Retirement Formula based on the value of your house?

[ShokWaveRider]

We could not spend ~$310k a year if we tried.......... The house only costs $15k a year to run all in!

 

[pb4uski]

I agree the ratio is meaningless, but you don't have to be condescending. But the numbers fit my situation, and I didn't base them on the ratio 5 years ago.

I was trying to be humorous, not condescending. I'm sorry that it ws received differently from intended. I should have added a to that broken clock post.

 

[youbet]

#1 - represents only about one half of our current annual spend. It would be a very spartan existence if spending was limited to 0.3 X the current market value of our home.

#2 - is just another way of stating the so-called "4% guideline." No news here. If the current market value of our home was 2X the Zillow estimate, then that would work fine.

 

[joeea]

A mortgage on a property does not effect its "market value."

If affects your expenses.

 

[Winemaker]

I was trying to be humorous, not condescending. I'm sorry that it ws received differently from intended. I should have added a to that broken clock post.

Good enough!

 

[MichaelB]

"Here’s the idea
1. Take the market value of your house, and multiply by 0.3. That is the income you need in retirement.

2. Take that number, and divide by 0.04. That is the value of the assets you need to retire with."

This might make sense as an average. One rule of thumb is one can afford a house that costs 2.0-2.5 times annual salary.

If one buys a house that costs 2.5 x one’s annual salary, and the house value stays roughly constant with annual salary, then on retirement, 0.3 x the house value equates to 75% of annual gross salary. Close to the oft mentioned ballpark of 80%. Divide by .04 simply gives us a 4% withdrawal rate.

We all know a better way to approach, but as a way to give a ballpark number based on averages, it’s not bad.

 

[Pellice]

Terribly off. Saying "the income I need" is 50% ABOVE what I'm getting. And I'm living on more money now than when I was working.

 

[LARS]

This might make sense as an average. One rule of thumb is one can afford a house that costs 2.0-2.5 times annual salary.

I would suggest to you that someone with considerable assets need be far, far less concerned with any income gauge to house value.

If not working, and again with predominantly assets not streams of income to support lifestyle, then total assets to house value is far, far more relevant.

 

[W2R]

If my "salary" is my average spending over the past 9 years of retirement, then my house cost almost 6x my salary. But then, being retired, I don't have to save money for retirement from my salary like I did during accumulation phase. So if I was working, the rule of thumb might apply. Oh well, so confusing to me.

Luckily I generally tend to ignore rules of thumb, do what makes sense to me, and just blithely continue on my way through life... LOVE my Dream Home, and it is exactly right for me and for my lifestyle. I fit very nicely in this neighborhood and do not feel too rich or too poor for the area.

 

[MarieIG]

I will say, that when I got a statement from the County jacking up the assessed value of our house, I felt no compulsion to run out and buy an expensive car to park in the driveway.

A house worth 1.4 M in some areas of California can be a modest house. And if the owners are benefitting from Prop. 13; they may easily be able for afford to stay in their home, if they so choose.

If comes down to expenses/income.

 

[dg001]

In all fairness to the author of the article, none of the folks who replied here are "typical" spenders.

You all got deeper into the meat of the numbers and figured out LBYM and expenses and all the other stuff most people are too lazy to do. You probably saw increases in home values or equity without jumping to a better house, and modified spending patters to maximize goals other than current spending.

In "typical rule of thumb" situations, people probably stick with homes that max out what they can afford and try to match furniture and cars with that lifestyle. I don't see the numbers as too far out.

 

[meleana]

Makes no sense to me, yet it is pretty accurate for us! The issue is, though, like many retirees we plan to move after we retire, so then what?

 

[audreyh1]

I remember in my younger working days you were encouraged to buy the biggest house you could afford based on some criteria. I suppose the idea was that the house would appreciate and reward you in the long run.

But I never saw it that way and stuck with the starter house I bought originally for 20 years, as I had no growing family to accommodate.

 

[catii]

Guess the author doesn't live in Hawaii, where the average house sells for $805,000, & the average family income is $76,500.


Bought our house for $260K in 1992, & it's ballooned to over $1.5 million. We're millionaires...on paper!

 

[triangle]

This might make sense as an average. One rule of thumb is one can afford a house that costs 2.0-2.5 times annual salary.

If one buys a house that costs 2.5 x one’s annual salary, and the house value stays roughly constant with annual salary, then on retirement, 0.3 x the house value equates to 75% of annual gross salary. Close to the oft mentioned ballpark of 80%. Divide by .04 simply gives us a 4% withdrawal rate.

We all know a better way to approach, but as a way to give a ballpark number based on averages, it’s not bad.

I was about to make a similar comment. I have often heard "recommendations" like don't spend more than 1/3 of your income on housing (specific amount varies based on area how conservative the source). So working the numbers backwards produced the simple formula given in the article. It is simplistic and assumes one has the same spending needs throughout retirement, but I don't think it is way off as an average number for families living in the suburbs.

 

[LJ Dem]

Using a formula based on the market value of your house is ridiculous. The most accurate way to determine the income you need in retirement is to divide your shoe size by 0.0001.

hahahaha THAT WORKS!

 

[joeea]

The most accurate way to determine the income you need in retirement is to divide your shoe size by 0.0001.

I like to wear flip-flops. What is "Large" divided by 0.0001?

Should I be worried that I have already retired?

 

[JJpop]

Kind of ridiculous

I think you should take the price you think your house is worth,double it,add in 90 % of your investments multiply that by your age subtracted from 100 and divided by 25.
Now you have a risk free retirement if that number gives you a monthly income that covers all your expenses for the rest of your life.

If Wells Fargo Advisors is really using this crap they should be put out of business.

 

[Markola]

It’s in the ball park for us, though I have to take what I think we’ll get from SS annually at 70 and multiply that x 25 to get an equivalent “portfolio principal” amount to then add to our actual portfolio principal. Based on this science, I will resign my job tomorrow. Dance!!

 

[Katsmeow]

This is so far off. As for 1, that number is way high. Number 2 is basically you need 25 times your spending in assets (leaving aside the net worth part for the moment). That might have some validity but totally discounts any value for SS or pensions. In our case SS covers about 2/3 of our spending. So, no I don't need 25 times total spending.

 

[Vacation4us]

Way off

As an individual I would need $244k a year income and a nest egg of over 6 million.

Never gonna happen, I could work for 30 more years and wouldn't come close.

If you include my husbands house forget about it.......

 

[RobbieB]

Yup, the shoe size method works for me too, same number as the home value method.

 

[W2R]

Here's the answer! I corrected some of the numbers in joeea's post below:

1. Take [-]the market value of your house[/-] what YOU think your house is worth on today's real estate market, and multiply by [-]0.3[/-] 0.13 . That is the income you need in retirement.

2. Take that number, and divide by [-]0.04[/-] 0.03 . That is the value of the assets you need to retire with."

There!!! All fixed.

 

[NW-Bound]

It's an attempt to link the total living expenses to the value of one's home.

And of course it is flawed because while the home value is a part of one's lifestyle and somewhat reflects the total expenditure, home prices vary greatly across the country, but food costs and utility bills, travel expenses, etc..., do not.

Personally, I am spending way less than 0.3x the value of my 2 homes. And if I were in California, I would not be able to own these 2 homes, let alone living off 0.3x the values of them each year.

 

[pb4uski]

Here's the answer! I corrected some of the numbers in joeea's post below:

There!!! All fixed.

I like your backwards analysis. As of my retirement date our annual spending was about 16% of the value of our house. Our annual spending was about 4% of our nestegg.... our WR will be less than 4% because of pensions and SS that come on line later (which the article totally ignores).

The above includes our mortgage payments... if I exclude mortgage payment from spending and reduce the nestegg for the mortgage balance (IOW, as if I paid of the mortgage when I retired) then our annual spending was 12% of the value of our home and 3.3% of our nestegg.... very different from 30% and 4%.