ER, home value and net worth

[tb001]

It helps to use two definitions, IMO. Your investable assets and your net worth. I think many people on this form consider home equity part of their net worth, but not their investable assets.

When planning your retirement, think of the income you can generate, not asset base. If you have a rental that returns a net of $1,000 a month, you will need less 3%-4% withdrawal money, right? (In essence, $1,000 a month in rentals, is worth $250k at 4% withdrawn, if that helps).

Our rental property returns a net average of just under 7%, not including tax benefits. As a result, we do not need as much in assets as a 4% withdrawal type scenario.

And you can use this same thinking when putting SS retirement benefits or a part time job into the mix.
Focus on the income you need in retirement, and work from there.

Thanks. This crystallized how I've been trying to think about it and makes sense to me. Essentially 24k of income adds an extra 500k to our property budget, *assuming* that 24k is sustainable and increases with inflation, etc...

This feels not crazy as long as that 500k isn't a large % of your investable assets.

I really appreciate all of the thoughtful comments. I do think when a home is a significant part of your NW and a significant $ value, that it shouldn't be considered as zero, though I understand the assumption for planning purposes. I've been thinking about it as zero when it comes to income needed to get us to 95% in firecalc, but is a safety net in case we need expensive LtC, as others have mentioned, which I think is a reasonable way to approach things.

 

[braumeister]

My home is just 10% of my net worth, but I always keep track of two numbers. One is my actual (total) net worth; the other is my liquid net worth.

Sort of related:

They're Richer Than Ever in the Land of Negative Interest Rates

After more than half a decade of negative interest rates, rising property values in Denmark have left the average family with net assets of 1.9 million kroner ($314,000), according to the latest report on household wealth.

“Right now, net assets are at a record-high level,” said Tore Stramer, an economist at Nykredit in Copenhagen. “So the good news of the day is that the average family has never been richer.”

 

[jollystomper]

Our home equity is around 13% of our assets. For retirement planning purposes we are ignoring it other than as a place to live, that we will be able to leverage into future (and smaller/less expensive) places to live.

 

[NW-Bound]

If I had to do it over again I would have bought a smaller house - no more than 3 bedrooms and 2 bathrooms. Downsizing sounds like a good plan but the reality is it is a lot of work to declutter and fix up a big house to sell, and you might not want to leave your neighbors and neighborhood when you are older. Bigger houses usually cost more to insure, upgrade, heat, cool, repair, furnish, pay property taxes on, etc.

I may sell the 2nd home in the future if we no longer can use it and if the kids do not care to keep it. But about the main home, I cannot see us downsizing. It's a lot of hassle, and does not save that much money. I can get the same money by cutting expenses elsewhere first.

We only sell the main home and move out if 1) we become so broke and have to move into the RV, or 2) we have to move to a nursing home.

 

[RobbieB]

I love the "RV backup plan" you always reference.

Me thinks you are actually serious. How did you get so afraid?

 

[NW-Bound]

Yes, I like to talk about it a lot. And joke about it too.

Ever since I was interested in RV'ing and started to read RV'er blog to learn the rope about traveling and camping in an RV, I ran across mostly blogs by full-timers. Never even camped in a tent in my life, I thought it was fun to live in an RV. And it was, for the several 1 and 2-month long cross-country trips we have made.

Now, that I have done a bit of RV'ing, I know that I want to have a permanent home to go back to. Need space and storage for my hobbies.

No, my stash is large enough, and I know how to live frugally, so it is highly unlikely that I have to move into my class C. But I still bring up this full-time RV'ing to let people know that it would not be the end of the world if you have to live like that. Make the best of the situation, and carry on with a nomadic life. I am not afraid that my financial situation can deteriorate to that point. And even then, I am also not afraid of RV'ing.

The end of life is when you are diagnosed with a terminal disease. Everything else can be worked around.

 

[NW-Bound]

I have been on this forum 10 years, and every so often this topic comes up about house value.

Same as some people here, I know that RE is included in one's networth, but it is the liquid investable assets whose return I live off that's most important to me. I do not track home values, but am reminded often of the liabilities from them when I look at my expenses.

Yes, I know that without at least one home, I will have to pay rent (or live in the RV which I prefer to do only for traveling). But until I sell one or both, I'd rather concentrate on my investable accounts and try to squeeze more returns out of them.

Of course, if I need money I can sell them for cash, but if I manage my accounts well, that will not be necessary. Until then...

 

[daylatedollarshort]

We live in an urban area where housing has become very expensive, and we know more than one family who decided their house was literally their retirement savings. It worked out really well for some. Others ended up not really fitting in more blue collar / rural America or a foreign country and now with home price increase here they can't afford to move back, not to the same standard of living anyway. Downsizing or relocating are probably great options for many in retirement, but I wouldn't buy a house in my younger years making downsizing or relocating my only retirement option.

 

[Teacher Terry]

I have seen people move to foreign countries, not like it and can't afford to come back also. If we ever needed some of our home $ we would downsize to a small condo. I could never live in our motorhome. 1 month traveling is sufficient.

 

[joeea]

My two homes are about 28% of my net worth. Back in 2011 it might have been different. A few years from now it might be different.

But I can't see how that matters much today.

If and when I sell one or more, only then will I know what kind of "windfall" I could extract from their sales (if any). And I'd still need to live somewhere. At that point in time, I might revise my net worth numbers by the amounts netted.

For now, whenever I want to project retirement income and expenses, I generally leave out the equity in the houses. I also leave out the value of all other non-liquid assets (like our cars, electronics, etc).

 

[W2R]

We live in an urban area where housing has become very expensive, and we know more than one family who decided their house was literally their retirement savings. It worked out really well for some. Others ended up not really fitting in more blue collar / rural America or a foreign country and now with home price increase here they can't afford to move back, not to the same standard of living anyway. Downsizing or relocating are probably great options for many in retirement, but I wouldn't buy a house in my younger years making downsizing or relocating my only retirement option.

During the housing crash a few years ago, I felt so sorry for those Californians who I knew that were living in a high COL community and relying heavily on their homes to fund retirement. What a nightmare for them! I think you were smart to not make downsizing or relocating your only retirement option.

I also feel sorry for those who can't move back. In a way, I'm in that situation too in that I really can't afford to move back to Hawaii with the same standard of living. But in my case, I haven't actually lived there in 43 years so the Hawaii I remember is long gone anyway; no big deal, I am happy here.

 

[NW-Bound]

I have seen people move to foreign countries, not like it and can't afford to come back also. If we ever needed some of our home $ we would downsize to a small condo. I could never live in our motorhome. 1 month traveling is sufficient.

As long as I can take care of my homes I will keep them. We need room to spread around.

We will be living in our motorhome for a couple of months later this year on a long trek through Alaska. It is kind of fun, like children in a play house.

And if one lives full-time in one, well, people live in small places like a boat all the time, so it's surely doable.

 

[pb4uski]

A home is a place to live. I've know and have heard of people who for different reasons moved and sold at a gain (including us) and who sold at a loss. My attitude is that it is a place to live and if I later sell it at a gain then that gain is gravy.

IMO, it would be the ultimate in foolishness to rely on your home equity as your sole retirement fund.

 

[tb001]

We live in an urban area where housing has become very expensive, and we know more than one family who decided their house was literally their retirement savings. It worked out really well for some. Others ended up not really fitting in more blue collar / rural America or a foreign country and now with home price increase here they can't afford to move back, not to the same standard of living anyway. Downsizing or relocating are probably great options for many in retirement, but I wouldn't buy a house in my younger years making downsizing or relocating my only retirement option.

Agreed it shouldn't be your only option! Just the swings in home values can be huge. We bought from an almost retired couple who got hit hard in 2008-2010 and had to sell the dream home they'd built. It worked well for us, but I know was heartbreaking for them.

I believe you've posted that you're in the Bay Area. We're in the Bay Area as well and have been exploring taking equity out of our home and moving to a LCOLA. I grew up in a more rural, blue collar community and would move in a heartbeat, but DH is less interested. As an alternative, we're looking at areas where we can purchase a similar or nicer home with no mortgage, so maybe a happy middle ground.

And home value swings can obviously be huge. That said, it also likely depends on the home value in question. So if you own outright, a 500k home isn't necessarily a great cat food prevention strategy, while a 3mm home gives you a decent nut, even if you see a 50% drop.

 

[NW-Bound]

IMO, it would be the ultimate in foolishness to rely on your home equity as your sole retirement fund.

Not if your home is worth megabucks, like a nice home in California, and if you do not mind relocating somewhere less expensive.

As for me, RE is a small enough portion of the networth that if I had to sell for monetary reasons, I would be in a big trouble having spent the bulk of the stash.

Converting my homes to cash would not keep me afloat for long, if I insist on continuing living the "Evil Ways". I would have to change.

 

[RunningBum]

My two homes are about 28% of my net worth. Back in 2011 it might have been different. A few years from now it might be different.

But I can't see how that matters much today.

If and when I sell one or more, only then will I know what kind of "windfall" I could extract from their sales (if any). And I'd still need to live somewhere. At that point in time, I might revise my net worth numbers by the amounts netted.

For now, whenever I want to project retirement income and expenses, I generally leave out the equity in the houses. I also leave out the value of all other non-liquid assets (like our cars, electronics, etc).

Isn't that (bolded part) true of any investment? I've got some Wellesley in my Roth that I won't be touching for many years. I don't know what it will be worth then.

 

[PandaBear]

If I had to do it over again I would have bought a smaller house - no more than 3 bedrooms and 2 bathrooms. Downsizing sounds like a good plan but the reality is it is a lot of work to declutter and fix up a big house to sell, and you might not want to leave your neighbors and neighborhood when you are older. Bigger houses usually cost more to insure, upgrade, heat, cool, repair, furnish, pay property taxes on, etc.

We always assumed the house we currently live in was our "starter" house. 4/2, not quite 1800 square feet, 1 level. But we live in a super HCOL area, and those pesky kids we had were pricey so we never moved up.

Our friends in CO downsized to a house bigger than ours, lol.

 

[daylatedollarshort]

Not if your home is worth megabucks, like a nice home in California, and if you do not mind relocating somewhere less expensive.

We know one family who had the attitude you can't live in your stocks and bonds, so they bought a very expensive house and entertained a lot in it. But they are some of the ones who sold their house to fund retirement, now do not like their LCOL retirement location and there is no going back.

 

[street]

I don't use net worth as a number or tool for my retirement worth. I use only money assets for a number of worth.

My home and ranch would be a number that would be only a guess what the real value would be at any given time.

There has been a lot of good input and thoughts on this thread of how people look at their own worth.

 

[ncbill]

We live in an urban area where housing has become very expensive, and we know more than one family who decided their house was literally their retirement savings. It worked out really well for some.

It's worked out fine for an old college buddy of mine...so far.

The small home he bought in a suburb of a large California city (not LA or SF) 15 years ago has grown in value from ~$400,000 to $1,500,000.

However looking on Zillow shows the last million of that increase has come only in the last 5 years.

So while we see increasing numbers of people concerned about a stock market bubble, it's scary that there are those who live in HCOL areas that still seem very confident (here and on bogleheads) their home values will never go down.

 

[joeea]

Isn't that (bolded part) true of any investment? I've got some Wellesley in my Roth that I won't be touching for many years. I don't know what it will be worth then.

If you wished to sell Wellesley today, you could find out what it's worth - today. The vast market tells you what your stocks are worth.

If you wished to sell your house, you would have to find potential buyers and negotiate a selling price. The one ultimate buyer tells you what your house is worth.

When I was looking to purchase a 2nd home, the elderly couple who owned it had put it on the market for $420k 15 months earlier. They dropped the prices some, took it off the market for a month, put it back on the market, dropped the price again - no buyers. I bought it for $330k.

 

[Cobra9777]

The two of us are still in a huge house that we bought 15 years ago when the kids were 10 and 13. My retirement spreadsheet includes $250K coming in 12 years from now, representing estimated net proceeds from downsizing. The plan does not need the $250K to work, and there's a chance we might never sell... or that we might "downsize" to a place of similar value. So it's really just one of several possible scenarios to generate additional funds if needed as we age. Our spending today does not consider the $250K downsize scenario.

 

[Scuba]

Another vote for excluding from net worth calculations, but considering it as long-term care insurance. By the time one of us is likely to need long-term care, we should have 7 figures of equity and we have no children. So either a HELOC or a reverse mortgage will give us funds needed for LTC, if any.

 

[Clone]

so they bought a very expensive house and entertained a lot in it.

The other piece of that puzzle that works against folks- a big expensive house will typically have larger costs associated with utilities, taxes, upkeep, etc. So you convert your cash into non-performing assets, with a burn rate associated with the 'pride of ownership'.

 

[tb001]

The other piece of that puzzle that works against folks- a big expensive house will typically have larger costs associated with utilities, taxes, upkeep, etc. So you convert your cash into non-performing assets, with a burn rate associated with the 'pride of ownership'.

That's true, but why work for the money if you don't enjoy it? If having a large, nice property brings you enjoyment, the dollars are well spent. It's all a matter of priorities. Money for the sake of money's sake isn't what it's about for me. It's about the experiences we have with it.