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Old 07-29-2008, 05:11 AM   #21
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Location: Central, Ohio, USA
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After long and arduous consideration (about 30 seconds) I would include the home in the Net Worth BUT only at the REVERSE MORTGAGE value. So if the place and you would qualify for a RM of say $150K, I would include that number in NW. The assumption here is you will always need a place to live (but also assuming you will die at home or at the local hospital) so the maximum value I would use would be the net RM value. Of course you could use a large number if you KNEW you were headed to the underside of the local interstate overpass at some point.

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Old 07-29-2008, 06:46 AM   #22
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This argument has gone around and around a half dozen times. As CFB points outthere is no question that home equity is part of net worth - net worth is not something you define for yourself. If you want to exclude home equity from calculations about how much income you expect to derive from investments, fine - you are talking about something other than net worth. I do exactly that - I use my non-house investments to figure out my SWR for retirement living. But, like CFB, I also calculate how the home equity can be used to bail me out if a humongous black swan comes flying in.

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Old 07-29-2008, 07:30 AM   #23
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Just to clarify this, lets look at three scenarios. I'll just lay out the parameters but I'm too lazy to run the numbers...I think the general idea should be obvious.

1) Do a firecalc using your retirement $, minus the house, plan for 85 years of age since thats when the IRS says most of us will be pushing up the daisies, get your 4%. Works great unless you live past 85.

2) Do the same as above but push it to 90/95/100/120. You've now reduced the risk of living too long, but your 4% is going to be a lot smaller.

3) Do the same as #1, but presume that if you live past 85 your home equity will bail you out via sale/reverse mortgage/heloc/renting a room/whatever. Solves the risk of living too long without forcing you to accommodate a low probability scenario into the rest of your lifes withdrawal rate and spending.

4) Include the home as part of the retirement 'stash', presume the value of the house is "last dollars to withdraw", do the plan to 90/95/100 and look at the detail results to see if there is ever a point during the 'run' where your portfolio value would have dropped to the level where you'd have had to dip into the home equity.

#1 is fine. It ignores the risk and pretends the house isnt part of the equation.
#2 seems silly. You're taking the risk into account but not all the assets to adjust the risk.
#3 is really the same as #1, but you've accommodated the risk with an offsetting asset.
#4 is a lot of work, but some calculator crazed folks will have a blast with it.
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
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Old 07-29-2008, 01:20 PM   #24
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My cashflow spreadsheet is set up to calculate three types of net worth for me:

(1) Total net worth = assets minus liabilities -- the standard balance sheet taught in accounting class. The estimated fair market value of my house is included, as is the payoff balance of all debts, including the mortgage. Any asset can be sold for a salvage value and converted into cash if desired (the price one can get when selling an asset may or may not be to one's liking, but the sale can still be made nevertheless).

(2) Financial net worth = financial assets minus liabilities -- only taxable and retirement financial assets are included. If I need to raise some cash quickly, I can sell a few shares of stock; I can't sell the front porch and a couple of doors and windows of my house to raise the money. I include all liabilities, including the mortgage, because I could pay off my mortgage by selling financial assets to do so (actually, I paid off my mortgage a while ago, but my spreadsheet still has this calculation structure built into it).

(3) Non-retirement financial net worth = taxable financial assets minus liabilities -- only taxable financial assets are considered because I'm not planning on drawing on my retirement money until I'm 70 1/2 years old (to give it more time to compound). Only taxable financial assets (plus any earned income I make) are available to me under normal circumstances right now to pay living expenses. Liabilities still include the mortgage payoff balance because one can sell off taxable financial assets at any time to pay off the mortgage if desired.

Someday, I may sell my present house and roll over the proceeds into another house in an area that is much less expensive to live. I can also will my house to my heirs or favorite charity. Other types of assets some people have are annuities, whole life insurance, baseball card collections, family heirlooms, and whatever that can always be converted into cash should the decision be made to sell them.

For FIRE cashflow planning, I use my financial net worth because a 4% SWR works. The assets are liquid and can be sold off periodically to raise the money needed to pay living expenses. I consider all income-producing assets to be financial assets (but I only own stocks and do not own any investment real estate or businesses directly).

Between now and age 70 1/2, however, I use only my non-retirement financial net worth because I don't want to tap into my retirement assets right now. I only want to use my taxable financial assets so that my retirement financial assets have a longer time to compound under tax-advantaged circumstances. Once I become 70 1/2 years old, retirement assets become part of my "taxable assets" to the extent I have to take the required minimum distribution each year.

My Roth IRA lurks in the background as "longevity insurance" in case I need additional money when I reach my 80s. I don't factor my Roth IRA in any cashflow planning at the present time, but it's there in case I need it eventually. Otherwise, my beneficiaries will get whatever balance is there when I move on to the afterlife.

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