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House Value as Percent of NW during Retirement
08-05-2013, 02:54 PM
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#1
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Recycles dryer sheets
Join Date: Apr 2007
Posts: 491
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House Value as Percent of NW during Retirement
I know there is no right answer to this question as there are many variables, but I am curious about the group's general position and thoughts on this topic.
For purposes of this question, it is assumed 1) you own the house outright, 2) you are fully retired and 3) all income is from investments (no pension).
What percentage of your total new worth do you feel is reasonable to have in home equity during your retirement phase. I.e., if your NW was $1.5M, how much of this would be be comfortable being in your house vs. investments earning income?
I am going to retire in nine months and the wife and I are purchasing our retirement house (paying cash). I originally planned for the retirement house to be about 8% of NW, but after looking around it looks like it will more likely be 11-12%. Does this sound nuts to you? Is it in the right ballpark IYHO? Are there any non-obvious questions I should be asking myself about this?
I realize that what this is essentially asking is how much of your income stream are you willing to give up to own a nicer house. Thanks for your feedback. I love this forum!
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08-05-2013, 03:29 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2008
Location: NC
Posts: 21,298
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I'd think home cost or percentage relative to net worth would be a secondary consideration at best. I'd be more focused on:
1) total cost of ownership - what the ongoing expenses for the home are/will be (prop taxes, insurance, utilities, replacement/maintenance costs). IOW I'd be more leery of an 8% of net worth home with $10,000/yr propery taxes than a 11-12% of net worth home with $5,000/yr property taxes. Over 30 years give or take, property taxes and ongoing expenses would probably be the (much) bigger outlay than initial purchase price delta.
2) what your net worth is (irrespective of home cost) vs projected expenses, longevity, etc.
And it depends on where you live to some extent. You may not be able to live in Manhattan with a home at 8% of net worth, while it might be very easy in many regions.
But ultimately you're right IMO, it comes down to "how much of your income stream are you willing to give up to own a nicer home." I prefer having a modest home to hold down fixed expenses (turns out our house is about 7-8% of net worth, though I never calculated before this), but I realize others may want a much nicer home than we do, and I can understand same. An individual choice we all make...
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57
Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
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08-05-2013, 03:30 PM
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#3
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Dec 2006
Location: Collin County, TX
Posts: 9,296
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Here's an old thread on the subject....
http://www.early-retirement.org/foru...ght=percentage
DH and I have both been retired for about 4 1/2 years. We're in the same home and the percentage is still around 11%.
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There's no need to complicate, our time is short..
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08-05-2013, 03:40 PM
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#4
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Recycles dryer sheets
Join Date: Jul 2013
Posts: 162
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We are not retire yet but plan to be within a few years. So we have been actively planning for it.
When we do our retirement planning, we mainly look at our investable portfolio (net worth - primary home) and our expenses. We don't think the primary home as a percentage of net worth has much meaning. Perhaps we are missing something. According to our plan, our home will be about 15% of our net worth so our expenses need to be generated by 85% of our net worth.
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08-05-2013, 03:42 PM
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#5
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Recycles dryer sheets
Join Date: Apr 2007
Posts: 491
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Quote:
Originally Posted by bbbamI
Here's an old thread on the subject....
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Thanks. I searched around a bit and did not find this one.
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08-05-2013, 03:48 PM
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#6
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Thinks s/he gets paid by the post
Join Date: Feb 2011
Posts: 1,797
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I've always thought this question was a bit more complex than a simple "% of NW". Expenses of supporting same price home can vary tremendously across the US, inc property taxes, insurances (hurricaine & flood ins can be $$), HOA dues, etc. Also regular upkeep can be a lot more $$ on a typical older home vs brand new.
IMHO your concept of treating house as a % of your income stream is spot on. If you were w#rking and had your retirement income stream as your income, what price home in your desired area would you feel comfortable buying?
Example-
$175k mortgage @4.5% loan (PITI typical) would be ~$1068/mo
Mortgage Calculator
$1.5M NW @ 3.5% SWR = $52,500/yr
$52,500 x 0.25 (typical budget allowance for housing) = $1093/mo
175k = ~11.6% of 1.5M
So IMHO- you are in the ballpark, depending on personal risk tolerance & other unusual expenses of course.
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08-05-2013, 03:57 PM
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#7
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Administrator
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,707
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+1@midpack. The % of net worth isn't what matters. How big is your non-housing portfolio, can it sustain your future budget needs, and is the spending on the house (taxes, maintenance, upkeep) affordable.
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08-05-2013, 03:58 PM
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#8
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Moderator
Join Date: Apr 2012
Location: San Diego
Posts: 14,211
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I live in a pricey area. My house is far from fancy-schmancy... not even mcMansion... 2000 sf, 1960's era tract home. But it's in San Diego in a good area with good schools... so it's worth an obscene amount.
I'm not planning to move when I retire... so I guess I'm leaving income stream on the table because we won't be cashing out our house and moving to a lower cost of living area.
I did the calcs with my current networth and zillow value of the house... It's a whopping 36% of our net worth.
Doesn't matter. It will be paid for in a few months, and our prop taxes increases are limited by prop 13. So it's affordable, once it's paid off. I don't consider it's value in our retirement plans except as plan b or c... like if we need to buy into a continuing care community or need to pay more than a couple of years of long term care nursing home. I'm not planning on it's value for my plan A of retirement... where we live there and maintain it, and pay taxes on it... but it's just there as shelter.
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08-05-2013, 04:03 PM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2009
Posts: 6,695
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I agree with Midpack. The value of my co-op apartment is meaningless. What matters to me is the monthly maintenance which has actually gone down slightly in each of the last years. The maintenance pays for the financial and physical upkeep of the co-op complex including my building and the grounds.
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Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.
"I want my money working for me instead of me working for my money!"
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08-05-2013, 04:18 PM
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#10
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Thinks s/he gets paid by the post
Join Date: Jul 2012
Location: Mississippi
Posts: 1,894
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I agree with it sort of being an expense, You have to consider taxes, insurance and maintenance. Your retirement income has to be able to cover that so to me less is more.
I guess I might consider the house as more of a down payment for a room at the retirement home, if I last that long and the time comes.
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08-05-2013, 04:30 PM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Posts: 35,712
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Quote:
Originally Posted by Culture
I originally planned for the retirement house to be about 8% of NW, but after looking around it looks like it will more likely be 11-12%. Does this sound nuts to you?
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My 2 homes are 22% of NW. No way I could afford 2 reasonably nice homes in places like California.
Quote:
Originally Posted by bbbamI
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I looked back at that thread, and found that I computed 30% of NW back then.
What happened since 2010 was that my portfolio has gone up, while house values were stagnant.
Now, I need to recompute the numbers before/after I consume that egg.
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08-05-2013, 04:47 PM
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#12
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Moderator Emeritus
Join Date: Jan 2007
Location: New Orleans
Posts: 47,500
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Quote:
Originally Posted by Culture
I know there is no right answer to this question as there are many variables, but I am curious about the group's general position and thoughts on this topic.
For purposes of this question, it is assumed 1) you own the house outright, 2) you are fully retired and 3) all income is from investments (no pension).
What percentage of your total new worth do you feel is reasonable to have in home equity during your retirement phase. I.e., if your NW was $1.5M, how much of this would be be comfortable being in your house vs. investments earning income?
I am going to retire in nine months and the wife and I are purchasing our retirement house (paying cash). I originally planned for the retirement house to be about 8% of NW, but after looking around it looks like it will more likely be 11-12%. Does this sound nuts to you? Is it in the right ballpark IYHO? Are there any non-obvious questions I should be asking myself about this?
I realize that what this is essentially asking is how much of your income stream are you willing to give up to own a nicer house. Thanks for your feedback. I love this forum!
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I think 12% sounds great, and not nuts at all. As far as non-obvious questions go, well, maybe it is obvious (?) but anyway make sure you can handle the property tax, insurance, maintenance, and any other ongoing expenses on your future budget.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities. - - H. Melville, 1851.
Happily retired since 2009, at age 61. Best years of my life by far!
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08-05-2013, 05:25 PM
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#13
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Thinks s/he gets paid by the post
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
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To answer the OP's question, about 10-15%.
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Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
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08-05-2013, 05:49 PM
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#14
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2010
Posts: 5,911
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It was 17 percent. Now it is O. Not certain if we will buy again or just rent.
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08-05-2013, 08:11 PM
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#15
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Thinks s/he gets paid by the post
Join Date: Aug 2006
Posts: 2,433
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If we assume a 4% SWR and use the old rule of thumb that housing costs should be about 1/4 of your gross income; then 1% of your liquid net worth would be available for maintaining the house. If the house is paid off, property taxes, insurance, and average annual maintenance should not exceed 1% of your liquid net worth.
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I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
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08-05-2013, 08:23 PM
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#16
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Thinks s/he gets paid by the post
Join Date: Jun 2007
Posts: 2,657
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I am in a pricey real estate area and not planning on moving in ER. I guess that means I am locking up capital in my home that could be used instead in my portfolio, but as long as my remaining portfolio will support my expenses, then this location is something I consider as part of my desired lifestyle. I also view it as a safety net of sorts. If markets perform worse than FIRECalc predicts, I can downsize my house and give my investments a boost. Currently close to 40% of networth is tied up in house.
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08-05-2013, 08:46 PM
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#17
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Recycles dryer sheets
Join Date: Jan 2007
Posts: 280
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Timely thread. We sold our house in 2006, and have been Full-Time RVers since then. Not ready to stop traveling, but we spend the winter in the same place every year and are going to look for a winter home there.
The good thing about homes in a retirement area, there seems to be a lot of.......uh.......turnover.
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08-05-2013, 08:49 PM
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#18
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Thinks s/he gets paid by the post
Join Date: Aug 2009
Posts: 1,578
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Same here. About 40% as I live in the Bay Area . It's paid off. But I realize that I'm leaving a lot of income on the table by staying here, but I love the house so ill probably stay here.
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08-05-2013, 09:05 PM
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#19
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Full time employment: Posting here.
Join Date: Sep 2011
Location: Bushnell
Posts: 607
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Quote:
Originally Posted by MichaelB
+1@midpack. The % of net worth isn't what matters. How big is your non-housing portfolio, can it sustain your future budget needs, and is the spending on the house (taxes, maintenance, upkeep) affordable.
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+1
That said, my place is about 10% of total net worth. I own it free and clear. The other 90% constitutes what I consider my "investable assets".
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08-06-2013, 04:21 AM
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#20
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Thinks s/he gets paid by the post
Join Date: Aug 2006
Posts: 2,433
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Quote:
Originally Posted by FIRE'd@51
If we assume a 4% SWR and use the old rule of thumb that housing costs should be about 1/4 of your gross income; then 1% of your liquid net worth would be available for maintaining the house. If the house is paid off, property taxes, insurance, and average annual maintenance should not exceed 1% of your liquid net worth.
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I estimate that property taxes, insurance, and maintenance run about 2-4% of a home's value, the differrence primarily due to differing property taxes in different locations. In suburban NYC my property taxes ran about 1.85% of my home's value. Here in central VA, they are about 0.75%.
This leads to a home's value being 25-50% of one's liquid net worth (i.e. portfolio). Adding the home's value to net worth gives 20-33% of total net worth. Presumably, this number could be even higher if one has a pension and/or Social Security.
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I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
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