Home equity not a retirement solution?

[youbet]

Quote:

Originally Posted by Cute Fuzzy Bunny Do you sell the house, rent another place to live and eat, or sit in the house and starve?

What I said, CFB, is that "Taking equity out of the house isn't in the retirement funding plan."* And it isn't!

All our plans are calculated on staying in this house as long as we want with a conservatively calculated quantity of non-real assets to back that desire up.* We don't list the house as a "retirement asset,"* even as a fall back retirement asset.* This probably caused me to stay hitched to the plow two or three years longer than if I had pencilled in the value of the house as a spendable asset.

On the other hand, we have friends who enjoy their large scale, expensive homes and fully understand that they will be able to downsize and harvest liquid assets to live on later in life.* They've built that into their retirement funding plans and it makes sense to me for them to do that.

Because our hobbies, lifestyle, some family matters, etc., are tied to our home, we planned to not "spend" our home but rather to keep it.* So that's how we planned, and, yes, even worked extra time to have it work out that way.*

You moved the situation from retirement planning to hypothetically dealing with some catastrophe later in life.* That isn't what I was talking about.* But, of course, if I needed money for my family to survive, I'd do whatever it would take including selling blood plasma, working, liquidating non-financial assests (including the house and furniture) and mooching off whoever I could.* Who wouldn't?

But, again, my ER planning was based on not drawing on home equity for living expenses.* I wouldn't necessarily recommend this algorithm for everyone.

[cute fuzzy bunny]

Spidey said 'everyone agrees that its a fall back position' and you said "Nope, I don't. So I guess not everyone agrees.". I asked if you ran out of money, would you sell the house, rent and eat. You actually didnt answer the question, but I presume the answer is 'yes'.

That would make it a fall back position. Which would make it a tappable asset. Which makes it part of your net worth. Which made your comment to Spidey seem more of an attempt to argue a point that you didnt even actually disagree with. Which always causes a small short circuit in my brain.

Now that we've gotten past that, can I propose that this is a far simpler equation than we're making it out to be?

We're where we are now, and someday we're all gonna die. In between here and there we have a life to live and parameters around that life. When we die, we may plan to leave something behind for our heirs.

We have a "net worth", which is any tangible asset that can be used, sold or converted to some form of currency. We also have intangible assets like lots of free time. Both our intangible and tangible assets change in value over time due to investments, aging, depreciation.

I have to choose to use tangible and intangible assets to meet the lifestyle parameters I've chosen, or the ones I can afford, until the time I die.

Which tangible and intangible assets are up to each individual to prioritize and will always be different. Some will see their house as simply a place to live and a tappable tangible asset. Some may choose to be sentimental about it and see it as a last gasp tappable asset.

To argue that its not on the table or part of a fall back plan, or that because of what it is, that its not a tappable tangible asset and therefore part of the net worth seems to be a low value exercise.

How it turns into an asset and the resulting cash flow variants is certainly an interesting dialog.

This is probably more "brain wiring" like a lot of other topics. Some people value "certainty" so much it overrides more valuable uncertainties. Some people fear certain things so much they'll create irrational arguments out of bits of unwhole cloth that on the whole look perfectly rational to them. Some people attach great sentimentality to things and others attach none or nearly none.

I think the "home as an asset" thing is as big a divider between how people think as almost any other hot topic discussion item we have here. Whether its sentimentality or some ground up brain wiring that the home is "not on the table" is up for debate.

I regularly look at the value of the home i'm living in and market prices. When that market price rises above or sinks below the value, I start considering options. At various points in our lives, homeownership may not be a priority or a benefit.

[Nords]

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Originally Posted by 2B Half of the people over 85 have some form of dementia.

We're not too sure about the people under 85, either!

I'd sure hate to have to contend with the daily dementia/Alzheimer's pop quizzes. The penalties for failure are way too high.

Quote:

Originally Posted by Cute Fuzzy Bunny To argue that its not on the table or part of a fall back plan, or that because of what it is, that its not a tappable tangible asset and therefore part of the net worth seems to be a low value exercise.

That's almost as low a value as attempting to agree on a common definition of "net worth"!

[kcowan]

What I see is confusion about planning versus an unexpected calamity. In our case, we sold the house for $750k and use the money in our portfolio to rent a 3300 sq.ft. penthouse for $35k/yr. In the event of an unforeseen disaster like a market meltdown or an expensive illness, we have considered moving from our high cost district to a sunny climate in Mexico, Costa Rica, or Uraguay.

We have traded the uncertain real estate holding and its associated appreciation for more liquid investments along with their attendent risks. We have also gotten rid of maintenance costs, heating, water, sewage, and electricity costs (included in above), and property taxes. So far so good (10 years, 4 retired).

Would I include the value of the house in ER planning if I were to go through it again? Sure because it is an option. To rule it out without considering the alternatives is similar to not shopping around for the best investments. Now having made the decision to stay in the old house also makes sense as long as the extra costs of that decision are acknowledged (such as working a little longer).

[Scrooge]

Quote:

Originally Posted by Cute Fuzzy Bunny I think the "home as an asset" thing is as big a divider between how people think as almost any other hot topic discussion item we have here.* Whether its sentimentality or some ground up brain wiring that the home is "not on the table" is up for debate.

I think there may well be a rational component to this reluctance to include your primary residence in you list of assets, especially if you don't plan to move immediately after your ER.

First, it can be hard to predict what your home will be worth 20 years from now if/when you may need to tap into it. Second, you don't know how much it will cost you to own/rent elsewhere if you were to move in 2026. Third, moving out of your current house (which you presumably know well) and into another house or apartment may add extra layers of uncertainty, e.g. unpredictable and potentially expensive maintenance like roof replacement or, heaven forbid, foundation work. Fourth, there are various intangibles like living close to your children and grandchildren.

In the end, many folks' subconscious may say: "Oh, forget about it, there are just too many variables here! I'll plan for my retirement without factoring in the value of my house. If and when I face a total financial meltdown, then I'll re-evaluate my options."

Having said that, keeping your house in ER can also add a degree of uncertainty, e.g. rising real estate taxes, although probably not to the extent described above.

[Rich_by_the_Bay]

Quote:

Originally Posted by Scrooge I think there may well be a rational component to this reluctance to include your primary residence in you list of assets, especially if you don't plan to move immediately after your ER.

Well said.

And welcome to the "ground up brain wiring" club .

[2B]

I am intentionally not paying off my mortgage so that I'll have more after tax cash after ER to manage my tax rates prior to SS. That means I'm including the cash to pay off my mortgage in my list of assets. I don't see where that's any different than if I included my home's value in my assets.

My assumption is that when I find it hard to keep up my house I'll move to some form of independent living or a close in townhome. At that point any home equity will be part of my liquid assets.

Money is money no matter where it's at or how it's invested.

[Scrooge]

Quote:

Originally Posted by 2B I am intentionally not paying off my mortgage so that I'll have more after tax cash after ER to manage my tax rates prior to SS.* That means I'm including the cash to pay off my mortgage in my list of assets.* I don't see where that's any different than if I included my home's value in my assets.

If I understand your approach correctly, you have a certain amount of cash set aside that could otherwise be used to pay off your mortgage, right? And then you add that cash to your list of assets and add the outstanding amount of your mortgage to your list of liabilities, right?

If that is the case, then we are talking about your mortgage loan, which is typically unrelated to the future value of your home. You can predict your mortgage payments 20 years from now (unless it's an adjustable mortgage* ), but it's much harder to predict how much your place will sell for in 2026.

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My assumption is that when I find it hard to keep up my house I'll move to some form of independent living or a close in townhome.* At that point any home equity will be part of my liquid assets.

Sure, that works, but the big unknown is what that "home equity" will be when you decide to sell. If I had sold my house 6 years ago, I would have received $200K less than if I were to sell it now. Who knows what it will be worth 6, much less 20, years from now?

Quote:

Money is money no matter where it's at or how it's invested.

On the one hand, it is certainly true that money is highly fungible. It always makes me cringe when people say things like "Yes, we are spending quite a bit now. But then again, we are making good money and can afford it. Of course, we will have to spend a lot less once we retire and don't have that kind of income." As if money earned now could not be set aside and used in retirement!

On the other hand, the money that you have invested in your primary residence is effectively invested in a non-diversified, potentially volatile and illiquid asset. If you owned 2,000 shares of Microsoft and planned to hold it for the next 10-20 years, how confident would you be that you knew its eventual value?

[Scrooge]

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Originally Posted by Rich_in_Tampa And welcome to the "ground up brain wiring" club .

Far be it from me to turn a perfectly good joke into a serious discussion* but whenever I see "cold reason" collide with "ground up brain wiring", I become curious. The former is typically based on the analytical approach to reality and the latter is a shortcut based on digested and internalized experience of previous generations.

There is often something interesting about this collision. The least interesting cases are the ones where "cold reason" is 100% right and "ground up brain wiring" is 100% wrong because previous generations' experience is no longer applicable due to changing circumstances.

However, sometimes "cold reason" underestimates transaction costs or misses something important altogether and that can be a interesting area for further digging.

[Rich_by_the_Bay]

Quote:

Originally Posted by Scrooge Far be it from me to turn a perfectly good joke into a serious discussion but whenever I see "cold reason" collide with "ground up brain wiring", I become curious.

It was just a little poke at CFB's earlier characterization of anyone who disagreed with his POV. We have lobbed this back and forth a few times - just good natured kidding. He's much more entertaining when we keep him on the defensive -- right, Ted? Worst part is that he's alot smarter than I am.

However, I agree with your insight: in stuff like this, rarely does a spreadsheet or pure arithmetic analysis capture all the decision factors. It still needs to pass the "feels OK to me" test among others. A bit like whether to pay off your mortgage, or whether there is a place for immediate annuities.

In this case, my sense is that there are two basic camps: those who feel home equity should be part of the early planning process because it can eventually be converted to cash, while the other camp knows that but feels there are so many uncertainties surrounding such a conversion years down the road (assuming you have no immediate plans to sell) that it is useless to try and plan around it now, just assume it won't happen (and if it does, deal with it then). Voila.

[cute fuzzy bunny]

Whoa folks, before we get carried away with what you THINK i'm saying, let me clarify. Not that such clarification has ever helped in the past. The last time I tried to clarify a position on killing innocent people, I was turned into a supporter of infanticide in under 3 posts... :P

I have no interest in changing anyones point of view, nor am I insistent on projecting my own onto anyone elses. I'm just trying to understand by asking questions. I got into this mess because someone disagreed with something and the disagreement didnt make sense.

As far as the 'brain wiring' comment, its already been well established that most decisions are made in the gross absence of facts, based on emotional and intellectual hairballs that exist in people. You already know the answer to the question, its simply an exercise in creating the structure of rationality and reasoning to support that. Not that theres anything wrong with that...everyone works the same way.

As far as Scrooges comments...the same sentiments could be made about almost any retirement investment or asset, couldnt they? Every asset and its purchase, holding and sale has lots of implications and concerns/issues.

While there are certainly exceptions, most homes retain value well, increase value with or in excess of inflation, can provide an income stream (reverse mortgages, renting a room or the whole thing), or a lump sum (mortgaging, splitting land or selling outright). Its also probably the most expensive thing you own and perhaps the largest single investment in many investors portfolios.

With that in mind, you exclude it from any planning and dont consider it when investing millions of dollars?

In my case, its an appreciating asset that is an excellent store of value, and to me it represents the opportunity to either be more conservative or more aggressive with my investments because the home effectively acts like a giant bond.

By the way, who the heck is "ted"?

[Martha]

Quote:

Originally Posted by Cute Fuzzy Bunny By the way, who the heck is "ted"?

I think Rich got you mixed up with your dog. Just like my neighbor thought I was Judy, when it is my dog's name.


I know a few people where home equity likely will be a retirement solution. If you reach 65, and SS isn't enough, a reverse mortgage can be a life saver.

[2B]

Quote:

Originally Posted by Martha * I know a few people where home equity likely will be a retirement solution.* If you reach 65, and SS isn't enough, a reverse mortgage can be a life saver.

Think about it....

You can't afford the house you live in. You have no intention or ability to get a job. Now, you take on debt.

This is when you must downsize and pull your assets out of your home to cover your cost of living. I think reverse mortgages were invented as the "last hurrah" for baby boomers to spend it all and then some. What happens to the people when they run out of equity? They are then stretched beyond their means and now they are broke.

It might work but you need to know when you'll die and how much you'll need to die with dignity.

My inlaws will use their home equity to pay for their nursing/assisted living costs.

Dear SIL suggested that since MIL and FIL didn't want to leave their home that they should get a reverse mortgage to pay for in home care. That way they could stay there longer. I almost choked but showed her that they could have in home care for about 3 years and then there was no equity left in the house. That would be a great plan if we were sure they would die within 3 years or she has lots of money to cover them after that.

By moving into a "facility" they have enough for 12 to 15 years based on the latest real estate agent's market analysis. Of course, my inlaws keep saying that they want to stay in their home. They no longer can make a rational decision.

[Rich_by_the_Bay]

Quote:

Originally Posted by Cute Fuzzy Bunny By the way, who the heck is "ted"?

Ah.. there it is - post by ESRBob where mentions what I assumed was your nom de plume: p. 243 of his book, he states.

Sorry -- CFB it is.

[Scrooge]

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Originally Posted by Martha I think Rich got you mixed up with your dog.

Now, is that a step up or down from the infanticide charge?*

[Scrooge]

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Originally Posted by Cute Fuzzy Bunny As far as the 'brain wiring' comment, its already been well established that most decisions are made in the gross absence of facts, based on emotional and intellectual hairballs that exist in people. You already know the answer to the question, its simply an exercise in creating the structure of rationality and reasoning to support that.

Sure, that's very common, but the interesting question is how did we first arrive at the answer that we "already know", which we then rationalize after the fact? This is a causal world after all It could be hidden self-interest or "nature" or "nurture", but whatever it is, it's real and usually worth looking into.

Quote:

As far as Scrooges comments...the same sentiments could be made about almost any retirement investment or asset, couldnt they?* Every asset and its purchase, holding and sale has lots of implications and concerns/issues.

Sure, but as I pointed above, we are talking about a (a) non-diversified (b) volatile and (c) illiquid investment here. And once you liquidate it, you will have all kinds of other issues related to selecting and buying a new place, moving, etc, which we will be progressively less inclined (to be polite) to handle as we get older. Thankfully, there are ways of alleviating the situation without exposing yourself to these uncertainties, e.g. reverse mortgages, but I am not sure they have fully trickled down through the collective subconcsiousness yet.

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With that in mind, you exclude it from any planning and dont consider it when investing millions of dollars?

Looking at my calculations, I see that I count on 45% of the current market price of the house if I am to sell it within 3 years and move to a less expensive area (Plan A). On the other hand, if I end up staying in the house for another 10-15 years (Plan B), then I lower the number to ca. 30% since it's hard to predict what the house will be worth 13-18 years from now and how much a new place will cost me.

[mathjak107]

a reverse mortgage is really a balloon payment loan in disguise...its a balloon payment due either when you sell your house or when you die...nothing new or exciting here,or even useful at that

[cute fuzzy bunny]

Quote:

Originally Posted by Rich_in_Tampa Ah.. there it is - post by ESRBob where mentions what I assumed was your nom de plume: p. 243 of his book, he states.

Ah yes, I remember that post...I havent read Bobs book, so it didnt stick. Fine, "ted" is is. My wife really hates Cati though. She's filing for a name change.

Quote:

Originally Posted by Scrooge Now, is that a step up or down from the infanticide charge?

nm

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Originally Posted by Scrooge Sure, that's very common, but the interesting question is how did we first arrive at the answer that we "already know", which we then rationalize after the fact? This is a causal world after all It could be hidden self-interest or "nature" or "nurture", but whatever it is, it's real and usually worth looking into.

This is why I call them 'hairballs' and looking into them is something I really enjoy. I often learn something when asking questions about peoples decision making matrices. They're complex intellectual, emotional...and/or sometimes physical claptraps, the origin of which probably cant be determined. In this case, theres probably a consolidated ground up parental, religious and educational influence about the home being a separate thing, sacred, not to be touched.

The easiest and my most common example is an investor born in the depression era and equity investing. Many of those folks grew up in an environment where stocks were evil and a lot of the economic suffering they experienced both directly and indirectly shaped their lives. You strike up a conversation with one of these folks, maybe a parent or grandparent, and talk about buying equities. They immediately respond to the negative, even though there are no facts in evidence about which equities, whether they're good investments, or any other information. You've poked the hairball and gotten a factless response. Further facts will not change the response.

In the working world, I used to exploit a common hairball and the majority of people using this board will understand it. You need a faster, better computer and the new ones have really cool features that the one you have doesnt have. You want it. You know you do. Now, the one you have, and probably the one before that, were perfectly well suited to what you're doing and the new one really doesnt buy you anything.

Whats my interest in this? Trying to help people understand that they have these 'hairballs' and to try to help them find ways to not let them interfere with their early retirement, planning and investing.

Unfortunately, when you ask questions of peoples intentions and motivations (prodding the hairball), many people react quite unpleasantly. The rational, conscious portion of the mind really doesnt like having the subconscious disturbed. The conscious mind has already come to terms with that screaming monster and built a construction of 'facts' and a set of information that both can live with, and you're disturbing the domestic peace.

They usually call you fairly unpleasant names, presume you have some evil intent, or are trying to beat them up.

Its easier to make the hairball prodder into the bad guy than it is to examine the alternatives and perhaps re-rationalize. After all, i'm just some jerk that likes harassing people, wants others to agree with my point of view and thinks baby killing is a-ok.

The typical situation in this case when a hairball is being threatened is to take a relatively irrelevant or unrelated comment from a post and decide to attack that point, as it doesnt threaten the hairball. Often people dont even agree with the argument they're posing or the point they're making, but it does make for a good distraction. See my sig.

A big hairball is someone who "is" their idea. You challenge the idea and you've challenged the person themselves. I've run into plenty of those folks. You become satan himself the moment you point out the gaps in their well thought out plans.

I'll bet most people I get into these 'discussions' with dont even read any of the posts I write in any kind of detail. And thats fair because they really arent interested in my explanations. They've already determined that I'm threatening them, what my next reply will be, and how to escalate the offense/defense to make me stop poking the hairball.

Quote:

Sure, but as I pointed above, we are talking about a (a) non-diversified (b) volatile and (c) illiquid investment here. And once you liquidate it, you will have all kinds of other issues related to selecting and buying a new place, moving, etc, which we will be progressively less inclined (to be polite) to handle as we get older. Thankfully, there are ways of alleviating the situation without exposing yourself to these uncertainties, e.g. reverse mortgages, but I am not sure they have fully trickled down through the collective subconcsiousness yet.

This is turning into a repeating/recycling discussion. Many investments are non diversified, volatile and illiquid. Yet they get no special treatment. The same folks who will argue that you cannot include the primary residence as an asset, incorporate it into net worth or consider it in any financial planning may own other pieces of real estate or REITS and include those, or own other large assets that are non-diversified, volatile and illiquid and have no issues with throwing those right into the net worth.

I can sell my primary residence or mortgage it (no reverse needed) for a lump sum. In the latter I dont have to move or do anything at all. Hell, the bank will even send a notary over to my house with the paperwork and direct deposit the funds into my checking account. I can sell my primary residence, rent a house next door or down the street, and pay someone a couple of thousand bucks to move all my stuff. Certainly not a pleasant experience for many, but not exactly walking the plank. Heck, in some states its more work to sell an old car and buy a new one than it is to sell a house and pay a mover.

Let me give you an example. You've got a $2M equity portfolio and a $500k paid off house. Your equities drop 80% and the market outlook for the next year or two doesnt look good. The checking account and emergency cash supplies are almost exhausted. Do you take a mortgage on your paid off house, rent a room, sell the house and rent it back or move, or sell your severely depreciated equity assets?

Minus the "home is sacred and not part of my planning" hairball, you probably dont do the last one. It probably makes the least financial and economic long term sense. The other options may have more complexity and more emotional issues wrapped up in them, but they're probably better ideas with the long term in mind.

Further, I think some people will work for 3-5 years longer by holding their home equity aside from the rest of their assets, because of the 'home is sacred and not part of my planning' hairball. Is that in their best interests? Perhaps not.

And no, i'm not saying you should plan to sell or mortgage your home as part of any primary plan or mindlessly consider it just another xxx dollars in your portfolio. Just acknowledge its existence as an asset, incorporate what it is and how it behaves as an investment into your planning, at least at a macroscopic level, and recognize that its at least a fallback option if your primary plans fail.

Defeat your hairball...its rather liberating. I sure as hell cant do it.

[ladelfina]

In these parts there is a different animal from the reverse mortgage. It's called the "nuda proprieta'" (literally the "naked property"). Try to put the "naked" part out of your mind because the transactions usually involve very elderly women.

Rather than getting a mortage with a bank and paying interest, what happens is that the elderly person who wants to stay in their home, but needs cash, sells the property outright at a discount to market rates, and retains the right to live in the property until death, at which point the owner can move in or do whatever else they might want with it. At least with this system you don't have the worry of outliving your mortgage term..

It's kind of ghoulish to look at the ads for these apartments, since the prime selling point (the advanced age of the owner-occupant) is prominently displayed: "Nuda proprieta'* 95-YEAR OLD.. in XYZ street... 2 bedrooms ..115 m2... etc."!!!

[Sarah in SC]

CFB,
Thank you so much for the "hairball"!
That was worth more than you could imagine. In fact, it occurs to me that the succinct, simple, reasonable explanation you just provided and the underlying psychology of the "hairball" were so illuminating, that I owe dory some money. Paypal here I come.
Sarah...who has seen a lot of hairballs...