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Old 12-18-2003, 04:04 PM   #1
 
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Re: Include Real Estate in SWR Calculations ???
Old 12-18-2003, 04:34 PM   #2
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Re: Include Real Estate in SWR Calculations ???

I include real estate, but not my personal residence. It's nice to know I have equity available as a possible last-resort source of income, but I take it (and other personal property) off the table from a planning perspective.
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Re: Include Real Estate in SWR Calculations ???
Old 12-18-2003, 04:48 PM   #3
 
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Re: Include Real Estate in SWR Calculations ???

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but I take it (and other personal property) off the table from a planning perspective.
It seems to me that this asset is more of a known than future returns. If it could increase your SWR, why not include it? A reverse mortgage is more of a known than a 5% return or a 3% inflation rate.

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Re: Include Real Estate in SWR Calculations ???
Old 12-18-2003, 05:03 PM   #4
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Re: Include Real Estate in SWR Calculations ???

I follow the same thinking as wabmester. But my home will be worth only about $130,000 at ER. If I had a $500,000 house, I'd probably count at least $300,000 as available for ER expenses. Even a $200,000 house in my area would be a palace by my standards.
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Re: Include Real Estate in SWR Calculations ???
Old 12-18-2003, 05:10 PM   #5
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Re: Include Real Estate in SWR Calculations ???

I guess I don't like the idea because you're hiding the costs of a reverse mortgage. How are you going to account for the possibility that you might sell/move and then owe interest.

If you simply have cash available for investment and carry a normal mortgage, the expenses are explicit, so it makes sense to consider both the free cash and mortgage expense in your planning. Otherwise, it seems like a "free lunch."
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Re: Include Real Estate in SWR Calculations ???
Old 12-19-2003, 03:23 AM   #6
 
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Re: Include Real Estate in SWR Calculations ???

When I pull out my stubby pencil and soiled
envelope to do some serious financial projections,
I always include my residence but exclude all
personal property. I suppose I'm making a distinction
between income/appreciating assets and depreciating
assets (cars for example).

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Re: Include Real Estate in SWR Calculations ???
Old 12-19-2003, 04:07 AM   #7
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Re: Include Real Estate in SWR Calculations ???

If you subscribe to the SWR concepts, then I'd run the figures with the house and again without the house.

If times got tough and you needed the money, would you sell and move, or reverse mortgage and stay? If selling and moving, remember the new expenses you'll incur, and add those to the needed withdrawals in that scenario. Either way, figure the house value as whatever net cash you'd expect to realize.

Having done that, I'd look to see just how risky the withdrawals look when the house is or is not considered. *Then decide according to your risk tolerance.

Let's say to meet your expected cash requirements, you get a 97% safe rate with the house, and only 25% safe rate without.

Or, suppose it's 100% with the house and 95% without.

I think most of us would find the first situation too risky, and the second one an acceptable risk.

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Re: Include Real Estate in SWR Calculations ???
Old 12-19-2003, 07:53 AM   #8
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Re: Include Real Estate in SWR Calculations ???

We are currently in a larger house than will be necessary after the kids are grown and gone. I count the house equity minus the cost of a smaller house for the two of us. For Firecalc I put in a 'sell the house' cash event, and a drop in non-inflation adjusted dollars equal to the current mortgage payment.

Using the value of your minimum usable house as part of the SWR plan just sounds too risky to me. However, it is a good fallback in case you end up in the 5% failure window (I use 95% for a success probability, look at 90% and would use 90% if needed).

However, if you have reason to know your life expentacy with more accuracy than the majority of the population, then I think using house equity would make sense.

The home as an investment:
One more way of thinking about it is that owning a leveraged asset like a home is a growth strategy, and while I am still doing it at 50, I do not expect to be doing it at 70. Put it in line with your other investments. If your portfolio still has a very large growth component, then it makes sense to have a mortgage because a mortgaged home is a growth investment. If you have switched to lower growth assets, more income (say less than 70% equities would be my call, but that is arbitrary) oriented portfolio, then leveraged assets like a mortgaged house are no longer in line with your investment direction. Perhaps thinking of it that way will help. A paid off home is an income type investment, paying some housing expenses monthly (i.e. the lack of a mortgage or rent) while a mortgaged home is a growth type investment.

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Re: Include Real Estate in SWR Calculations ???
Old 12-19-2003, 08:08 AM   #9
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Re: Include Real Estate in SWR Calculations ???

Cutthroat -

To answer your question directly - I would look at the cost of the smallest house in the area that I would be comfortable living in, and then count the difference between the 500k equity and the cost of the smaller house as a lump sum. Put the earliest (future) date you would be willing to move down as the lump sum date.

Even if you don't move, I think this is a safe plan. You always can move, but the probability is that you might not have to. SWR is for the 95% safe rate (or thereabouts) and the average result is developing a residule estate. So if things are better than the 50% point you may not have to ever sell or reverse mortgage the property.

The point of SWR, the safe withdrawal rate, is to ensure you do not run out of assets. All assets that you could spend should be included to make the SWR $$'s as high as possible. Then hope you don't actually need to spend all of them. SWR is appropriately conservative to begin with; we don't need to make it more so.

Of course, if selling the house is not an option for some family or other reasons, then do not include it.

Wayne
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Re: Include Real Estate in SWR Calculations ???
Old 12-19-2003, 11:03 AM   #10
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Re: Include Real Estate in SWR Calculations ???

In our case selling is 'somewhat' risky option - uninsurable 'fish camp' over water. Moving is likely to be a hurricane driven event so the house is off the table for our SWR not a big deal. I do check rents every few years to consider worst case effect on the budget.

Back in early ER our rental duplex was included in the years we owned it. Also we could could have moved back into one half as a back up - it would have a trade off between loss of rental income and equivalent rental cost to us.
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Re: Include Real Estate in SWR Calculations ???
Old 12-19-2003, 05:55 PM   #11
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Re: Include Real Estate in SWR Calculations ???

It seems to me that this discussion is pretty much academic for anyone who uses FIRECalc for their retirement planning.

If you are still making mortgage payments on your house, include those in your expenses up to the time that the mortgage is paid off. Then, reduce your expenses.

If you intend to sell your house and move to a less expensive one (or would be willing to if your investments did not do well) then you can enter the price of your existing and the price of your prospective house. And you can model a reverse mortgage by reducing your annual expenses by the payments that the reverse mortgage would make.

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Re: Include Real Estate in SWR Calculations ???
Old 12-21-2003, 09:50 AM   #12
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Re: Include Real Estate in SWR Calculations ???

Jarhead -

My comment on using excess equity is much like the 'ace in the hole' approach, but I think a little more quantitative. Since the 95% survival results are simply that - 95% of the portfolios will survive it is already a pessimistic estimate. Adding an ace in the hole to that makes it a >95% estimate ( I won't say 100%), but at the cost of lower current spending.

The odds are that your portfolio will do better. In fact you could look for a 50% point to see the historical average. Therefore by using the excess equity in the home you would hate to sell, but could, can increase the SWR and the odds are you can keep the home. I would calculate it both ways, and if the extra income really helps attain the lifestyle you want then maybe it is worth the risk. If the income without the extra is quite satisfactory, then there is no reason for the extra risk.


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Re: Include Real Estate in SWR Calculations ???
Old 12-22-2003, 06:53 AM   #13
 
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Re: Include Real Estate in SWR Calculations ???

I have run FIRECALC and it is interesting. However,
I have never spent much tiime obsessing over my
SWR (too many unknowns). I estimate that my (personal)
net worth is up about 25% since I drew my last paycheck in 1998. I will be 59 and 1/2 in March, 2004 and 62 in Sept., 2006, so I'm feeling pretty
comfortable now. Obviously, I'm still anticipating some bumps in the road though. Remember what Gilda Radner said, "It's always something!"

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Re: Include Real Estate in SWR Calculations ???
Old 12-22-2003, 07:05 AM   #14
 
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Re: Include Real Estate in SWR Calculations ???

Quote:
My point with Cut Throat, is why consider selling a home
that you love, and do not have to because a computer program tells you that it would be prudent.
Your approach, and Cut Throats probably makes more sense for discussion, but I am an optimist, and do not believe that you have to settle for 4% especially in the early years.
Jarhead,

Right ! - I am not considering selling the home at all. What I would consider doing when I'm over 75 years old is getting a reverse Mortgage and using it for expenses. Dying with a $500,000 home debt free is only good to my heirs.

I am certainly with you on withdrawing a higher percentage in the early years for Travel and such. And then backing down in the later years. I currently have my plan rigged to do exactly that.
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Re: Include Real Estate in SWR Calculations ???
Old 12-23-2003, 09:29 AM   #15
 
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Re: Include Real Estate in SWR Calculations ???

Hello cut-throat! You were justified in your
"turning 30 panic". The years fly by and pretty
soon (if you are lucky enough to still be alive), a lot
of your adventures will lose their appeal, or maybe be
too strenuous. I spent Saturday afternoon at a
nursing home Chrsitmas party. I'll bet you a case
of your favorite wine that a lot of the residents planned
adventures and never got there.
One thing or another held
them back and now they are stuck. If I end up there
at least I will have a pretty colorful life to look back on,
and stories to tell the grandkids. I know some pretty
good ones.

John Galt
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