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Old 03-28-2014, 01:06 PM   #41
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I don't think that home equity is part of "income." It is, of course, part of net worth as it is an asset which has value.

I am aware of the fact that this net worth exists and it could be converted to cash at some point if needed.
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Old 03-28-2014, 01:11 PM   #42
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I don't think that home equity is part of "income." It is, of course, part of net worth as it is an asset which has value.

I am aware of the fact that this net worth exists and it could be converted to cash at some point if needed.
By that logic Berkshire stock is not a part of your income either as it does not provide any dividends and you can only convert it to cash by selling it (just like your home).
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Old 03-28-2014, 01:13 PM   #43
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I don't think that home equity is part of "income." It is, of course, part of net worth as it is an asset which has value.

I am aware of the fact that this net worth exists and it could be converted to cash at some point if needed.
This pretty much covers it. Until the home is 100% paid off, it is an expense. When it is paid off, it ceases to be an expense but remains part of my "net worth", which is a separate entity from "retirement assets" IMO.

I am presently planning to always have some type of housing expense. I think my wife and I may end up being renters at some point (we currently own a home with about a 60/40 equity to liability ratio), so when we estimate our expenses in retirement, we have a chunk that we assume will be used for rent/mortgage. Of course, if we pay off a house and live there for all eternity, our expenses will be significantly less, and thus our FIRECalc % will go to 100% and our portfolio will be larger than what we need.

Win.
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Old 03-28-2014, 01:18 PM   #44
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Home equity does not create income nor is it an expense.
Actually, it could create income. For example, you take on a roommate. It's a matter of how you chose to manage that particular asset.

But, in general I agree with your point. Every asset has it's place in a FIRE portfolio. Different asset classes are managed differently. It seems naive to blindy ignore 5% - 10% of a retiree's net worth in retirement financial planning.

Of course, this is a "belts and suspenders" group on this board and real estate equity, along with collectibles and other non-monetary investments, are prime targets to add to the "gravy/extra/just-in-case/frosting on the cake/etc." list. Hence, the propensity to turn a blind eye to real assets inside the FIRE portfolio.
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Old 03-28-2014, 01:40 PM   #45
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Taking on a roommate would make it more akin to an investment property than a personal residence.
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Old 03-28-2014, 01:43 PM   #46
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By that logic Berkshire stock is not a part of your income either as it does not provide any dividends and you can only convert it to cash by selling it (just like your home).
no , a home you are living in is a consumption item until the day comes you are not consuming it. a true investment can be sold on a moments notice and put into any asset class you like or spent.

unless you can sell your living room off you can not do that.
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Old 03-28-2014, 01:51 PM   #47
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Taking on a roommate would make it more akin to an investment property than a personal residence.
Exactly. That's why I don't blindly ignore real estate assets within my FIRE portfolio. I manage and consider them differently than financial/monetary investments, but don't ignore them. Indeed, your personal home equity, if desired, could be completely or partially converted to investment property.
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Old 03-28-2014, 01:55 PM   #48
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no , a home you are living in is a consumption item until the day comes you are not consuming it. a true investment can be sold on a moments notice and put into any asset class you like or spent.

unless you can sell your living room off you can not do that.
.
A home may not be as liquid an investment as most financial investments, but it is an asset that can be managed for the benefit of the owner in terms of reducing cash flow needs (rent) or even providing income (partial conversion to rental property). And this can be done without "selling your living room off." Although, I do appreciate your humor about that..........
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Old 03-28-2014, 01:56 PM   #49
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it sure could but until the day it is converted a home stays on the expense side of my balance sheet representing my cost of housing.

I feel the same way about some of the fine art work I have.

with no intention of selling any of it it remains off my balance sheets. it is just another consumption item until the day I sell it.

it would serve no purpose figuring my home as any part of my retirement income plan other than a cost cutter hopefully.

it may improve cash flow but it adds zero to the income number.

it really is no different than any other expenses I can lower that can improve cash flow.

in fact a renter who goes from a 3 bedroom house when the kids lived home to a one bedroom apartment can see the same improved cash flow.
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Old 03-28-2014, 02:00 PM   #50
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This pretty much covers it. Until the home is 100% paid off, it is an expense.

It's still an expense even after it's paid off, though less of a burden. With property taxes, utilities, upkeep and improvements...homes are a money pit.
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Old 03-28-2014, 02:04 PM   #51
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it sure could but until the day it is converted a home stays on the expense side of my balance sheet representing my cost of housing.
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An interesting way to look at things. Because expenses are not reported on a "balance sheet," I see it a bit differently. But, each to his own.
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Old 03-28-2014, 02:04 PM   #52
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Absolutely. When we retire we plan on selling the home and renting, at the very least for a few years and possibly permanently.

We count the value of the home in our portfolio, and count anticipated rent expense in our cost of living estimates.
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Old 03-28-2014, 02:09 PM   #53
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It's still an expense even after it's paid off, though less of a burden. With property taxes, utilities, upkeep and improvements...homes are a money pit.
Fact. Good point. Even with no mortgage, our present home would cost us at least $6500/yr property taxes, $300/month in HOA dues, and some pro-rated maintenance costs every year. Probably getting close to $10k/year or $800/month even without a mortgage.

Maybe we should be renters...

I have considered moving to rent elsewhere closeby, but keeping the home as an investment property and renting it out. Especially once it's paid off, it would be a significant income stream at the rents we can "command" in our neighborhood. Before the mortgage was paid off, we could probably break even on it.
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Old 03-28-2014, 02:23 PM   #54
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are you depending on 'cashing out' the equity by selling your home to pay for your retirement, or do people not include it?
We are not "depending" on it. Our numbers work fine without it. However, since our house is 2X bigger than what we need, we know that we will downsize at some point when we grow weary of the upkeep and expense. At that point, our housing costs go down and the delta equity becomes part of the retirement portfolio. The expense reduction and the delta equity are not trivial amounts in our case. So, yes, it is very definitely part of our retirement plan. Our current assumption is that we'll pull the trigger about 15 years from now.

As others have said the remaining equity in the new, smaller home is not considered in any retirement planning except as possible end-of-life emergency fund or inheritance. Of course it should always be included in net worth calculations.
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Old 03-28-2014, 02:29 PM   #55
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I don't factor the equity into retirement income, but I do consider it sort of an emergency fund. I'd tap into it if I had to. And, if the stock market ever plunges again like it did back in 2008, as long as interest rates stay low, I'd definitely consider raiding some of it to buy more stocks/mutual funds.

As for an expense, well I figure I gotta live somewhere. If I'm not paying a mortgage/property taxes, I'm going to be paying rent. And around these parts, where a small apartment in an iffy neighborhood can be $2000 per month, the house is definitely saving me money!
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Old 03-28-2014, 04:06 PM   #56
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An accurate model will include all significant assets and their associated expenses. If you model living in the house 'forever', so be it. Your model will end with the house as an asset. One could argue that simply leaving the personal residence out of the model and just acknowledging that the net worth at the end would be increased by the .93 times the market value of the house at the end would be a valid approach.

But it seems like many/most will not die in their own owned house. If a sale is envisioned, then leaving the personal residence out of the model would not reflect the reality of the situation. Leaving the house out of the model might be considered conservative since the sale would suddenly add unexpected assets to the balance sheet. If the plan hung together before (with the expense associated with renting or in an assisted living place), then of course the plan will still work with the 'unexpected' real estate proceeds.
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Old 03-28-2014, 04:16 PM   #57
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Not us.

It's part of our net worth, but I don't include it as part of our retirement portfolio for calculating our withdrawal rate. You've got to live somewhere.
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Old 03-28-2014, 04:21 PM   #58
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From our perspective (DW and myself) we don't include it any of our financial models. Equity is not part of net worth or income generating assets. It is in the back of our heads strictly as a safety net.

Funny, now if the question is asked of our adult children, I would bet OUR house is part of THEIR net worth. If you gits my drift.
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Old 03-28-2014, 04:37 PM   #59
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An accurate model will include all significant assets and their associated expenses. If you model living in the house 'forever', so be it. Your model will end with the house as an asset. One could argue that simply leaving the personal residence out of the model and just acknowledging that the net worth at the end would be increased by the .93 times the market value of the house at the end would be a valid approach.

But it seems like many/most will not die in their own owned house. If a sale is envisioned, then leaving the personal residence out of the model would not reflect the reality of the situation. Leaving the house out of the model might be considered conservative since the sale would suddenly add unexpected assets to the balance sheet. If the plan hung together before (with the expense associated with renting or in an assisted living place), then of course the plan will still work with the 'unexpected' real estate proceeds.
Interesting points. We do in fact plan to stay here until we die. We selected this particular home for that very reason. That being said, we're acutely aware that folks often cannot remain in their home.

Still, I prefer to be conservative and not count the house. I do try to keep my pulse on the values of any homes I've lived in, and to do what I can to improve the home and the area it's in, so that the values go up...So...yeah, it is an asset that I track. Just not as part of my retirement income plan, nor even my net worth. Just bonus, I guess...
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Old 03-28-2014, 04:42 PM   #60
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Retirement income no...net worth yes.
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