You don't include your home in your calculations. That is not irrational. But it also is not irrational for people to include their home.
Not true - you could own a home free and clear, but if you fail to pay your property taxes then the gubmint can get a tax lien and foreclose on the house.
Do you have any other hairs you need split?
But I think it is irrational. Sure, it does increase your net worth figure, but that's rather meaningless.
IMHO, your house is a consumption item, just like the food in your freezer and pantry. You don't count those in your net worth, because those are consumption items. You have to live somewhere. Whereever that is, you are using up the benefit by simply living in it. Unless you are planning to sell your house and move into a cardboard box under a bridge, that is.
i can see that housing is a consumption item if you are paying rent. that is more like the food in your freezer because once you consume it (live for the month that your rent payment bought or ate the food in your freezer) it is gone with no value left. but when you are buying (or have bought) a home the easiest way to show it isnt a consumption item (but actually a financial asset) is to look at the situation when you have paid off the mortgage note on said house. at that time your monthly income requirement to cover living expenses drops by the amount of the P&I of your mortgage payment.
in an attempt to show my point that your house is a financial asset lets look at an example. assume while you have a mortgage payment the P&I = $1000/mo. when the mortgage is paid off there would be a drop in the required income to cover living expenses of $12,000 a year which using the 25x rule of thumb is equivilant to an additional $300,000 of portfolio value that would be required if you had to pay that $1000/mo out in rent to maintain an equivilant lifestyle in retirement if you didnt own said home. the nice thing about this (fantom) $300,000 of portfolio is that it is throwing off (a fantom) $12,000/yr that is both guaranteed and non taxable (which would actually make the value greater than $300,000)
jdw_fire, I agree with rayvt that it makes sense to not include your house in your net worth. An exception would be if you bought more house than you need/want in retirement, and plan to downsize at some point. In that case, the "excess value" (house value minus replacement cost) in your house could be added to your NW.
I was just wishing that for the past 7 years I'd put my after tax savings into extra principal payments rather than equities. If I'd put the money towards paying off debt I would have paid off the mortgage and my current 20% loss from the peak of my after tax investments would be a far smaller absolute number, instead I still have $200k left on the house.
Well, I would say that, yes, your house is a financial asset. In essentially the same sense that your car, your clothes, and the food in your freezer are. You can either sell it to raise cash, or "consume" it by living in it. But you can't do both. You can't eat your cake and have it, too.
It's not income, it's just the absense of an expense.
...
You've un-committed an expense, not added to your income.
Consider it this way. Suppose your paid-off house is worth $300K, throwing off a "phantom" non-taxable income of $1000/mo. Alternatively, suppose your house is worth $3M, throwing off a "phantom" non-taxable income of $10,000/mo. Is there any difference in your finacnial situation between these two scenarios? I say no. You can't spend that $1000, nor can you spend the $10,000.
All our computations and models rely on historical data and I was with ERD50 for a long time. But we all know that time horizon and future market returns will change the results of such calculations, a few down years going into ER is always possible. So I will continue to take 50% of my gains and put it into the mortgage as insurance against years of negative returns.
Your numbers are flawed though. The 25x rule of thumb is for an inflation adjusted level of spending. A mortgage is a fixed annual payment. I've done FIRECALC runs to evaluate the multiplier for my non-COLA'd pension, and I (as have others) come up with ~ 12-14x for portfolio equivalent. So let's try again:
$1,000/month is $12,000/annual. That is a 30 year, 5%, $187,000 mortgage.
$12,000 x 14 (using the upper end) = $168,000.
So, with the mortgage, you have an extra $187,000 in your portfolio, but you only need ~ $168,000 to pay the mortgage. Individual tax situations will affect this, and probably close the gap some (or entirely). But the numbers always seem to come out pretty close, and that is why I always suggest to run the numbers, or even just go with what "feels good", but I've never seen the numbers to justify that it makes a big difference either way.
-ERD50
the problem with your example is that you havent kept lifestyle constant and therefore it is an invalid example in your attempt to refute my point.
The point I was trying to make is that it doesn't matter how much your house is worth. You are "using up" the entire value of your house by living in it. That's what I meant by saying a house is a consumption item.
I have the same problem when people say "Paying extra on mortgage principal is the same as earning the same rate. If the mortgage is 6%, then I am earning 6% on the extra $1000 principal payment."
My response to that is, "Well then, I pay off my 20% interest rate credit card every month, so I'm earning 20% on that money. And 20% is more than 6%, so I'm doing a whole lot better than you."
The truth, of course, is that they are not earning 6% and I am not earning 20%. Both of us are just reducing the expense that we would otherwise be paying. It's no different from deciding to not buy a new car. I've avoided a $20,000 expense but that's not the same as earning $20,000.
We could do that for this and a dozen other subjects. But once we did, what would we talk about?Is there any way of linking this thread into a closed loop leading back to one of the other hundreds of ther unresolved conversations on this same topic?
my example using a mortgage was an attempt to get at what the rental value of said house might be so please forgive me. that being said i believe i am still correct when you use the rental value of the house in the example. i explained further in a previous post. and rent will need a cola to compensate.
We could do that for this and a dozen other subjects. But once we did, what would we talk about?
Now I'm really lost - did you just switch this to a rent-vs-buy discussion?
Rental value is whatever the market will bear - but that's a totally different discussion.
-ERD50
Hairy men?We could do that for this and a dozen other subjects. But once we did, what would we talk about?
the point i am making is that an owned home has an equivilant, non-zero portfolio value from a retirement perspective. ...
But what some of us are saying is: Assume that your home represents some standard of living that you wish to maintain during your retirement.