OK, what does this mean?

[2B]

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.

 

[REWahoo]

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.

 

[Kwirk]

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.

 

[pksublime]

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.

 

[Kronk]

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.

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.

 

[Nords]

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!

 

[ziggy29]

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.

 

[Gotadimple]

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.

-- Rita

 

[2B]

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.

 

[Kronk]

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.

 

[Kwirk]

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.

 

[kumquat]

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.

 

[Kronk]

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.

 

[Finance Dave]

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?

Dave

 

[Midpack]

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...

 

[W2R]

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 lived in College Station, Texas for almost 13 years, and did not spend much time out in the countryside. I saw the occasional rattlesnake or scorpion but didn't happen to have any problems with chiggers. But the fire ants were AWFUL and ubiquitous, as were the field mice. And OMG, the SPIDERS? Nobody has mentioned them but our back yard was full of the very dangerous brown recluse spiders. I have never seen so many spiders in my life.

I still loved Texas (love the salt-of-the-earth mentality there, and OK, I admit it, the wildflowers are breathtaking), but probably will not move back due to the property taxes and relentlessly hot, long, and parched summers that turn the countryside brown and made me wonder if I would fry like an egg on the sidewalk.

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.

I guess I am sitting on a fence with this. I don't consider my home equity as part of my portfolio, so I do not include it in my asset allocation. However, I do count it as part of my net worth. The latter is mostly useful for purposes of daydreaming and pumping up my own sense of self-importance (in other words, not at all useful). I do not consider my paid off house as fixed income. It just lowers my expenses a little.

 

[RonBoyd]

I do not consider my paid off house as fixed income. It just lowers my expenses a little.

The interest expense of house payments could be "little," I suppose. The "Opportunity Cost" expense could, however, be considerable. All things considered, I would think that a "paid-off" house is more desirable -- on the Income side -- than one with a mortgage during one's retirement. At least, I would consider a mortgage to be a drag on income in most cases.

(I, of course, am unsure how this theory can be transferred to the Accounting involved in the current conversation. <chuckle>)

 

[2B]

I'll take the role of real estate heretic here and say that homes do not always increase dramatically in value over the longterm. There seems to be a common thread that owning a home minimizes espenses versus renting and provides an inflation hedge. I think that there may be better ways to deploy assets than having a paid for house.

What I have seen with my parents and in-laws is not so optimistic. My parents home of over 30 years was a smaller home in Des Moines, WN. By the time they were ready to sell, the neighborhood had pretty much gone to crap. The house needed lots of work. Despite a view of Puget Sound, it took well over a year to sell for about 2X what they originally paid for the place in 1965. That's not much of an ROI when you throw in property taxes and maintenance. My in-laws did much better. Their house was a disaster and would have required a small fortune to fix up. Fortunately, Houston grew the right way for them and their way out in the country lot purchased in 1952 was worth a small fortune. It was torn down to make way for a McMansion. If they had bought two miles north or south, they wouldn't have been so fortunate. Back in 1953, no one could have predicted what eventuallly happened.

 

[W2R]

The interest expense of house payments could be "little," I suppose.

Comparing my paid off house to the option of renting, I consider the reduction of expenses to be:

(Expense Reduction) = Rent - (property tax) - Insurance - maintenance

The "Opportunity Cost" expense could, however, be considerable.

Only if selling or mortgaging your house is something you intend to consider in your financial plan. Not working is also an "Opportunity Cost" expense, but the option of working is another one that I do not intend to consider in my ER financial plan.

Of course, if the world economy disintegrates and I am facing financial Armageddon, at that point I would consider changing my financial plan to include other options such as working until the day I die and/or raising my expenses by not living in a paid off house. Don't hold your breath waiting to see either of those options in place, though.

So, in my case I do not consider my paid off house to be something to consider in my own financial plan/accounting. Nor do I consider the possibility of working full time (even at a more enjoyable job) to be an ER option that I intend to consider in my own fnancial plan/accounting. Naturally these are personal decisions, with many weighing in on either side and YMMV

 

[RonBoyd]

Naturally these are personal decisions, with many weighing in on either side and YMMV

Oh! I guess I should have prefaced my remarks with "I agree with you 100%."

 

[Finance Dave]

I guess I am sitting on a fence with this. I don't consider my home equity as part of my portfolio, so I do not include it in my asset allocation. However, I do count it as part of my net worth. The latter is mostly useful for purposes of daydreaming and pumping up my own sense of self-importance (in other words, not at all useful). I do not consider my paid off house as fixed income. It just lowers my expenses a little.

I anticipate downsizing in rehirement....so I count the difference between the house I live in now and the house I anticipate purchasing. I think that once people are very old (when they can no longer take care of themself), many of them likely would sell their house and live in some type of condo or assisted living or nursing home etc....which acts like an apartment in the respect that you pay a monthly "fee"....so you could cash out your house and use the proceeds to pay the rent. The only problem would be what to do if you outlive the proceeds.