OK, what does this mean?

[Midpack]

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...

 

[jIMOh]

I do not consider SS when I plan. I am also 18-38 years from retirement and 35 years from age 70, when I would expect to be eligible for SS.

I would not include all resources (house) as part of retirement asset base, because my house will not generate me an income- it is my place to live.

 

[mike hall]

I agree with the house issue. It has a value, and is part of your total assets, but unless you are willing to convert it to cash, it should not be considered in the portion of your assets that will provide your income in retirement.

 

[FIREd]

I think it depends.

For example my MIL owns her home outright and is guaranteed to receive SS benefits. In her case, we already know that she will have to take a reverse mortgage on her home to be able to retire, so I definitely think of her home as part of her portfolio. Therefore I don't think she should invest part of her IRA in REITs for example since her home equity already represents about half of her net worth. Also, because she is old enough to be guaranteed to receive defined SS benefits for the rest of her life, I definitely consider her SS benefits part of her fixed income portfolio. So the way I see it, she can afford to invest her IRA more aggressively.

For me though, I don't intend to use my home as a piggy bank to fund my retirement and since I don't believe I will receive much in the form of SS benefits, I never include those 2 items in my asset allocation.

As for your graph, Midpack, I would have created different categories: I would have broken it down into stocks, bonds + cash + SS, Home + REITs + other properties. I think it would be more appropriate to calculate your asset allocation.

 

[Nords]

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...

One concept is that a pension is the equivalent of bonds-- Treasuries for veterans & civil-service, corporates for many, junk for perhaps a rising number of retirees. Pick an average rate of return from a fund website or an index fund.

Another concept is that you shouldn't value something you don't have-- the present value of your Social Security benefits is zero. When you're 62 years old then they may have some value, but they may not even achieve that until you're 70 years old.

A third issue is that if you own rental real estate then you may not want to invest in REITs. But that's not necessarily good advice, especially if you're good at managing real estate.

 

[donheff]

I had some time to kill in the book store yesterday and skimmed through "Spend till the End," by Burns and Kotlikoff, which recommends this approach. They advise what Nord's mentioned with respect to COLAd pensions and SS - value them as the equivalent amount of TIPS needed to derive the income they provide. That makes perfectly good sense but I have a hard time doing it. Between my pension and DW's SS we have all of the basics covered. We also have real estate covered by a weekend house we could/would sell in a crunch. Accordingly, our portfolio should be 100% equities. But I like having a reliable source of income for travel and living high on the hog so I have a standard diversified portfolio - tilting to equities (75%). And we keep a few years of cash to pull in a downturn.

 

[rs0460a]

My thoughts on this...

The correct answer (of course ) is "it all depends".

It depends on your current life/lifestyle, your expected retirement lifestyle, and what you consider "sacred".

DW/me are 60. She will be taking SS at 62, me at 70.
Do I think SS will be there for us (and our remaining lifetime?) Yes.

Do we own our home and plan to "convert it" into funds for retirement? Yes, we own our home, and consider it as part of our "estate gross net worth". No, we do not count on it to be used to sell/downgrade, or convert to a reverse mortgage. However, we know that this is a resource that we "could" use. We look at it as an asset, but not one to be consider to fund our retirement income and is not part of our plan.

This (as in probably in 99% of discussions on this board) depend on your own situation (and your own beliefs).

Hey, I even have an annuity (SPIA), used as part of my retirement income, and I like it ....

- Ron

 

[RonBoyd]

I subscribe to the notion that Asset Allocation is, in essence, a tool used to either maximize the probability of Portfolio survival if withdrawals are larger than the sustainable withdrawal rate or to maximize Portfolio growth if withdrawals are less than the sustainable withdrawal rate. (or, I suppose, some combination/flucuation thereof.) In other words, Asset Allocation is an attempt to offset the damage ultimately done by the regular periodic income taken out of the portfolio -- assumably after retirement -- hopefully in some form of Reverse Dollar-Cost Averaging.

To use this tool properly, it is important to understand how the three iron laws of finance help in structuring a particular AA. These three laws tell us there is the time value of money, a tax value of money, and a risk value of money. Of the three, risk value is the most difficult to deal with -- that pesky enticement of "great return" for just a little bit more risk.

Anyway, I guess what I am trying to say is take your list of assets and determine how they fit in your vision of future "income" and go from there.

(the above highly influenced by Retirement Income Redesigned: Master Plans for Distribution: An Adviser's Guide For Funding Boomer's Best Years)

 

[cute fuzzy bunny]

I agree with the house issue. It has a value, and is part of your total assets, but unless you are willing to convert it to cash, it should not be considered in the portion of your assets that will provide your income in retirement.

So if you ran out of money and you were sitting in a paid off house, you wouldnt sell it, rent part of it out or reverse mortgage it?

You'd just sit there in the living room and starve?

Theres a reason why every single net worth calculation I've ever seen includes the home and the cars.

Granted selling my primary residence isnt my first plan, but its my emergency plan should I run out of money and live too long. Way better than pretending its not a real asset and doing a bunch of other stupid stuff over the next 40 years to avoid including it in my plan.

 

[mike hall]

So if you ran out of money and you were sitting in a paid off house, you wouldnt sell it, rent part of it out or reverse mortgage it?

You'd just sit there in the living room and starve?

Theres a reason why every single net worth calculation I've ever seen includes the home and the cars.

Granted selling my primary residence isnt my first plan, but its my emergency plan should I run out of money and live too long. Way better than pretending its not a real asset and doing a bunch of other stupid stuff over the next 40 years to avoid including it in my plan.

No ma'am....I wouldn't just sit there and starve. If I ran out of money as you say a whole lot would have to happen, like getting a job. But as long as you use your house as a place to live, that's what it is, whether it has a market value of $1 or $1 million. It's value is part of your estate, and would give you the potential to convert it to cash for living expenses. But for retirement planning it doesn't contribute to your income for living expenses.

 

[Martha]

Mike, just for your info, even though cute fuzzy bunny sounds like a girly name, cute fuzzy bunny is a guy.

 

[Marquette]

Maybe one of the mods could change his name to cute fuzzy manly bunny

 

[mike hall]

my apologies

 

[Nords]

my apologies

No problem, on this board we can't even come up with a standard definition of "net worth", let alone determine CFB's gender.

Like all great ideas, the two concepts are easy. It's the execution & verification that are fraught with difficulties.

 

[cute fuzzy bunny]

No apologies needed.

I'm comfortable enough with my masculinity to not have to define my name any further.

Of course, the interesting PM's from new users dropped off a lot when I stopped using the avatar of the woman with the big boobs.

Mike, knowing I have what will be a seven figure asset going into my 70's, 80's, 90's and maybe beyond creates a humongous change in how I plan the rest of my resources.

I dont have to have a plan that lasts until I'm 100. I just need a plan that takes me into my 70's or early 80's with an asset allocation shooting to do better than my costs plus inflation. I dont have to become ridiculously conservative and stuff my pants with annuities and bonds that pay next to nothing. I also dont have to shoot for the moon and take on too much risk to be sure I have enough to make it to 100.

I just need to make it to 80-something. If my middle-risk plan falters for whatever reason, I have a huge resource to tap. I can sell it and rent. I can rent a room or two. I can reverse mortgage it and have income for life. I can mortgage it and invest the proceeds. I can make all sorts of income streams out of it at a time in my life where a job or taking on too much market or spending risk is just too hard to do.

This topic comes up a lot and people seem to polarize on issues that have nothing to do with finances. Its "my home" and isnt considered, or its considered as part of ones net worth because thats how every financial class teaches it and that its a home isnt relevant.

To me, everything is an asset or a liability. I plan accordingly.

 

[mike hall]

I understand your position, and maybe I misunderstood the original direction this thread was taking. If a reverse mortgage is part of a person's plan then considering a value for a home would have to be included. I mistakenly thought the question was about how other people computed or analyzed net worth, and then it turned to whether or not a home should be considered. Disregard.

Mike

 

[Khan]

My latest property tax bill said my house was worth ~65K; I don't consider it an asset.

 

[cute fuzzy bunny]

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.

 

[ziggy29]

My latest property tax bill said my house was worth ~65K; I don't consider it an asset.

There's a difference between an "asset" and a "retirement asset," IMO. A retirement asset is something that does, or reasonably could, be at least partially converted into retirement income.

A $500K house can be at least partially considered a retirement asset if the plans including moving/downsizing and using a chunk of equity to fund retirement.

It's pretty hard to do that with a $65K house. So one might not include it in retirement asset calculations. But it very much IS an asset. If you didn't have that house, you'd have to pay a few hundred bucks every month to rent something equivalent. So even if there is little price appreciation, it's an asset that you could value (roughly) at the amount of money that would return enough income monthly to rent the place you're in.

 

[youbet]

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...

I considered the expected value of my pension, SS and the house when deciding on the AA for my financial portfolio in retirement but don't actually include those numbers in the calculations. My financial portfolio goal and actual is approximately 60/35/5 right now two years into RE and 60 yo. My personal risk tolerance would suggest something more like 50/45/5 but I consider the pension and SS that I'll be starting within a couple of years and that reduces the "can't sleep at night" factor.

Why not include the pension, SS and house in the calculations? Simply because I was going through the same issues you are concerning how to value them. So I just decided, based on my personal risk tolerance, that I could run a modestly higher equity allocation in my retirement portfolio because I know I have the future income and house.

Also, since I can't change the value of a pension, SS or the house through rebalancing, they don't need to be part of those numbers.

 

[2B]

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.

 

[Kronk]

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.

 

[REWahoo]

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...

 

[ziggy29]

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...

 

[2B]

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.