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Old 09-02-2009, 03:42 PM   #141
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The point I was trying to make is that it doesn't matter how much your house is worth. You are "using up" the entire value of your house by living in it. That's what I meant by saying a house is a consumption item.
i am not sure what point you are making. if you are talking about value to a persons retirement i addressed that in my previous post (and there are other ways to view that value as pointed out by other posters). if you are talking about an absolute value then it is easy to see that you dont "use up the entire value" by looking at what happens when you die. the house is worth something at that point (even if it is just the land value).


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I have the same problem when people say "Paying extra on mortgage principal is the same as earning the same rate. If the mortgage is 6%, then I am earning 6% on the extra $1000 principal payment."

My response to that is, "Well then, I pay off my 20% interest rate credit card every month, so I'm earning 20% on that money. And 20% is more than 6%, so I'm doing a whole lot better than you."
and you would be correct. if you dont pay off your credit card with $X then next month you will owe $X * (20%/12) more which is a larger number than the other person who wud have only avoided $X * (6%/12) in interest charges. thus you are better off.

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The truth, of course, is that they are not earning 6% and I am not earning 20%. Both of us are just reducing the expense that we would otherwise be paying. It's no different from deciding to not buy a new car. I've avoided a $20,000 expense but that's not the same as earning $20,000.
you may not be actually "earning" 20% but by avoiding paying out that 20% financially you are equivilant to having earned it. (actually a little better off as again if you reduce the amount of income you require, you lower your taxes, provided you can also alter your income)
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Old 09-02-2009, 05:53 PM   #142
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Is there any way of linking this thread into a closed loop leading back to one of the other hundreds of other unresolved conversations on this same topic? The posters wouldn't even have to know the difference, and it would save dozens of electrons.
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Old 09-02-2009, 06:04 PM   #143
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Is there any way of linking this thread into a closed loop leading back to one of the other hundreds of ther unresolved conversations on this same topic?
We could do that for this and a dozen other subjects. But once we did, what would we talk about?
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Old 09-02-2009, 07:04 PM   #144
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my example using a mortgage was an attempt to get at what the rental value of said house might be so please forgive me. that being said i believe i am still correct when you use the rental value of the house in the example. i explained further in a previous post. and rent will need a cola to compensate.
Now I'm really lost - did you just switch this to a rent-vs-buy discussion?

Rental value is whatever the market will bear - but that's a totally different discussion.

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Old 09-02-2009, 07:11 PM   #145
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We could do that for this and a dozen other subjects. But once we did, what would we talk about?
Curvy women?
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Old 09-02-2009, 08:15 PM   #146
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Now I'm really lost - did you just switch this to a rent-vs-buy discussion?

Rental value is whatever the market will bear - but that's a totally different discussion.

-ERD50
no, i am not switching anything. the point i am making is that an owned home has an equivilant, non-zero portfolio value from a retirement perspective. if you are renting your house then the rent is a consumption expense as rayvt said but not if you own your home. i just should have used rent in my 1st example instead of a mortgage payment. my point is more easily made (explained, shown to be true) if you are comparing paying rent to a f&c house but it is still true even if you have a mortgage.

however if you can accurately determine the equivilant portfolio value of a stream of rent payments (as well as the maintenance costs) for the house you are interested in buying this thought could be used to help you make the rent vs buy decision.
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Old 09-02-2009, 08:28 PM   #147
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We could do that for this and a dozen other subjects. But once we did, what would we talk about?
Hairy men?
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Old 09-02-2009, 11:03 PM   #148
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the point i am making is that an owned home has an equivilant, non-zero portfolio value from a retirement perspective. ...
OK, I see where you are coming from now (I think). So sure, equity in a house is certainly worth something. I don't think anyone is denying that. A retiree with $X portfolio and some home equity is certainly in better shape than a retiree with the same $X and *no* home equity.

But what some of us are saying is: Assume that your home represents some standard of living that you wish to maintain during your retirement. At that point, the $ value of it does not mean much. It is what it is, also assuming that any future moves would be a "sideways" move in cost (maybe trading square foot for location or other qualities, but at roughly the same cost). So, whether it goes up, down, or stays flat in value is of little consequence - it's all a wash.

Under those assumptions, let's say my home quadruples in value (along with all comparable properties). I am not in a position to increase my spending based on this higher Net Worth, because I didn't really "gain" anything - replacement homes are the same cost, and I said I was not going to downgrade. So why include it in a Net Worth calculation?

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Old 09-03-2009, 12:27 AM   #149
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Exactly right. That's what I was trying to get across when I said, "You have to live somewhere."

Or in the words of Buckaroo Banzai, "No matter where you go, there you are"
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Old 09-03-2009, 09:35 AM   #150
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But what some of us are saying is: Assume that your home represents some standard of living that you wish to maintain during your retirement.
My home also represents income as I rent out the downstairs apartment. It produces $18k a year and if I was to move downstairs myself and rent out the upstairs I'd get $30k. So once the mortgage is paid off the rent will cover a large portion of my expenses, that's part of my motivation to pay off the mortgage
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Old 09-03-2009, 03:18 PM   #151
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OK, I see where you are coming from now (I think). So sure, equity in a house is certainly worth something. I don't think anyone is denying that. A retiree with $X portfolio and some home equity is certainly in better shape than a retiree with the same $X and *no* home equity.

But what some of us are saying is: Assume that your home represents some standard of living that you wish to maintain during your retirement.
and what i said is that your home has a certian portfolio value which i will now call $Y (since you just used $X as the rest of the portfolio) which is computed more like a landlord would compute the present value of his income stream from that house if it was rented. and in other words $Y would be the retirement $ value of that standard of living you mentioned

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At that point, the $ value of it does not mean much. It is what it is, also assuming that any future moves would be a "sideways" move in cost (maybe trading square foot for location or other qualities, but at roughly the same cost). So, whether it goes up, down, or stays flat in value is of little consequence - it's all a wash.
since we now have 2, potentially different, values for said house (what i call $Y above and the price you could get for the house if you sold it, lets call this $Z) i must disagree with you when you say that "it does not mean much" and that "it's all a wash". it is only a wash if $Y = $Z

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Under those assumptions, let's say my home quadruples in value (along with all comparable properties). I am not in a position to increase my spending based on this higher Net Worth, because I didn't really "gain" anything - replacement homes are the same cost, and I said I was not going to downgrade. So why include it in a Net Worth calculation?

-ERD50
ok lets consider that. first lets set the initial conditions, you own the house F&C and before the increase in value $Y = $Z. now when you say "my home quadruples in value" i am assuming you are talking about $Z quadruples in value, but if $Y doesnt quadruple in value then you could harvest some of the $Z's increase and not affect your standard of living. that amount would be $Z - $Y. you could do that by selling and moving into a rental.

there is a similar argument for moving to a different part of the country (or world for that matter) however this kind of move has other factors involved that might outweigh the financial side.
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Old 09-03-2009, 08:19 PM   #152
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jdw - what you say is true, but it isn't within the constraints I was talking about. I prefaced all that with "a living standard you wish to maintain". That means not going from owner to renter, and not downgrading.

Clearly, if downgrading is in the forecast, and the timing works, that's great.

Having a lot of equity in a house gives you options, but so does having equity in a portfolio.

-ERD50
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Old 09-03-2009, 10:46 PM   #153
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jdw - what you say is true, but it isn't within the constraints I was talking about. I prefaced all that with "a living standard you wish to maintain". That means not going from owner to renter, and not downgrading.

Clearly, if downgrading is in the forecast, and the timing works, that's great.

Having a lot of equity in a house gives you options, but so does having equity in a portfolio.

-ERD50
i think you should go back and reread my posts. what i said maintained a constant standard of living (and was therefore even inflation adjusted). going from owner to renter doesnt necessarily change your standard of living. and i never said anything about downgrading.
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Old 09-03-2009, 11:05 PM   #154
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Exactly right. That's what I was trying to get across when I said, "You have to live somewhere."

Or in the words of Buckaroo Banzai, "No matter where you go, there you are"
My I haven't heard a reference to that movie in a couple of decade. Never understood why a movie that supposedly was a cult classic had so few references to it on the internet. Where exactly is the cult?

Well laugh while you can Monkey Boy there are a least two members on the forum and Netflix finally has it on DVD, sweet.

I now return you to the exciting topic of curvy woman,or is paying off the mortgage?
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Old 09-04-2009, 08:16 AM   #155
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i think you should go back and reread my posts. .... going from owner to renter doesnt necessarily change your standard of living. and i never said anything about downgrading.
jdw, I'm gonna give it a rest - we seem to be talking "past each other".

I'm just trying to keep it apples-to-apples. Going from owning to renting might even be an "upgrade" for some - but it is "different". So to keep it apples-to-apples financial comparison, I'm looking at keeping the home itself a constant, and letting the price of that home and equivalent homes vary. Anything else throws in another variable, and becomes another discussion.


There was a previous comment you made though, that I do want to comment on before moving on -

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your argument is based on complete faith in FIRECalc as a predictive tool. ....

your post implies that an investor either doesnt give FIRECalc any credence or believes it entirely. have you noticed how many people on here are no longer comfortable with a 4% "SWR" and are shooting for something 3% or less. looks like there are some people who dont have your complete faith in FIRECalc. ....
No, this is just not true for me. Just like the intro to FIRECALC states, I understand that it is not predictive, it merely tells us what would have happened under all the past scenarios in its database. As far as I know, no one has a predictive tool, so we do the best we can (I'm anxiously awaiting tests of Want2Retire's cool Crystal Ball purchase).

But, if something failed in the past, it seems reasonable that it would do poorly under any similar future scenarios.

Going from 4% to 3% doesn't reflect a lack of faith in FIRECALC at all. FIRECALC presents the data, it is up to each of us to decide what we want to do with that data. FIRECALC is exactly *why* I want to be closer to 3% than 4% over the long run. A 4% WR FAILS 1 in 20 times over 30 years in past scenarios, more over 40 years. A 4% WR has those "scary" dips in net worth, taking your portfolio down to 50% of its value even when it "succeeds". History says 3% is a smoother ride, history says I am less likely to be eating dog food.

To me, a "lack of faith" in FIRECALC would mean that I don't think it is doing the math properly, or it has wrong data in its database. I accept it is only a limited data set, but it is what it is, a tool. And it seems to agree pretty well with other methods, and w/o a predictor, it is one I will keep in my toolbox and refer to.

-ERD50
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Old 09-04-2009, 08:41 AM   #156
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Going from 4% to 3% doesn't reflect a lack of faith in FIRECALC at all. FIRECALC presents the data, it is up to each of us to decide what we want to do with that data. FIRECALC is exactly *why* I want to be closer to 3% than 4% over the long run. A 4% WR FAILS 1 in 20 times over 30 years in past scenarios, more over 40 years. A 4% WR has those "scary" dips in net worth, taking your portfolio down to 50% of its value even when it "succeeds". History says 3% is a smoother ride, history says I am less likely to be eating dog food.
I would tend to agree with this. FIRECalc is giving expected outcomes based on history. As we all should know about historical results, they are no guarantee of future performance.

In that sense, using 3% instead of 4% is showing a lack of faith that the future will be like the past, not a lack of faith in the tool's accuracy. If you had complete faith that the future would be like the past, you could use 4% and sleep well at night even through horrible bear markets.
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Old 09-04-2009, 09:19 AM   #157
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If you had complete faith that the future would be like the past, you could use 4% and sleep well at night even through horrible bear markets.
Only if you could sleep well knowing that 1 in 20 past scenarios failed at a 4% WR (got a backup plan?). And if you knew you and your spouse would not be alive 30 years and one day out from retirement, and you could still sleep well knowing that.

Of course, knowing the date of our demise opens up all sorts of SWR possibilities if you have no concerns with leaving money to heirs/charities. As you approach that day, it simply becomes $Portfolio/Days_on_Earth. At that point, spending anytime evaluating spreadsheets wouldn't be much of a priority anyhow (for better or for worse).


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Old 09-04-2009, 01:10 PM   #158
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jdw, I'm gonna give it a rest - we seem to be talking "past each other".

I'm just trying to keep it apples-to-apples. Going from owning to renting might even be an "upgrade" for some - but it is "different". So to keep it apples-to-apples financial comparison, I'm looking at keeping the home itself a constant, and letting the price of that home and equivalent homes vary. Anything else throws in another variable, and becomes another discussion.
ok let me try 1 more time to show you what i am saying by using a very specific example designed to make this an apples to apples comparison. suppose you live in track housing. the house you own F&C (house 1) sits right next to an identical house (house 2) that is owned by an investor who has it up for rent. SO living in either house would provide you with the "same" house (apples to apples). in reality both houses have both $Y and $Z values (please remember that $Y is derived from the rental income stream and $Z is derived from price you would get if you sold your house) and because the houses are identical sitting right next to each other, house 1's $Y = house 2's $Y and house 1's $Z = house 2's $Z (apples to apples).

hopefully you will grant me that living in either house you could get almost exactly the same lifestyle (apples to apples) except for maybe the financial side so lets talk about how house 1's $Z compares to house 2's $Y. i submit to you that at the point where house 1's $Z = house 2's $Y your financial lifestyles are equal (and this is because of the way i defined $Y).

soooo if house 1's $Z > house 2's $Y you could increase your lifestyle by selling your house (house 1) and renting house 2, thus harvesting the portion of $Z that is greater than $Y. you have just added more money ($Z -$Y) to your lifestyle. the reason house 1's $Z > house 2's $Y might happen is because rent prices are driven by a different market than house prices. now conversly if someone is renting house 2 and you are selling house 1 and house 1's $Z < house 2's $Y then that someone could increase their lifestyle by buying (and moving into) your house

the tricky (but not too tricky) part in this whole thing is determining $Y. you will need to take into account monthly rent, house maintenance costs, property taxes, home owners insurance, renters insurance, utilities that are included in the rent, hoa fees, and any other expenses that may be different between renting and owning i may have left out, all adjusted for inflation, as well as how to compute a PV you accept as real from that ultimate income stream. but just because it may be hard to compute doesnt mean $Y doesnt exist nor does it mean it cant be used the way i describe.
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Old 09-04-2009, 02:11 PM   #159
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soooo if house 1's $Z > house 2's $Y you could increase your lifestyle by selling your house (house 1) and renting house 2, thus harvesting the portion of $Z that is greater than $Y. you have just added more money ($Z -$Y) to your lifestyle.

This is not comparing apples-to-apples at all!

If you own a house, either free-and-clear or with a fixed rate mortage, your housing expense (P&I) is known and fixed.

If you are renting, your rent is *not* fixed---unless you have convinced the owner to sign a 30 year fixed-rent lease. Which no landlord would do.

These two scenarios are not even remotely the same.
Since they aren't, any further analysis is bogus.

But, it is trivially true that if you can sell your house for $X and re-aquire it (or an exactly identical one) for $Y which is less than $X, then you would benefit by doing so. In the real world, this is not possible.

And with this rental scenario we've drifted waaaaaay from the original point.
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Old 09-04-2009, 02:12 PM   #160
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And with this rental scenario we've drifted waaaaaay from the original point.
Never assume a thread can't morph into a rent vs. buy discussion....
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