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Old 11-21-2009, 09:08 PM   #61
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I don't count the value of my home in my calculations. I suppose if I have it with the intent to sell and make a profit, I would. But instead I just look at it as a place to live in.
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Old 11-21-2009, 09:27 PM   #62
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I don't count the value of my home in my calculations. I suppose if I have it with the intent to sell and make a profit, I would. But instead I just look at it as a place to live in.
Are you saying that when you calculated your retirement budget it included rent? That is, you set aside the value of your home in your calculations and therefore are including a sum to pay for rent?

If you don't include rent in your retirement budget because you own a home, you ARE counting the value of your home in your calculations. You're just using your home's value to offset an expense rather than generate income, but essentially the same thing on the other side of the ledger.

BTW, that's how I handle it, an offset to rent expense. I have the expenses of home ownership in my budget (taxes, maintenance, etc.) but not rent. This is not ignoring the value of a home, just accounting for it in another way.
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Old 11-21-2009, 09:46 PM   #63
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I like to calculate our net worth on income producing assets. I don't include any of our real estate ...
I'm like kumquat in that I don't calculate the real estate.
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Old 11-21-2009, 09:58 PM   #64
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I'm like kumquat in that I don't calculate the real estate.
So, you include rent as a housing expense during retirement even though you own a home? That's quite a conservative approach. But, of course, most everyone on this board is conservative in one way or another in their FIRE planning and execution.
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Old 11-21-2009, 10:27 PM   #65
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I do believe that one's home should be considered part of one's portfolio.
I do too. But I think the discussion on this thread is suffering from "terminology disfunction." What does it mean to be within a portfolio? And the value of what is used to calculate what?

Accounting for the value of your home in your portfolio doesn't necessarily mean taking that value and multiplying by 4% (or whatever number you use) to determine a SWR for RE. Rather, you might have your home drive a reduction in housing costs in retirement (no rent). Or you might note it as an asset of last resort that could be liquidated. Etc.

I have several assets in my portfolio that are not included in the calculation of my retirement SWR. My house. A trust I set up for my grandson with special needs. A fund for the grandkids' education. But they're all there on my portfolio spreadsheet as they are not entirely independent from one another.
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Old 11-22-2009, 12:09 AM   #66
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The value of our home represents 18% of net assets. The equity in our home represents 8% of net assets.

I struggle to understand why people do not include the value of a home in a net worth calculation. At the end of the day a home is an asset, it has value and it can be sold for money - the fact that the owner lives in the home does not change any of these facts.

That said, I do not intend to rely on realising that value for the purpose of funding my retirement.
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Old 11-22-2009, 12:29 AM   #67
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T
I struggle to understand why people do not include the value of a home in a net worth calculation.
I struggle to understand why people even bother to calculate their net worth. Is it a means of keeping score, to see if we are "progressing"? For the purposes of supporting future spending in retirement, the only assets worth talking about are those that produce income. From this perspective, owning a home is important if it helps one avoid expenditures (e.g. rent) or if the intent is to eventually convert the equity to cash. Otherwise, it's just a place to live and a nice place for the relatives to meet after the funeral.
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Old 11-22-2009, 05:07 AM   #68
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I'm somewhat surprised by the number of folks who do not account for the value of their homes(s) in their financial records and/or calculations. My home is only 5% - 6% of my total net worth, but it's recorded and included in my calculations and planning. Like other assets, it has its own set of issues regarding costs of ownership, benefits of ownership, volatility in value, long term potential for appreciation/depreciation, and so on.
I think it depends on what your plans are with respect to the house. If you intend (hope) to stay in your home until death, it makes sense to omit its value as part of your retirement nest egg. If you intend to sell it and move to a cheaper place, it probably makes sense to consider at least some of its value as part of your retirement nest egg.


It also may come down to what one means by 'accounting for it'. Be aware of its value? sure. Have it figure into your nest egg total from which you calculate your SWR? Well, that gets more tricky and depends on your plans for the house, as I mentioned above.


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I have other assets of significant value I would set aside from consideration in my planning before my home.
Just curious, like what?
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Old 11-22-2009, 10:55 AM   #69
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That's pretty much my approach for omitting the value of my condo as part of the nest egg. I don't include my home for the same reason that I don't include the value of my car and don't include the value of my (misplaced somewhere) Chipper Jones rookie baseball card. I know there is value in each, but I treat my condo as my place to live in, my car as my means of transportation and my Chipper Jones baseball card as a baseball card, not as investments.

I suppose if World War III breaks out and I have to sell all my possessions to live, then I'd be thinking more of the values associated with them.
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Old 11-22-2009, 11:06 AM   #70
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it makes sense to omit its value as part of your retirement nest egg.
I'm guessing you do count the value of your home. You include ownership of your home and the associated benefits when you calculate your budget for retirement. As I said above, having your home factor into reducing expenses (increasing expenses in the case of a second home or vacation home) is similar to including its value in income estimations, only working on the expense side of the ledger.
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It also may come down to what one means by 'accounting for it'. Be aware of its value? sure. Have it figure into your nest egg total from which you calculate your SWR? Well, that gets more tricky and depends on your plans for the house, as I mentioned above.
As mentioned in my post above, this discussion is suffering from "terminology dysfunction" as folks are saying they don't include home value in their financial records at all but what they mean is that they don't include home value in calculating SWR, an entirely different thing.

Maurice, if you don't include the value of your home in your financial records and calculations, couldn't that be an issue in estate planning? That is, might plans be forged disregarding the house that might be inappropriate if the house is a significant slice of one's total net worth?

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Just curious, like what?
See my post above where examples are given.
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Old 11-22-2009, 11:27 AM   #71
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For the purposes of supporting future spending in retirement, the only assets worth talking about are those that produce income. From this perspective, owning a home is important if it helps one avoid expenditures (e.g. rent) .
My observation on this board is that it is popular to have a so-called "paid for home" when entering retirement in order to have a place to live rent free. A few prefer to plan to rent going into retirement, but it does seem like home ownership is a popular situation with the FIRE'd and FIRE'd wannabees and not something disregarded and unaccounted for.

It also seems popular to consider home value and the rent-freeing utility it provides on the expense side of the ledger rather than using home value as part of SWR calculations.

Either way, your home is part of your portfolio, your net worth, and needs to be included in budgeting and estate planning exercises.

I think most of us are saying the same thing. It's just that some are saying they don't include home value in their accounting of total assets in any regard when they mean they don't use home value in calculating SWR, a different thing entirely.
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Old 11-22-2009, 11:36 AM   #72
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... having your home factor into reducing expenses (increasing expenses in the case of a second home or vacation home) is similar to including its value in income estimations, only working on the expense side of the ledger...
Yes, tell me about it!

I do consider my 1st house a necessity. Though it is a bit large for us when we become empty nesters, I have figured that it would not save us much money to sell it and to move into a smaller house. Been living in it for 22 years, we are so used to the area.

The 2nd home is another matter. Although I told myself and my wife when buying it that we should look at it as "consumption" and not as an investment, the operating and maintenance expenses still hurt a bit when we have to write a check. The money tied up in it could also have been used to buy low "rebalance" into equities in the past year (not sure if I would have the guts, but just playing Monday quarterback here ).

So, I do look at the houses differently from income producing assets, and each of them separately. We still love having a nice place at 7000ft to escape from the summer heat, but of course it is cheaper to stay in the city and to dial in a lower setting for the thermostat.

Perhaps in another 10 years, when housing market comes roaring back, I will brag about how I made a prescient purchase in a place desirable by retirees, but for now the 2nd home sure feels more like consumption than an investment.
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Old 11-22-2009, 11:37 AM   #73
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A little less than 20% here. Wish it were less. Still gotta live somewhere.
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Old 11-22-2009, 11:38 AM   #74
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We don't think about a second home. I am worried about keeping a second bathroom.
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Old 11-22-2009, 11:58 AM   #75
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Maurice, if you don't include the value of your home in your financial records and calculations, couldn't that be an issue in estate planning? That is, might plans be forged disregarding the house that might be inappropriate if the house is a significant slice of one's total net worth?

That's why I said it depends on what someone means by 'accounting for it'. My home as an asset is listed in my will. It is, of course, insured. But if you look at my spreadsheet that caluclulates the value of my investments (and computes various withdrawal rates), it doesn't show up. And if you were to ask me my net worth, I would give you a number off the top of my head that excludes my house.


Should I firm up my plans to move somewhere cheaper, I may start considering some of its value in my calculations.
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Old 11-23-2009, 03:17 AM   #76
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The issue is not that most of us don't have enough house, but rather MOST OTHER people don't have enough investments. If you own a $70,000 house and $30,000 in stocks, then you've hit the 70% they mention...and sadly I think this is where many Americans are.
I really wonder about the statistics of this - if it is true that most are in that type of situation, what does that say about the future....and their ability to 'raid' other people's cookie jars? As I ponder the ER and FI situation, I see some distinct differences: 1) one can try and optimize their living expenses such that they minimize those expense - however, with the probable inflation explosion and increase in tax confiscation, it seems as if that expenses optimization line will re-adjust higher, with less of the amount being discretionary; 2) be so damn wealthy, you don't care. I'm grappling with where the middle ground is and am having a hard time finding it. Any ideas? Or am I just trying to have a better crystal ball :-) as many of the posters here post about?

On topic - CA, NY, DC - areas where people would be house rich and other asset poor. I find that many of the authors of these 'articles' tend to live in those areas and skew their article to that audience.

Lastly, if the above is true (70% of net worth is house), and the non-scientific review of the posters on this board and their percentage (avg 15%), this group of people on this board is quite a unique one and it seems a rare one......
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Old 11-23-2009, 04:18 AM   #77
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one can try and optimize their living expenses such that they minimize those expense - however, with the probable inflation explosion and increase in tax confiscation, it seems as if that expenses optimization line will re-adjust higher, with less of the amount being discretionary
If I had to generalise, those who have a high percentage of their wealth tied up in expensive housing in states with serious deficit problems are most vulnerble to tax increases - specifically increases in property taxes.

I own a rental house overseas (where I used to live) partly as an investment and partly as a hedge against the cost of buying a house should I ever return to live. However, the local equivalent of property taxes has been consistently rising at rates higher than general CPI and higher than the rent I am collecting. I am considering selling because of the rising tax issue.

I would be very surprised if the posters on this board were representative of the population in general.
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Old 11-23-2009, 04:46 AM   #78
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Ours seems to be around 18%. California, mcmansion, paid for. If we chose to rent, in order to rent something of equal caliber, I figure that our income producing investments would have to be about $1.4M more than they are (that is not the value of the house, just what I would need at my target <3% WR to pay the rent). House is not worth that much.

So when considering balanced planning and working assets, I do consider the value of my home (i.e., better to rent or better to own??). I do consider it part of my net worth. However, since it is paid for and we will not have to rent (replacement value), I do not consider it in my WR calculations, because I am not withdrawing from it. I only consider the on-going costs such as prop tax, insurance, and upkeep. Thus while it is a working asset, and therefore an investment, it is illiquid and does not produce cash, nor does owning it result in income taxes. Therefore, for current liquidity cash planning purposes, it is left out of the equation.

That said, DW and I do view it as insurance. We may eventually sell and move to something @ 25-35% of our home's value, but that would only be when we are no longer able (or willing) to care for it (and the acreage it sits on).

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Old 11-23-2009, 08:45 AM   #79
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I consider the equity value in our home that I know I can get if I sell it as part of my net assets. Yes, we all have to live somewhere, but the known cash value of of the home that I would keep in a sale is indeed an asset. We could always rent or live with kids (severely endangering our mental health, not to mention theirs) or buy something very cheap in a low cost area. In any of these scenarios, we would end up with a decent chunk of cash out that would not be taxable. We are among those who have only owned two homes in our lives, and we have had the current one for 27 years. I feel confident that, even if we dropped the price to a level that would make a very quick sale possible, we would still be walking away with 3 to 4 times what we paid for it. To me, that's an asset. But, as others, I don't count that asset when I figure what will be a reasonable SWR. It's there if absolutely necessary, but not part of a realistic calculation of what we can pull annually for income.
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Old 11-23-2009, 11:11 AM   #80
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The issue is not that most of us don't have enough house, but rather MOST OTHER people don't have enough investments. If you own a $70,000 house and $30,000 in stocks, then you've hit the 70% they mention...and sadly I think this is where many Americans are.
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I really wonder about the statistics of this - if it is true that most are in that type of situation, what does that say about the future....and their ability to 'raid' other people's cookie jars?
I had a project at work at while back to put together a report on a customer's 401k data. In building that report, I could see the contribution levels of the 400-500 employees in the organization. Just from eyeballing it, I'd guesstimate that fewer than 10% were contributing the max, and the majority of those seemed to be older employees contributing up to "catch-up" limit of $21,500. Most of the contributions were very small ($2K - $3K per year).

The 401k consultant at my own company told me that I'm one of only 2 people at my ~20-person company contributing the max.

I do get concerned that by being responsible now, I'm going to get "punished" later in life, to help pay for the folks who haven't saved enough.
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