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Old 06-27-2008, 10:16 AM   #21
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I hate to beat a dead horse, but I'll repeat the question.

Khan, you run out of money. You're sitting in a 65k house. You elect to sit in the living room and starve?

Of course not.
I think my in-laws would have. As they aged, their number 1 priority was to "stay in their home." Even after my MIL fell and broke her hip, my MIL and FIL kept talking about moving back home when she got better. They tended to discount the doctor telling them that she would never be able to live outside a nursing facility.

After my FIL was diagnosed with Alzheimer's, we moved him to assisted living when he became difficult to manage. Even after we sold the house, they still talked about moving back home. They were effectively almost broke except for their house by the time we sold it.

I personally believe personal real estate should be in a financial plan. It should also be a relatively small portion of the total assets. If someone has $1.5 MM in net worth and $1MM of that is their house, they need to make some serious adjustments. In my case, my oversized money pit that I'll sell as soon as DW relents is a little less than 15% of our net worth. It has a mortgage so the actual equity is about 5%.

The care and feeding of the house consumes about 40% of our spending (including accruals for major repairs and autos). I would like to cut it to around 20%. BTW the figures include all housing costs such as mortgage, property taxes, repairs, accrual for major repairs, utilities, lawn service, etc. Plus we live in Texas so rattlesnake and scorpion removal fees also apply to housing costs.
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Old 06-27-2008, 10:22 AM   #22
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Heh. The equity in our house (paid off) accounts for probably around 55% of our net worth. But, then, we're still young. By the time we retire, hopefully the house won't represent more than about a quarter of our assets.
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Old 06-27-2008, 10:38 AM   #23
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2b, I suspect CFB was making the assumption the individual who wouldn't sit in their home and starve was of sound mind. From what you've told us about your in-laws I don't think they were in that category.

Probably due to a long history of scorpion stings and rattlesnake bites...
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Old 06-27-2008, 10:43 AM   #24
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Plus we live in Texas so rattlesnake and scorpion removal fees also apply to housing costs.
I've lived in Texas for more than five years and in the central part of the state (not too far from REW) for more than two. And I'm yet to have an encounter with a rattlesnake or a scorpion. Or a chigger, for that matter. Granted that I haven't tried hard to find them, but...
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Old 06-27-2008, 10:48 AM   #25
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Heh. The equity in our house (paid off) accounts for probably around 55% of our net worth. But, then, we're still young. By the time we retire, hopefully the house won't represent more than about a quarter of our assets.
Depending on your age that might be a good number. When I first bought a house, it probably represented 75% of my net worth. I once made the mistake of making a mega down payment and neglecting an emergency fund and came very close to losing the house. That was my "Scarlett O'Hara moment" when I vowed to never be poor again.

As you approach retirement, I'd say 25% would be an excessive portion of your net worth.
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Old 06-27-2008, 10:51 AM   #26
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I've lived in Texas for more than five years and in the central part of the state (not too far from REW) for more than two. And I'm yet to have an encounter with a rattlesnake or a scorpion. Or a chigger, for that matter. Granted that I haven't tried hard to find them, but...
I have been hit by a rattlesnake. I was fortunate to be wearing heavy boots and was hit just below the top of the boot. I had two pretty holes in my boot that just didn't quite make it all the way through.

Chiggers used to be much worse before the fire ants took over most of the state. I think the fire ants eat them.
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Old 06-27-2008, 10:52 AM   #27
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I've lived in Texas for more than five years and in the central part of the state (not too far from REW) for more than two. And I'm yet to have an encounter with a rattlesnake or a scorpion. Or a chigger, for that matter.
Good, then all these fine folks moving to TX to retire will settle next to you and not me...

Interesting what difference a few miles can make (OK, 100 or so - but by TX standards that's next door neighbors) since we've had rattlers on the back steps and in the driveway. And a couple of weeks ago while eating a bowl of popcorn I felt something hit my hand and bounce into the bowl - followed by scurrying sounds. Seems a scorpion fell from the ceiling...

Must be all that granite up your way vs. nothing but limestone down here.
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Old 06-27-2008, 11:07 AM   #28
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If nothing else you need to consider your house an asset that produces what you would otherwise be paying in rent less repairs that would not be covered by a landlord and less taxes and insurance.
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Old 06-27-2008, 11:22 AM   #29
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I would like to point out something though. A house can, and should be, included iff (not a typo) you plan on downgrading your housing situation in retirement. Some people definitely do use a house as a means to save up some money (equity) and then they sell it and buy a smaller house or rent.
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Old 06-27-2008, 11:23 AM   #30
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As you approach retirement, I'd say 25% would be an excessive portion of your net worth.
Net worth of $2 mil, $500k of house, $1.5 mil in equities doesn't seem excessive to me.

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If nothing else you need to consider your house an asset that produces what you would otherwise be paying in rent less repairs that would not be covered by a landlord and less taxes and insurance.
But if you count it as an income-generating asset, wouldn't you also have to account for the implied rent as an expense?

I keep the house separate from everything else in my portfolio. I'd have to read more about the theory in the original post to figure out what the real benefit is in counting it as part of the asset allocation.
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Old 06-27-2008, 11:34 AM   #31
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And I'm yet to have an encounter with a rattlesnake or a scorpion. Or a chigger, for that matter. Granted that I haven't tried hard to find them, but...
You better hope REW doesn't track down your mailing address!
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Old 06-27-2008, 11:43 AM   #32
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But if you count it as an income-generating asset, wouldn't you also have to account for the implied rent as an expense?

I keep the house separate from everything else in my portfolio. I'd have to read more about the theory in the original post to figure out what the real benefit is in counting it as part of the asset allocation.
It depends on what you are counting in your asset allocation and what the allocation applies to.

A home is an asset. It has a value. It should be included in "net worth" but possibly not at all in terms of your "portfolio."

For the purposes of including a home in a retirement portfolio, it makes no sense except to the extent you plan to downsize. If you have a $500K home and you'll soon be moving to a $200K home, it makes sense to consider about $250K (profit minus sales expenses and moving costs) as potential retirement investments.

But if you are in a cheap house and there's really little to be gained by selling it to help fund retirement, there's no reason to put it in your asset allocation for retirement. Yes, it's an asset and it has value -- but it has no place in your plan or in your retirement portfolio.
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Old 06-27-2008, 11:53 AM   #33
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It depends on what you are counting in your asset allocation and what the allocation applies to.

A home is an asset. It has a value. It should be included in "net worth" but possibly not at all in terms of your "portfolio."
I agree. I would use the value of the house in a net worth calculation. In addition when doing long-term planning (i.e., Firecalc), I'd make a determination when the value of the house would be cashed out in favor of rental living. That can also have some bearing on how long your nest egg lasts.

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Old 06-27-2008, 12:26 PM   #34
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Net worth of $2 mil, $500k of house, $1.5 mil in equities doesn't seem excessive to me.
I seems excessive to me but we all have to decide our own "rules." I am assuming you are talking hypothetical since your earlier post said your paid for house was currently 55%.

My consideration for "excessive" assumes no glorious COLA'd government pension that covers 80+% of your living expenses like some of the posters here have. I am basing it on my finances which includes an almost irrelevant non-COLA'd pension and the prospect of maybe getting SS in the undefined future. My income will come primarily from the what is generated by my assets. A $500K house by Texas standards would have almost $15K in annual property taxes and consume an immense amount of electricity and maintenance. Something in the $150-200K range would look much nicer to me with a $2MM net worth.
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Old 06-27-2008, 12:39 PM   #35
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Yup, that was hypothetical. But maybe not too far out of line with where we're aiming in 15 years.

A 500k house in my area of PA might have 5k of property taxes. 150-200k would be a fairly small townhouse in this area. You couldn't find a single family home you'd actually want to live in for that.
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Old 06-27-2008, 09:33 PM   #36
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But if you count it as an income-generating asset, wouldn't you also have to account for the implied rent as an expense?
I thought we were only discussing assets. Are you saying that your retirement is not enhanced by owning a particular home rather than renting it, all else being equal?

Perhaps not if taxes, insurance, and maintenance exceed what the rent and related expenses would be. I don't think that's usually the case though.
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Old 06-27-2008, 10:13 PM   #37
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I have two lines in our financial spreadsheet.

One is income producing assets. I think the definition is clear.

The other is total assets, including those that produce no income but could be sold at some time to fund our stay in geezer-ville. These include our house and (until maybe this year, finally) Dw's farm land.
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Old 06-28-2008, 07:55 AM   #38
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I thought we were only discussing assets. Are you saying that your retirement is not enhanced by owning a particular home rather than renting it, all else being equal?

Perhaps not if taxes, insurance, and maintenance exceed what the rent and related expenses would be. I don't think that's usually the case though.
Oh, right, this was only about the income side of the equation. Just thought it'd be wrong to say: here are my sources of income (including implied rent from the house), and they have to meet my expenses (which, my point was, would have to include implied rent to balance things out).

Nope, I'd rather own my own home. Still, houses aren't cheap. If I sold my paid-for house for $380k (Zillow figure), then say I have $360k in the bank. That's a sustainable $1200 per month at 4%. Another $300 per month in taxes and maybe another $200 per month in maintenance, and I'd be breaking even with a $1,700 per month rental. Maintenance figure is actually fairly low, since I've got a fair amount of deferred maintenance going. Of course, houses usually gain value over time as well... Eh, whatever, I'm not going to sell my house and start renting.
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Old 06-28-2008, 08:50 PM   #39
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I have heard people suggest that your asset allocation must include all your resources, not just your portfolio. And I have heard people ask how to value their expected SS benefits, pensions, etc. - and I've been told to do a PV calculation. So now that I have all my resources valued - what does it tell me? I am researching, but maybe someone can tell me before I stumble on the answer...
are you asking how to do a PV calculation?

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Old 06-29-2008, 05:32 AM   #40
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are you asking how to do a PV calculation?

Dave
No, I did that (for SS & pension) to arrive at the pie chart. Now that I have my AA including all "resources" what do I do with it. I was told to consider SS and home like TIPS or bonds, no COLA pension like bonds. So that all suggests I have lots of bonds and should hold more equity in my "portfolio." Just haven't wrapped my head around this concept...
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