SWR — Can You Include Real Estate as Part of Your Portfolio

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RAchip
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SWR — Can You Include Real Estate as Part of Your Portfolio

Post by RAchip » Mon Feb 12, 2018 10:04 pm

I assume you dont include the value of your primary residence in your portfolio but what if you have a $1mm home and could easily downsize to a $500k home in the future if needed? Can you include the $500k difference in calculating SWR? How about vacation houses that could be sold or rented later in retirement if necessary?

alex_686
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by alex_686 » Mon Feb 12, 2018 10:07 pm

One should included real estate as part of your portfolio. As well as Social Security, etc.

Most don't becuase it is complex and emotional. Most people think it is some type of special asset class and can't approach it with a cold eye.

On that note, recognize that most people overestimate their properties value, underestimate the maintenance costs, and overestimate price apperication.

itstoomuch
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by itstoomuch » Mon Feb 12, 2018 10:13 pm

I don't count the value of home. Our home value will increase when we move from MCOL to HCOL area.
Our home and rentals have a Market Value that is meaningless to us but meaningful to Lenders and to the taxman.
I count the rentals for ROI or CapRate for Income Value.
Our son can count his inheritance in Market Values, only when we are dead. :|
Our son can count our retirement income in what he doesn't need to support us.
I am beginning to support my father (father's wife lifestyle). He's 98.

RE is a fixed asset that is hard to convert into Income guesses, Until it really happens.
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liberty53
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by liberty53 » Mon Feb 12, 2018 10:34 pm

Interesting question.

The 4% SWR is based on the well known Trinity Study as well as on Bengen's studies. Those studies did not use real estate as an asset class, only stock and bonds.

The SWR calculators like cFireSim and FireCalc use stocks, bonds, and cash, but still no real-estate.

The home you live in is used to affect overall need (expenses). The potential equity and profit on the sale of the home is not included.

One way to include other asset classes would be to include a future receipt of a lump sum in the SWR calculators and see how it affects the SWR. The lump sum of course would be the gain on the sale of the asset net of taxes at some future date. Both calculators mentioned above allow you to include future receipts.

btownguy
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by btownguy » Mon Feb 12, 2018 10:51 pm

Unless you can see yourself getting money out of your RE (i.e. downsizing the house regularly), I see no value in including RE in your portfolio value when calculating a SWR.

WhyNotUs
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by WhyNotUs » Mon Feb 12, 2018 11:10 pm

If you are playing with a calculator and committed to transferring $500k at retirement from RE to investments, then plug that amount in as a lump sum investment at 65 and put it in with your chosen AA at that age.

Obviously, there is no withdraw rate for a house that you are living in regardless of its impact on your net worth. Thus a big motivation for downsizing. Downsizing would also reduce expenses- maintenance, property taxes, insurance, etc. in most cases.
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MrNewEngland
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by MrNewEngland » Mon Feb 12, 2018 11:15 pm

No.

SWR is what you need in expenses. The more expensive the property you have the more it’ll cost you in taxes, maintenance, and upkeep... adding to your expenses.

Person A lives in a $100k condo that’s paid off with $900k in retirement accounts.

Person B lives in a $900k condo that’s paid off with $100k in retirement accounts.


Both are worth $1MM. Who’s better off?

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Watty
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by Watty » Mon Feb 12, 2018 11:33 pm

If it was an investment property you were renting out you could but not a house you are living in.

The reason is that the property is giving you free rent which is called "imputed rent"(Google this).

If you also counted it in a 4% safe withdrawal rate then you would be double counting it and withdrawing the 4% and consuming the free rent.

aristotelian
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by aristotelian » Mon Feb 12, 2018 11:37 pm

No, unless downsizing in retirement is explicitly part of your financial plan. "Could downsize" only increases your portfolio if you actually do it.

Nate79
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by Nate79 » Mon Feb 12, 2018 11:47 pm

Your plan should have an accurate assesment of all assets that you will have invested and plan to withdraw from to cover expenses. If that includes $500k from downsizing and investing the proceeds then yes, that would be included in funds as part of SWR. Why would you purposefully ignore a $500k account that is invested?

Ron Scott
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by Ron Scott » Tue Feb 13, 2018 12:14 am

In the last analysis SWR is an educated guess so excluding real estate makes it a more conservative one and including it a riskier one.

I would feel safer in excluding real estate although adding in 75% or so the current value of a non-primary place would probably be fine. Just realize that you're essentially committing to sell it to be able to continue living independently and putting off that sale until the last possible minute wouldn't be the wisest.

You should also feel better about doing so if your SWR is 3% vs. the good-old-days 4%, or if "cutting back significantly" to you means flying more economy comfort vs. eliminating your heart pills.

There's a looseness to this stuff.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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zTurtle
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by zTurtle » Tue Feb 13, 2018 1:10 am

Another option not mentioned yet is to take a Reverse Mortgage on your primary residence, turning it into an income stream (but losing equity)

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privatefarmer
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by privatefarmer » Tue Feb 13, 2018 6:51 am

what about refinancing and taking the equity out? I don't see why you wouldn't count that. Although you'd have a mortgage payment so your monthly income needs would go up. I never understood why people want to have a paid off house when they die, unless they plan to give it to their kids. Why not leave the bank holding the bag when you croak?

1nv35t
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by 1nv35t » Tue Feb 13, 2018 7:01 am

If you plan a ladder using present day value i.e. assuming assets and spending might rise with inflation on average, then there's no harm in including potential liquidation of part of your home value as part of that.

60 year old that anticipates living to 85 and $40,000/year spending = $1M.

Pension of $20,000/year received from age 70 = 15 years x $20,000 = $300K.

Downsize 1M home to 500K home = $500K

$200K of other assets and potential spending is countered by potential assets/investments.

MrNewEngland
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by MrNewEngland » Tue Feb 13, 2018 7:26 am

privatefarmer wrote:
Tue Feb 13, 2018 6:51 am
what about refinancing and taking the equity out? I don't see why you wouldn't count that. Although you'd have a mortgage payment so your monthly income needs would go up. I never understood why people want to have a paid off house when they die, unless they plan to give it to their kids. Why not leave the bank holding the bag when you croak?
Sure, but that makes your expenses go up...

IlliniDave
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by IlliniDave » Tue Feb 13, 2018 7:58 am

I don't (just personal preference), but since I intend to downsize my residence I do include an estimate of the net in my estimate of my portfolio at retirement which does factor into my estimated withdrawal rate based on my estimated future spending. Lots of estimating there! But if I weren't planning to downsize I would not include any portion of my home's value as part of my investment portfolio just because I "could" maybe downsize if I had to. I don't think there's a right or wrong to it, it's just personal preference.
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halfnine
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by halfnine » Tue Feb 13, 2018 8:13 am

Watty wrote:
Mon Feb 12, 2018 11:33 pm
If it was an investment property you were renting out you could but not a house you are living in.

The reason is that the property is giving you free rent which is called "imputed rent"(Google this).

If you also counted it in a 4% safe withdrawal rate then you would be double counting it and withdrawing the 4% and consuming the free rent.
If the OP considers the house fungible then this is fine as long as they include imputed rent as an expense.

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siamond
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by siamond » Tue Feb 13, 2018 9:32 am

The answer is unfortunately a tad complicated. By default, a home is an expense, not an investment. You can't get access the money (you need a home!). Even if you could, on average, its value increases more or less like the inflation, as the history of the Case Shiller house price index indicates (in the midst of a LOT of local variations), which means that its inflation-adjusted value stays more or less constant (again, on average across the US).

Now the downsizing equation is different. BEFORE you downsize, the $500k would NOT appreciate like the stock market, hence breaking the underlying assumptions of an SWR calculation. Still, it is definitely worth *something* - after downsizing you have a nice pile of money that you can spend (hence avoiding withdrawals) and/or that you can invest in the stock market. It is actually quite similar to a bequest in a way, a lump sum that shows up at one point in time.

A flexible way to model that is to make a net present value (NPV) computation of future lump sums. Assume a discount rate of say 5% (a fairly conservative estimate of future returns, inflation-adjusted). Use the NPV() function in a spreadsheet, with a given sequence of lump sums (this could also include future recurring income like SSA, Pension). You'll obtain the present value of a theoretical portfolio at T0. Add this value to your existing savings, and apply the SWR formula.

I quickly assembled a simple Google sheet doing this type of NPV + SWR math: https://goo.gl/dq4UXe. Of course, this is scenario-making, with various assumptions (e.g. when a lump sum shows up, life expectancy, etc), so take it with a big grain of salt...

zwzhang
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by zwzhang » Tue Feb 13, 2018 9:57 am

RAchip wrote:
Mon Feb 12, 2018 10:04 pm
what if you have a $1mm home and could easily downsize to a $500k home in the future if needed?
That is a nice Plan B

alex_686
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by alex_686 » Tue Feb 13, 2018 10:36 am

MrNewEngland wrote:
Tue Feb 13, 2018 7:26 am
privatefarmer wrote:
Tue Feb 13, 2018 6:51 am
what about refinancing and taking the equity out? I don't see why you wouldn't count that. Although you'd have a mortgage payment so your monthly income needs would go up. I never understood why people want to have a paid off house when they die, unless they plan to give it to their kids. Why not leave the bank holding the bag when you croak?
Sure, but that makes your expenses go up...
I am sort of reversing my opinion from "Yes" to "No'. I missed the SWR part. SWR assumes economically productive assets that kicks off cash flow and value. A house does not really do that.

That being said, the above point is rational. You have a 1m home, you take your 500k mortgage at 3% and invest in the stock market to get 7%, earning a 4% spread, so your home is now kicking off a 2% return. You net assets don't change yet know we can fit into a SWR. Yeah leverage! That is, if you are comfortable taking the risk.

Otherwise, I would be cautious about using your home in SWR calculation. Long term home price increases adjusted for inflation is around 0% to 1%. HCL areas have broken this trend over the past few years.

dbr
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by dbr » Tue Feb 13, 2018 10:50 am

RAchip wrote:
Mon Feb 12, 2018 10:04 pm
I assume you dont include the value of your primary residence in your portfolio but what if you have a $1mm home and could easily downsize to a $500k home in the future if needed? Can you include the $500k difference in calculating SWR? How about vacation houses that could be sold or rented later in retirement if necessary?
Of course not and of course. First you might be confusing the rate, the R, in SWR with the amount of withdrawal. Obviously if you account for more assets you can also withdraw more money.

That does not mean the rate of withdrawal relative to the assets can be made greater by allocating part of the portfolio to real estate. I don't know if a portfolio that is partly allocated to real estate can sustain a higher rate of withdrawals than one that is all stocks and bonds. The first guess is that it doesn't make any difference. Real estate does not offer a whopping advantage in return for the risk taken to be different.

If your planning involves selling real estate to add to the portfolio, then obviously the amount of spending you can sustain is greater than if you just hold the real estate until you die and pass it on to someone else. But SWR is not the same as amount of spending.

If your planning involves running a real estate holding that produces a net cash flow, obviously that cash flow can be spent to increase your spending while needing less withdrawal from investments. The doesn't affect the SWR from your portfolio but it means you can spend more relative to what the amount taken at your SWR gives you.*

You can run retirement spending models that include cash flows such as real estate income, pensions, and social security and that include the addition of lump sums from selling real estate and investing it in stocks and bonds.**

*This does not mean I just said real estate income is a pension.

**This does not mean cash is not bonds and I forgot to mention it.

Admiral
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by Admiral » Tue Feb 13, 2018 11:00 am

privatefarmer wrote:
Tue Feb 13, 2018 6:51 am
what about refinancing and taking the equity out? I don't see why you wouldn't count that. Although you'd have a mortgage payment so your monthly income needs would go up. I never understood why people want to have a paid off house when they die, unless they plan to give it to their kids. Why not leave the bank holding the bag when you croak?
That's EXACTLY why. For the vast, vast majority of people their home is their largest asset by FAR. Assuming they want to leave something to their progeny, why on earth would they NOT want a paid off house? Who wants to leave their kids owing money from an estate to a bank? :confused

And the point of retirement for most people is to LOWER one's expenses, not increase them.

Right?

To OP: a house is part of your net worth and your assets. But unless you are monetizing it or making it liquid (as through a reverse mortgage, sale for profit, etc) then it's irrelevant to your SWR except in the sense that if you carry no mortgage, your living expense is lower.

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White Coat Investor
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by White Coat Investor » Tue Feb 13, 2018 11:11 am

RAchip wrote:
Mon Feb 12, 2018 10:04 pm
I assume you dont include the value of your primary residence in your portfolio but what if you have a $1mm home and could easily downsize to a $500k home in the future if needed? Can you include the $500k difference in calculating SWR? How about vacation houses that could be sold or rented later in retirement if necessary?
I wouldn't include it until you actually sold it and invested that money. Same with a second home. If you're renting it most of the year, include it. If not, don't.
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White Coat Investor
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by White Coat Investor » Tue Feb 13, 2018 11:12 am

privatefarmer wrote:
Tue Feb 13, 2018 6:51 am
what about refinancing and taking the equity out? I don't see why you wouldn't count that. Although you'd have a mortgage payment so your monthly income needs would go up. I never understood why people want to have a paid off house when they die, unless they plan to give it to their kids. Why not leave the bank holding the bag when you croak?
Taylor Larimore did this to give his kids their inheritance early and carries a mortgage in his 90s.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Tyler9000
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Re: SWR — Can You Include Real Estate as Part of Your Portfolio

Post by Tyler9000 » Tue Feb 13, 2018 12:18 pm

RAchip wrote:
Mon Feb 12, 2018 10:04 pm
I assume you dont include the value of your primary residence in your portfolio but what if you have a $1mm home and could easily downsize to a $500k home in the future if needed? Can you include the $500k difference in calculating SWR? How about vacation houses that could be sold or rented later in retirement if necessary?
Retirement spending calculations depend on accurate account sizes and cash flows. If you plan to downsize and sell your vacation home the day you retire, then feel free to use that extra money in your spending projections. But if you plan to stay in the more expensive home and keep the vacation home and only want to keep the option to sell or rent in the future, then planning your spending rate today based on investments and income you do not currently have is not a good idea.

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