. If you’re going to work, you could adjust down $7.5M accordingly--potentially significantly.

Not saying I would do this (or plan on $60k in annual expenses given the other assumptions), but I think it is doable.
I like your thinking. But 2% is the perpetual withdrawal rate, not 3%. It was even 2% back in the days when bonds actually paid interest. So using that math, you'd need about $7M to cover costs +$3M house price = about $10M.
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by LFKB »

OP, to answer your question, I bought a $4 million house when I was at net worth around $2 million and income of around $1 million per year. People here told me I was crazy to do so.

It’s been five years and the house is now worth about $6 million and my net worth is well into 8 figures.
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by quantAndHold »

calmaniac wrote: Fri Dec 03, 2021 8:00 am Can you give us an idea of the location? Silicon Valley?
Someplace in California where a 2200 square foot house goes for $3m. So yes, probably Palo Alto or thereabouts.

Anyway, I think the disconnect a lot of people on this thread are having is they’re seeing the price tag, and thinking jet setter living in a mansion, when OP is looking for a normal middle class life in a 2200 sqft house. It might be more useful to think of it as a $500k house, sitting on $2.5m worth of dirt. Maintenance, insurance, and other living expenses are going to be similar to someone living in a $500k house somewhere else. The main differences are the $30k+ property taxes, and the amount of money tied up in the property. Since OP is talking about early retirement in this house, presumably they will either pay cash or something very close to that. If they pay cash for the house, they really only need about $120k in income to support the lifestyle they’re proposing. Which makes the $7-8m estimates not that far off ($3m for the house, $4-5m to support the perpetual withdrawal rate). Anything above that is making assumptions about the OP’s lifestyle that they didn’t state.
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by Firemenot »

Leesbro63 wrote: Fri Dec 03, 2021 9:47 am
grogu wrote: Fri Dec 03, 2021 8:36 am I’m going to give you a lower number than most others, based on the assumptions you asked us to follow:

$60k baseline annual expenses (OP’s assumption) + $36k property taxes (OP’s assumption) + $9k insurance (OP’s (conservative) assumption) + $20k healthcare costs (my assumption) + $10k additional maintenance costs (my (possibly low) assumption) = $135k annual expenses. $135k / 3% perpetual withdrawal rate = $4.5M in assets

$4.5M to cover costs + $3M house purchase price = $7.5M.

Notably, my calculation assumes no income from job. If you’re going to work, you could adjust down $7.5M accordingly--potentially significantly.

Not saying I would do this (or plan on $60k in annual expenses given the other assumptions), but I think it is doable.
I like your thinking. But 2% is the perpetual withdrawal rate, not 3%. It was even 2% back in the days when bonds actually paid interest. So using that math, you'd need about $7M to cover costs +$3M house price = about $10M.
2% as the perpetual withdrawal rate? That’s way too pessimistic. You could just put all the money in TIPS (or some such inflation-protected vehicle) and it would last 50 years. Even with sequence of return risks, I think we can safely count on some return beyond inflation. If we can’t, we have much bigger problems and conventional investments may all be junk, even at a 2% withdrawal rate.
Last edited by Firemenot on Fri Dec 03, 2021 11:43 am, edited 1 time in total.
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by Firemenot »

Aged Maduro wrote: Fri Dec 03, 2021 5:45 am
Firemenot wrote: Thu Dec 02, 2021 6:02 pm
Aged Maduro wrote: Thu Dec 02, 2021 6:00 pm There isn't a net worth large enough for me to pay $3,000,000 for a 2,200 square foot house with 4 bedrooms and 2 bathrooms. I live in a nice, upper income neighborhood in the northeastern U.S. and could buy a house like that for about $400,000.
So if your current house happened to cost $3 million and you had a net worth of $50 million, you wouldn’t buy it?
No, i would never pay 3 million dollars for my current house because it simply is not worth that much. In the same way, i would not overpay for a car or any other good just because i had more money. The only way i would consider paying 3 million dollars for a 2,200 square foot property is if it were a trophy asset, such as a luxury condo in midtown Manhattan.
Money is just a tool. At a certain point after needs are met and there’s a reasonable margin of safety, who cares? Quality of life is worth a lot too.

Also, effectively you’re saying the dirt under a house should never be worth a couple million dollars. That’s routinely the case in the desirable areas of California. Supply and demand. Why is that overpaying?
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by runner3081 »

LFKB wrote: Thu Dec 02, 2021 9:58 pm
runner3081 wrote: Thu Dec 02, 2021 5:06 pm Honestly, never. Excessive price for a house, no matter where it is, in my opinion.

Also, net worth has absolutely zero to do with my mental math on purchasing a house.
If you were worth $10 billion you wouldn’t be comfortable buying a $3 million house?

Net worth has absolutely nothing to do with your math on buying a house?

???
Net worth need to be clarified. So what if you have a net worth of 20 million? It all depends on the basis for that. If you have 20 million in investments, that is one thing, but what if that 20 million is tied up in a commercial building?

So no, "net worth" broadly speaking should have nothing to do with home purchase affordability.
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by flyingaway »

With a $3 MM house, you must have a private chef, some service personals, private driver, private gardener, etc., to go with it. I guess you need to have at least $100 MM net worth.
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by Leesbro63 »

Firemenot wrote: Fri Dec 03, 2021 10:21 am
Leesbro63 wrote: Fri Dec 03, 2021 9:47 am
grogu wrote: Fri Dec 03, 2021 8:36 am I’m going to give you a lower number than most others, based on the assumptions you asked us to follow:

$60k baseline annual expenses (OP’s assumption) + $36k property taxes (OP’s assumption) + $9k insurance (OP’s (conservative) assumption) + $20k healthcare costs (my assumption) + $10k additional maintenance costs (my (possibly low) assumption) = $135k annual expenses. $135k / 3% perpetual withdrawal rate = $4.5M in assets

$4.5M to cover costs + $3M house purchase price = $7.5M.

Notably, my calculation assumes no income from job. If you’re going to work, you could adjust down $7.5M accordingly--potentially significantly.

Not saying I would do this (or plan on $60k in annual expenses given the other assumptions), but I think it is doable.
I like your thinking. But 2% is the perpetual withdrawal rate, not 3%. It was even 2% back in the days when bonds actually paid interest. So using that math, you'd need about $7M to cover costs +$3M house price = about $10M.
2% as the perpetual withdrawal rate? That’s way too pessimistic. You could just put all the money in TIPS (or some such infarction-protected vehicle) and it would last 50 years. Even with sequence of return risks, I think we can safely count on some return beyond inflation. If we can’t, we have much bigger problems and conventional investments may all be junk, even at a 2% withdrawal rate.
This has been discussed many times on here. I’ve never heard that 3% is a safe perpetual rate. Many don’t even think it’s safe enough for just a 30 year withdrawal rate. You may be right that a hard 2% is too conservative, but for a young person who won’t or can’t go back to work, I think the SWR for 50+ years is closer to 2% than 3%.
asap
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by asap »

Sounds like you can afford it. Invest in index, buy a home where you want to live and ignore noise here.
EddyB
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by EddyB »

Aged Maduro wrote: Thu Dec 02, 2021 6:00 pm There isn't a net worth large enough for me to pay $3,000,000 for a 2,200 square foot house with 4 bedrooms and 2 bathrooms. I live in a nice, upper income neighborhood in the northeastern U.S. and could buy a house like that for about $400,000.
How much would it cost to move the OP's friends and family, and their friends and family, to your neighborhood, though?
EddyB
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by EddyB »

Leesbro63 wrote: Fri Dec 03, 2021 9:47 am
grogu wrote: Fri Dec 03, 2021 8:36 am I’m going to give you a lower number than most others, based on the assumptions you asked us to follow:

$60k baseline annual expenses (OP’s assumption) + $36k property taxes (OP’s assumption) + $9k insurance (OP’s (conservative) assumption) + $20k healthcare costs (my assumption) + $10k additional maintenance costs (my (possibly low) assumption) = $135k annual expenses. $135k / 3% perpetual withdrawal rate = $4.5M in assets

$4.5M to cover costs + $3M house purchase price = $7.5M.

Notably, my calculation assumes no income from job. If you’re going to work, you could adjust down $7.5M accordingly--potentially significantly.

Not saying I would do this (or plan on $60k in annual expenses given the other assumptions), but I think it is doable.
I like your thinking. But 2% is the perpetual withdrawal rate, not 3%. It was even 2% back in the days when bonds actually paid interest. So using that math, you'd need about $7M to cover costs +$3M house price = about $10M.
Citations would be great.
Firemenot
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by Firemenot »

Leesbro63 wrote: Fri Dec 03, 2021 11:24 am
Firemenot wrote: Fri Dec 03, 2021 10:21 am
Leesbro63 wrote: Fri Dec 03, 2021 9:47 am
grogu wrote: Fri Dec 03, 2021 8:36 am I’m going to give you a lower number than most others, based on the assumptions you asked us to follow:

$60k baseline annual expenses (OP’s assumption) + $36k property taxes (OP’s assumption) + $9k insurance (OP’s (conservative) assumption) + $20k healthcare costs (my assumption) + $10k additional maintenance costs (my (possibly low) assumption) = $135k annual expenses. $135k / 3% perpetual withdrawal rate = $4.5M in assets

$4.5M to cover costs + $3M house purchase price = $7.5M.

Notably, my calculation assumes no income from job. If you’re going to work, you could adjust down $7.5M accordingly--potentially significantly.

Not saying I would do this (or plan on $60k in annual expenses given the other assumptions), but I think it is doable.
I like your thinking. But 2% is the perpetual withdrawal rate, not 3%. It was even 2% back in the days when bonds actually paid interest. So using that math, you'd need about $7M to cover costs +$3M house price = about $10M.
2% as the perpetual withdrawal rate? That’s way too pessimistic. You could just put all the money in TIPS (or some such infarction-protected vehicle) and it would last 50 years. Even with sequence of return risks, I think we can safely count on some return beyond inflation. If we can’t, we have much bigger problems and conventional investments may all be junk, even at a 2% withdrawal rate.
This has been discussed many times on here. I’ve never heard that 3% is a safe perpetual rate. Many don’t even think it’s safe enough for just a 30 year withdrawal rate. You may be right that a hard 2% is too conservative, but for a young person who won’t or can’t go back to work, I think the SWR for 50+ years is closer to 2% than 3%.
Michael Kitces has written very in-depth articles about retiring at a very early age and a safe perpetual withdrawal rate. My memory may be rusty but I believe he placed the very safe number at at least 3.5% and said likely it’ll be considerably higher. It’s somewhere on his very voluminous website. Granted, that’s just one voice and there are some voices on the extreme conservative side as well.
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stostech
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by stostech »

runner3081 wrote: Fri Dec 03, 2021 11:16 am
LFKB wrote: Thu Dec 02, 2021 9:58 pm
runner3081 wrote: Thu Dec 02, 2021 5:06 pm Honestly, never. Excessive price for a house, no matter where it is, in my opinion.

Also, net worth has absolutely zero to do with my mental math on purchasing a house.
If you were worth $10 billion you wouldn’t be comfortable buying a $3 million house?

Net worth has absolutely nothing to do with your math on buying a house?

???
Net worth need to be clarified. So what if you have a net worth of 20 million? It all depends on the basis for that. If you have 20 million in investments, that is one thing, but what if that 20 million is tied up in a commercial building?

So no, "net worth" broadly speaking should have nothing to do with home purchase affordability.
Apparently you didn't read my original post:
- Net worth is accessible and invested sensibly for long term growth (60-70% in low cost equity index funds)
mervinj7
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by mervinj7 »

Firemenot wrote: Fri Dec 03, 2021 11:55 am Michael Kitces has written very in-depth articles about retiring at a very early age and a safe perpetual withdrawal rate. My memory may be rusty but I believe he placed the very safe number at at least 3.5% and said likely it’ll be considerably higher. It’s somewhere on his very voluminous website. Granted, that’s just one voice and there are some voices on the extreme conservative side as well.
This is the article I remember. I understood that his conclusion was that it's better to be flexible based on inflation and actual portfolio returns.

https://www.kitces.com/blog/the-problem ... ing-rules/
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stostech
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by stostech »

Nate79 wrote: Fri Dec 03, 2021 7:56 am This is a meaningless question. You need to define a plan with clear goals. If buying this house helps, or doesn't deter you from the plan then it is ok. If it hurts your plan then you either need to rethink your plan (i.e. maybe it means working longer before you can retire) or buy less house.
I've clearly defined the goals in the original post. At this point I'm trying to determine the threshold amount I need to have the plan be ok. If you don't have any input, that's ok. But please don't call the question meaningless.
EnjoyIt
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by EnjoyIt »

stostech wrote: Fri Dec 03, 2021 12:10 pm
Nate79 wrote: Fri Dec 03, 2021 7:56 am This is a meaningless question. You need to define a plan with clear goals. If buying this house helps, or doesn't deter you from the plan then it is ok. If it hurts your plan then you either need to rethink your plan (i.e. maybe it means working longer before you can retire) or buy less house.
I've clearly defined the goals in the original post. At this point I'm trying to determine the threshold amount I need to have the plan be ok. If you don't have any input, that's ok. But please don't call the question meaningless.
You have received a lot of opinions. What conclusions have you come up with?
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
SnowBog
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by SnowBog »

OP - I've been giving this more thought... As I noted in my prior reply, and as you've seen from others, many of us can't fathom spending $3M on a house...

For myself, having been in areas in CA in the 90's/00's and seen that a tin shack that looked like it was about to fall over was selling for $1M, I can appreciate the my frame of reference regarding "reasonable house prices" isn't realistic with the reality in VHCOL areas of the country.

But I'd propose framing this question differently - so as to avoid people (like me) with "sticker shock" at the high price tag.

Let's revisit and potentially adjust your "assumptions" - I'm focusing specifically on the ones below (although all original assumptions still apply).
stostech wrote: Thu Dec 02, 2021 4:09 pm Given the following assumptions:
- 45 years old
- Moderate desire to quit current job, with a likelihood of never returning to anything lucrative
- No pension or employer provided healthcare (after quitting)
- Excluding potential housing and healthcare costs for 2 people, other expenses/travel/hobbies aren't expected to exceed $60k/year total
To me, I think a way you might get better answers is to translate your $3M or $5M purchase price into the impact above...

Using https://www.mortgagecalculator.org/ with the following assumptions:
  • $3M purchase price
  • $1M down payment (presumably from equity in existing home)
  • $30k for property tax
  • $10k for home insurance
  • 30-year loan at 3.8%
It says your monthly payment is roughly $12.7k, or just shy of $152k/year.
  • Let's add 2% of the "home" value (let's use $500k for the "home") for upkeep/maintenance, which is $10k.
  • Let's add $10k for utilities (assuming that was excluded from the $60k above).
  • That puts your annual expenses - without healthcare (and potentially without taxes) at $232k.
  • Let's add in $30k for healthcare (that's the budget number I'm using for early retirement healthcare costs)
  • And $65k for taxes (based on $300k "income" from https://smartasset.com/taxes/california ... jUz1pjQZda), presumably would be less if you have sizable taxable and/or Roth accounts.
That brings you closer to $327k total expenses for your $3M house (more for your $5M option). (Feel free to tweak the assumptions/numbers - but I think putting this into "total expenses" will get more useful results for you.)

We could tweak your original assumptions to be:
- Excluding potential housing and healthcare costs for 2 people, other expenses/travel/hobbies aren't expected to exceed $60k/year total
- Estimated total expenses of $327k
And then the question is less about the "house" and more about how much money you need to retire with that kind of expense.

Since you are 45 and considering retiring, you would be looking at covering this from your existing savings (no other income expected - although I question if you have and should include social security - but since not provided I'll leave it out.)

For that long of a retirement, the SWR side would probably be looking at a 3.5% (maybe even 3%) withdrawal rate, which would put the "number" around $9.3M (or $10.9M @ 3%).

If you use the VPW spreadsheet, roughly $7.9M 60/40 portfolio would cover the expenses - but lacks the "required flexibility", $11M would get closer ($321k).

So, for me (ignoring social security, and with the assumptions I made above which may be wrong), I'd be looking at roughly $10M - $11M to feel comfortable. If my assumptions/expenses were wrong, I'd adjust accordingly...

Again - I'd encourage you to break down the numbers and get to an "annual expense" - and ask the question that way. It arguably doesn't matter what you are spending that money on... And avoids people hitting mental blocks on seeing a big price tag for a house.
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by SnowBog »

grogu wrote: Fri Dec 03, 2021 8:36 am I’m going to give you a lower number than most others, based on the assumptions you asked us to follow:

$60k baseline annual expenses (OP’s assumption) + $36k property taxes (OP’s assumption) + $9k insurance (OP’s (conservative) assumption) + $20k healthcare costs (my assumption) + $10k additional maintenance costs (my (possibly low) assumption) = $135k annual expenses. $135k / 3% perpetual withdrawal rate = $4.5M in assets

$4.5M to cover costs + $3M house purchase price = $7.5M.

Notably, my calculation assumes no income from job. If you’re going to work, you could adjust down $7.5M accordingly--potentially significantly.

Not saying I would do this (or plan on $60k in annual expenses given the other assumptions), but I think it is doable.
Your post was much simpler than mine - wish I'd seen it first!

I came up with a higher number - as I figured out monthly payments for the house and included that in expense, had a few different assumptions (such as higher medical, but lower property tax), and then attempted to estimate taxes.

But I think figuring it as an expression of "expenses" vs. the price of a home is likely to get OP more actionable input.
psteinx
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by psteinx »

Interesting thread. It's hard for many posters to accept the given assumptions and be analytical, and/or to shift reference paradigm from their own to the OP's.

That said, I think there have been a few posts already that have legitimately engaged with the OP's premise. Here's my take, not too dissimilar to what some others have said, but maybe with a few different notes:

===

OP asked about net worth for a presumably safe-ish, early retirement, given the pricey house, NOT income. So points about income are largely moot. That said, I think most here would assume at least some SS income down the line, plus Medicare. If that's not the case, perhaps OP should specify.

Yes, the dirt on the land the house sits is pricey. Mostly, that will be reflected in the purchase price and property taxes. But there are a variety of possible secondary implications, including high-ish CA state taxes, and likely higher non-housing costs to maintain a given standard of living, vs. if, say, OP was living in Nashville or Denver. Restaurants will be pricey, home repairs will be pricey, haircuts will be pricey, etc.

Yes, one can take OP's # of $60K, add in estimated medical, housing (other than purchase cost), then add in a figure for overall (i.e. income) taxes, then divide that by some withdrawal rate, to determine the size of the residual nest egg (after housing) that can sustain this. Some folks who have modeled this have not, I think, included income taxes. As a VERY ballpark figure, if we say $60K base + $30K med + $50K property taxes and maintenance, we get ~$140K, plus whatever goes to income & other non-property taxes (outside of the base figure).

Taxes will be higher because it's CA and OP's income will be high. Somewhat offset by the lower capital income taxes. OP has not said anything about the structure of his nest egg. If a big chunk of it is low basis, low dividend stock, then taxes should be estimated higher. If it's heavily concentrated (say, 70% in a single tech name, at a low basis), then further adjustments would have to be made for costs of restructuring to something more safe, OR, depending somewhat on the tech name, a much higher figure would be needed to get at least modest safety. IBM and Digital looked pretty good a few decades ago. If OP wants nest egg to sustain from age 45 to perhaps age 90, then don't bet it all on a single tech name...

Anyways, let's grossly simplify and say the gross needs to be $180K to get after tax of $140K.

Safe withdrawal rates, for a 45+ year retirement, starting from a negative real interest rate environment, should be pretty conservative. Let's spitball and say 2.5%. $180K/2.5% = $7.2M. Add in the $3M for the house, and you're around $10M. Possible future SS and Medicare might shave that down a hair.

Other notes:

1) About a third of the nest egg, plus a third of the spending from the remaining investable assets, so (1/3 + (1/3*2/3)) ~= 1/2 is tied to the pricey house. If things go downhill for OP in the first 10-20 years of retirement, OP could sell the house and relocate somewhere cheaper (but still likely quite nice), likely dramatically improving the outlook. So, that's a note for a bit MORE optimism (and arguably, a lower target nest egg to support this endeavor).

2) I share the view of some others that lifestyle inflation, to keep up with the Jones' is a real concern.

3) OP has not, I think, mentioned any kids. So as far as family connections to the area, it's what, maybe the elderly parents and some siblings/cousins? Folks tend to scatter somewhat, especially in areas where you need a REALLY high income to live comfortably). Parents eventually pass away. There are lots of areas with nice climate, beaches, culture, etc. where a basic house costs far less than $3M.

4) OP should also really consider the size of house needed. 2200 s.f. is not that big generally, but for a retired couple without kids, it's well more than strictly necessary. And further, even in pricey CA., I think moving 5 or 10 miles in one direction or another can shift price points by a factor of 2 or more. If OP and spouse want to retire early, and if the math above is a little tight, then maybe a 1400-1600 s.f. house, 5-10 minutes further towards the relatively cheaper areas, might cut the price tag by 30-50%. I doubt most folks (esp. if they don't have kids) need a dedicated guest bedroom - maybe a sleeper sofa or an air mattress tucked in a closet will suffice.
Last edited by psteinx on Fri Dec 03, 2021 2:04 pm, edited 3 times in total.
psteinx
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by psteinx »

Oh, and a further note.

If, in fact, OP and partner do not have kids, that would be something to add at least slightly to the "be cautious" side of the scale. Adult kids, successfully launched, can be a bit of a security blanket on various fronts, including financial, and if OP is missing that extra bit of security, then...
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stostech
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by stostech »

EnjoyIt wrote: Fri Dec 03, 2021 1:02 pm
stostech wrote: Fri Dec 03, 2021 12:10 pm
Nate79 wrote: Fri Dec 03, 2021 7:56 am This is a meaningless question. You need to define a plan with clear goals. If buying this house helps, or doesn't deter you from the plan then it is ok. If it hurts your plan then you either need to rethink your plan (i.e. maybe it means working longer before you can retire) or buy less house.
I've clearly defined the goals in the original post. At this point I'm trying to determine the threshold amount I need to have the plan be ok. If you don't have any input, that's ok. But please don't call the question meaningless.
You have received a lot of opinions. What conclusions have you come up with?
So far the more conservative consensus has fallen in line with my intuition: $10MM - $15MM
I was initially thinking $15MM was the goal, partly because I want to allow for changing circumstances when retiring early.

I am not someone that is used to higher expenses and it's that mindset that has allowed me to save the amount what I have. But at a certain point I'd like to feel comfortable investing more in quality of life. It's unfortunate that housing is so expensive where I'd like to live.

The replies have been very helpful, so thanks to everyone who put in the time!
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by Nate79 »

stostech wrote: Fri Dec 03, 2021 12:10 pm
Nate79 wrote: Fri Dec 03, 2021 7:56 am This is a meaningless question. You need to define a plan with clear goals. If buying this house helps, or doesn't deter you from the plan then it is ok. If it hurts your plan then you either need to rethink your plan (i.e. maybe it means working longer before you can retire) or buy less house.
I've clearly defined the goals in the original post. At this point I'm trying to determine the threshold amount I need to have the plan be ok. If you don't have any input, that's ok. But please don't call the question meaningless.
No you didn't, not even close. For example, a plan would look something like this:
I save XX per year under current living conditions.
I currently have XX of savings.
I assume XX growth rate.
I want to retire at XX age (XX years more of working under current conditions).

Buying a XX house I will/will not be able to retire at XX age because I will not save XX per year (or my current XX savings will be depleted by the purchase price).
Buying a XX house means I will now save YY per year and will be able to retire now at XX + Y years.

Something like that.
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stostech
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by stostech »

psteinx wrote: Fri Dec 03, 2021 1:42 pm ...
4) OP should also really consider the size of house needed. 2200 s.f. is not that big generally, but for a retired couple without kids, it's well more than strictly necessary.
It's not really the house size that's important. A 1500 sq ft 3 bedroom 2 bath would be fine. But I have other factors that are important: certain areas where land happens to be is pricey, reasonably big lot (~1/4 acre), nice house layout and natural light, not in need of major work or updating. For the criteria I have, the houses tend to be bigger than I need. In my original post I just included an average size based on what I was seeing to give a sense of potential maintenance costs.

Thanks for your input.
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by psteinx »

psteinx wrote: Fri Dec 03, 2021 1:42 pmTaxes will be higher because it's CA and OP's income will be high. Somewhat offset by the lower capital income taxes. OP has not said anything about the structure of his nest egg. If a big chunk of it is low basis, low dividend stock, then taxes should be estimated higher. If it's heavily concentrated (say, 70% in a single tech name, at a low basis), then further adjustments would have to be made for costs of restructuring to something more safe, OR, depending somewhat on the tech name, a much higher figure would be needed to get at least modest safety. IBM and Digital looked pretty good a few decades ago. If OP wants nest egg to sustain from age 45 to perhaps age 90, then don't bet it all on a single tech name...

Anyways, let's grossly simplify and say the gross needs to be $180K to get after tax of $140K.
A bit more thinking on taxes.

If, by chance, OP's current nest egg is mostly in stocks with low current embedded gains, then in fact, the taxes might be lower, at least initially, because selling a $100 stock with a $95 basis generates almost no taxes.

But more likely, OP's stock is a mix of stock acquired at a low basis (tech stock?) and/or that has gone way up in the last 3-5 years, and thus selling off stock to support lifestyle will incur significant taxes.

===

Also, if, in the decades ahead, inflation is more like 4%+ instead of the ~2% that many of us are used to, then you'll be paying taxes on more "phantom income" - i.e. growth/interest/dividends that's just keeping up with inflation, but to the government, looks like profits. Maybe not something folks are used to thinking about, or think much about on, say, a 5 year horizon. But on a 45 year horizon, this could be important. And of course, inflation could be higher than 4%, maybe much higher...
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stostech
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Re: At what net worth would you to be comfortable purchasing $3MM house? (given certain assumptions)

Post by stostech »

Nate79 wrote: Fri Dec 03, 2021 2:14 pm
stostech wrote: Fri Dec 03, 2021 12:10 pm
Nate79 wrote: Fri Dec 03, 2021 7:56 am This is a meaningless question. You need to define a plan with clear goals. If buying this house helps, or doesn't deter you from the plan then it is ok. If it hurts your plan then you either need to rethink your plan (i.e. maybe it means working longer before you can retire) or buy less house.
I've clearly defined the goals in the original post. At this point I'm trying to determine the threshold amount I need to have the plan be ok. If you don't have any input, that's ok. But please don't call the question meaningless.
No you didn't, not even close. For example, a plan would look something like this:
I save XX per year under current living conditions.
I currently have XX of savings.
I assume XX growth rate.
I want to retire at XX age (XX years more of working under current conditions).

Buying a XX house I will/will not be able to retire at XX age because I will not save XX per year (or my current XX savings will be depleted by the purchase price).
Buying a XX house means I will now save YY per year and will be able to retire now at XX + Y years.

Something like that.
My goal was to get info without introducing all the types of restrictions that you just outlined. Others interpreted these goals correctly and provided helpful input. You seem to be unable to so I'm not sure why you're bothering to comment.
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