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Should home-equity be included when calculating net-worth for retirement?
Old 07-28-2008, 10:20 AM   #1
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Should home-equity be included when calculating net-worth for retirement?

IN all of these retirement calculators, they say you should have this much of net worth to retire by this age, blah, blah, blah. Now should I include the value of my home in all of these net-worth or retirement calculators?

thanks
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Old 07-28-2008, 10:31 AM   #2
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I do not include it, because I'm not sure that we'll sell our house when we're retired. Even if we do sell the house in retirement, I don't know that we'll extract a significant chunk of money from the transaction, since we'll still need to buy another place to live in.

That's probably been the biggest change in my thinking since finding this site. We have quite a bit of equity in our house (it's about half of our assets). While that's great on paper, it's only accessible if we're willing to move to a lower-cost area. So far, we aren't (ask me again in 15 years).

If we end up selling the house and extracting a good chunk of equity, I'll look at it as a nice bonus, but I'm not planning for it. Your situation may be different.
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Old 07-28-2008, 10:39 AM   #3
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I include my home's value in my net worth. However, I do not use the value in my retirement calculations.
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Old 07-28-2008, 10:42 AM   #4
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I think equity is included in total net worth calculations, but not liquid net worth calculations.

I'd only include *part* of my equity as retirement assets if I had a firm plan to considerably downsize my home upon retirement and convert the proceeds into retirement income. We are already in a home we think we'll retire in, so there's nothing for us to include.
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Old 07-28-2008, 10:44 AM   #5
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How do people retire anyway? I definitely need an input here. Is it nicer to live in your own home. Or is it better to sell your primary residence and pay monthly rent for one of those nice retirement communities, with sauna, pool, golf course, theatre, etc included.

Anyone here living in those communities, they sound appealing.
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Old 07-28-2008, 10:55 AM   #6
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Originally Posted by Tempesta View Post
How do people retire anyway? I definitely need an input here. Is it nicer to live in your own home. Or is it better to sell your primary residence and pay monthly rent for one of those nice retirement communities, with sauna, pool, golf course, theatre, etc included.
I'm still a loooong way from making that decision, but the problem I have with paying monthly rent in retirement is the lack of cost-certainty. If I own my home outright, I'll have a much clearer idea of what my year-to-year costs will be than if I'm at the mercy of a landlord.
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Old 07-28-2008, 10:58 AM   #7
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This has been discussed regularly. My take on the consensus is that home equity is often considered part of net worth for accounting and estate purposes.

However, as a practical matter it is often not included as part of your nest egg for retirement planning purposes, unless there is a definite intention to downsize at a specific time, with a plan to invest the difference as retirement savings at the time of the sale (a planned windfall, so to speak).
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Old 07-28-2008, 11:02 AM   #8
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.....my year-to-year costs will be than if I'm at the mercy of a landlord.
that's a really good point I never thought, thanks. You're somewhat dependent of the landlords or community management, they could raise the cost, and not much you could do.
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Old 07-28-2008, 11:14 AM   #9
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I don't include the home equity in my "FIRE stash" because I don't include payments for housing in my required annual FIRE income. My assumption is that I will live in my home that I own free and clear.

So my FIRE stash is lower, but my annual FIRE income needs are lower as well. In the end I think it works out the same either way, but you just need to be consistent.
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Old 07-28-2008, 11:21 AM   #10
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A house isn't exactly a liquid asset... You can do fancy things like get a reverse mortgage or heloc if needed, or sell it fast and downsize, or whatever. If you're going to include it, be realistic and go with what you could get in a reasonable time frame and not your idealized "my house is worth this much" picture.

It's probably more fun if your house is paid off, but there have been countless discussions on that too.
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Old 07-28-2008, 11:23 AM   #11
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If you're going to include it, be realistic and go with what you could get in a reasonable time frame and not your idealized "my house is worth this much" picture.
Agreed. If I thought my house was worth $X, and I was going to downsize to a home valued at $Y (where Y is much less than X), I'd probably only include about (0.75*X) - Y as potential cash out of the downsizing for use as retirement assets. If that. I tend to err on the side of caution and conservatism at all times when evaluating my progress toward FIRE.
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Old 07-28-2008, 11:31 AM   #12
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Net worth is defined as the value of liquidated assets minus the value of liabilities.

It can be sold and you can use the proceeds to rent. It can be mortgaged or reverse mortgaged to provide a lump sum or a lifetime income.

There is no retirement or investment calculator that I'm aware of that calculates net worth and excludes home equity from that calculation.

If you leave the home equity out of one side, do you also exclude the mortgage amount as a liability? Come on...

My plan includes a provision where pretty much everything goes wrong, we have a 30 year bear market, and we also live far longer than the good old IRS mortality tables would suggest. In that instance we'd either sell the primary residence and downsize or rent or take a reverse mortgage. Any of those would carry us for another 10-20+ years, which would most certainly be to the end of our lives.

Without making that quite adequate and reasonable set of assumptions, I would have to plan for core portfolio changes and the amount that would be reasonable to retire on as a function of being far more disaster proof and far more long lasting than it most likely needs to be.

About the most effective way to do that would be to have either worked an extra 5-7 years, or to have taken an annuity. The former would have sucked, and the latter would have assured me a lifetime of income and lifestyle at levels lower than what I will likely accomplish on my own.

So...I do understand the emotional aspect of wanting to sweep your house away into some sort of lockbox and pretend it isnt there...but dont create a problem and introduce a solution thats worse than the problem itself, ay?
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Old 07-28-2008, 11:40 AM   #13
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How do people retire anyway? I definitely need an input here. Is it nicer to live in your own home. Or is it better to sell your primary residence and pay monthly rent for one of those nice retirement communities, with sauna, pool, golf course, theatre, etc included.
Your own home does not generate income. Only income-producing assets generate income. When your investment income exceeds your living expenses (including taxes) by your desired margin of safety, you are financially free and do not need to work for a living (although you may decide to keep working anyway for non-financial reasons).

Your home is an expense (i.e., property taxes, homeowners insurance, and maintenance) even if your mortgage is paid off. You can sell your home and convert your home equity to cash. You can then use that cash to purchase additional income-producing assets. You will also become a renter, which probably will increase your living expenses (i.e., you will still pay property taxes, homeowners insurance, and maintenance, but those amounts will be part of the rent your landlord collects from you because you and your fellow tenants are now buying that rental property for your landlord).

As far as where and how you live (i.e., retirement community, in your own home, in the snow belt, in the sun belt, whatever), that is a decision you get to make. You can do whatever you want as long as you can afford it. Write down what you want to do, run the numbers in a cashflow spreadsheet, and figure out (by making appropriate adjustments to your plans) how to make everything work out financially within your desired timeframe.
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Old 07-28-2008, 12:45 PM   #14
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I have it in my net worth, but I have it as an asset generating cash at 85 years old in firecalc.
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Old 07-28-2008, 12:57 PM   #15
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It definitely has been discussed before. Rich In Tampa said it best in my opinion. If you have plans to sell it for retirement, include it. I don't plan to, I don't include it in my retirement calcs just like I don't include my cars, clothes, TVs, etc. But I do sleep better knowing that I have a major asset that is somewhat liquid (moreso than clothes, for example) that I can sell (given adequate time) or borrow against if I see that I'm going to outlive my other assets. I also have no problem with leaving it as an asset for my heirs to sell or keep and use.
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Old 07-28-2008, 06:23 PM   #16
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As state previously net worth is everything you own minus what you owe, so in the purest sense your home is considered in your net worth.

IMO your home should not be factored in when calculating your 'retirement net worth'. UNLESS you are considering selling it to live on.

simple as that.
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Old 07-28-2008, 06:29 PM   #17
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I'm gonna have to go back to the usual end state discussion.

If you somehow end up broke, would you sit in your living room starving and eventually just lay down and die because the house isnt an asset?

Yeah, I didnt think so. You'd sell the house and live.

So it IS in everyones plan. Its the "fourth and 25, time to punt the ball" play.

So which is better, acknowledging the asset and incorporating it or pretending it doesnt exist and then doing things differently as a result?

Just acknowledging it as I did above turns my firecalc results from 95% to 100%, allows me to spend more money, and means I dont have to change my asset allocation or spending.

Didnt cost me anything. Probably wont use it. But if I have to, it'll foot the bill and nobody will get hurt or be any the worse for wear.
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Old 07-28-2008, 07:48 PM   #18
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It's in my "4th and 125, I wasn't even playing football much less whatever the hell game this is" plan.
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Old 07-28-2008, 08:08 PM   #19
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I consider firecalc a way to calculate income, not assets, so I don't include it. I don't include my cars either.
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Old 07-28-2008, 08:43 PM   #20
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I do not include it in retirement assets, as I figure I am not planning on spending 4% of it's value every year in retirement. Rather if my SWR from investments isn't as safe as I planned or something unexpected happens, then it becomes plan B as a safety net. If I include the full value of the equity in my net worth, then when I figure SWR of those assets, I will be overspending my actual portfolio and in effect forcing myself to liquidate the home when the other assets are used up. Some people may choose to plan like this, but I like a larger margin for error. Lucky heirs.
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