House Value as Percent of NW during Retirement

[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!

 

[Midpack]

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...

 

[bbbamI]

Here's an old thread on the subject....

http://www.early-retirement.org/for...d-up-in-house-50700.html?highlight=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%.

 

[GoodWishes]

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.

 

[Culture]

Here's an old thread on the subject....

Thanks. I searched around a bit and did not find this one.

 

[ERhoosier]

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.

 

[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.

 

[rodi]

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.

 

[scrabbler1]

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.

 

[rbmrtn]

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.

 

[NW-Bound]

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?

My 2 homes are 22% of NW. No way I could afford 2 reasonably nice homes in places like California.

Here's an old thread on the subject....

http://www.early-retirement.org/for...d-up-in-house-50700.html?highlight=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%.

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.

 

[W2R]

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!

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.

 

[obgyn65]

To answer the OP's question, about 10-15%.

 

[brett]

It was 17 percent. Now it is O. Not certain if we will buy again or just rent.

 

[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.

 

[growing_older]

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.

 

[winger]

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.

 

[bmcgonig]

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.

 

[truenorth418]

+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.

+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".

 

[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.

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.

 

[traineeinvestor]

+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.

Another +1

Our home is about 11-12% of total household net worth (8-9% if you just look at the equity) but it's our ability to meet the expenses (including the last 7.5 years of mortgage payments that matter).

 

[ShortInSeattle]

I agree it's living expenses that matter, but using today's values we'd end up at the house being about 17% of our net worth at retirement.

 

[ShortInSeattle]

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.

I feel the same way about Seattle. It provides for a nice retirement plan B or C though. If nest egg projections are off, you can sell the monster house and buy a cheaper home elsewhere.

Not that this is a plan A.

 

[NW-Bound]

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.

My housing operating costs actually run less than 1% of NW right now, barring unexpected maintenance costs (knock on wood).

But I have been thinking that having just one home would have freed up more money for foreign travel, and gas for my motor home.

I am too greedy, and want too much for my 3.5%WR. What to do, what to do?

 

[W2R]

My housing operating costs actually run less than 1% of NW right now, barring unexpected maintenance costs (knock on wood).

But I have been thinking that having just one home would have freed up more money for foreign travel, and gas for my motor home.

I am too greedy, and want too much for my 3.5%WR. What to do, what to do?

Well, which has the most value for you?

1) having the second home, or

2) foreign travel + gas for your motor home + a rental home near your second home when you want to vacation in that area?

Good luck as you think about your decision of what to do!