Home equity not a retirement solution?

[WRBT]

I believe a house is certainly considered a retirement asset.

People say "you can't eat drywall" but you can't eat a mutual fund statement either, one is more liquid than the other but both undergo a transaction to become usable for other forms of trade and both can undergo fluxuations in value over short periods of time.

 

[Rich_by_the_Bay]

Eh, I can live in an apartment or in my in-laws rv and sell my house.
Its always an asset. Just not a primary one.

This is semantics, I guess, but with practical consequences. I agree - a house is indeed an asset for estate planning, insurance, traditional net worth, an investment, and all that. Conceptually, though, I think most who are planning for FIRE are well advised not to add it to their FIRE resources for planning other than as a lifestyle choice.

If I had a clone who lived in a much more expensive house, but where everything else was identical, he would have less money to invest in order to meet other needs: same net worth in the traditional sense. My clone (with identical net worth) had better figure out how to live on a lower income than mine due to his lifestyle choice (aka bigger house).

Clone would have the potential to down-size and equal my income (or to travel less, eat less, drive junkers, etc.). That decision is a lifestyle priority choice and THAT is what is useful for FIRE planning. But if you don't intend to do that, you'd best not figure that asset in your plans except for lifestyle, no matter how much it's worth.

I'd say plan using dollars you have outside of your house. If you don't have enough, downsize first, then repeat.

 

[Scrooge]

If I had a clone who lived in a much more expensive house, but where everything else was identical, he would have less money to invest in order to meet other needs: same net worth in the traditional sense. My clone (with identical net worth) had better figure out how to live on a lower income than mine due to his lifestyle choice (aka bigger house).

Well, your clone could get a HELOC or a reverse mortgage (at 62). There are ways to make your house produce income, but there are also risks involved, just like with any other investment, especially a non-diversified one.

I'd say plan using dollars you have outside of your house. If you don't have enough, downsize first, then repeat.

I tend to view houses as part lifestyle choices and part investments. In that latter capacity, they have a number of upsides and downsides. The downsides include:

1. Potential price fluctuations, which make it harder to plan for ER. If you are betting your ER on your ability to sell the house for $$$, downsize and live off the difference, then you are, well, betting.

2. Unpredictable liquidity. Sometimes you can sell your house in hours, sometimes it may take a year. A friend just sold a house to a drive-by buyer who fell in love with it. None of the other properties in the neighborhood have moved in the last month.

3. Sometimes unwieldy limits on things you can do with your house. For example, you will have a hard time getting a reverse mortgage if you are under 62.

Overall, I would say that your house is definitely a RE asset, just a unique and potentially volatile one that requires extra careful handling.

Thanks for the discussion, folks, it made me go over my thoughts on the subject and do a better job of organizing them, something that I needed to do  8)

 

[free4now]

A house is not a piggy bank
Forget home equity as retirement solution -- except when it's the only solution

CHICAGO (MarketWatch) -- The equity you build up in your home is not a retirement-savings account, although many Americans are tempted to think that it is. But the smartest way to think about home equity, financial planners say, is as a cushion, a spare tire in reserve just in case savings calculations are off or liquid assets run out.

Okay, so here's my foolproof system for increasing your retirement savings overnight, which I will soon be selling for $19.95 on late night television:

Step 1. Believe the article saying that your home equity is not part of your retirement savings.
Step 2. Sell your home and start renting. Suddenly your retirment savings magically shoot up! It's like found money! Money from nothing!

 

[ESRBob]

Eh, I can live in an apartment or in my in-laws rv and sell my house.

Its always an asset. Just not a primary one.

CFB,
Now that you're married, can you really say that? I could live in a tent on the side of a mountain, but with the Princess, I'm afraid loftier digs are a necessity, now. Or are you going to tell us your wife not only works, cooks and looks terrific, but is willing to move into an RV, too? Such luck doesn't normally all fall into one guy's lap...

 

[Arif]

If I had a clone who lived in a much more expensive house, but where everything else was identical, he would have less money to invest in order to meet other needs: same net worth in the traditional sense. My clone (with identical net worth) had better figure out how to live on a lower income than mine due to his lifestyle choice (aka bigger house).

To make it even murkier your clone would also own an asset worth more than yours. So although his costs are higher, his yearly appreciation (not counting the current bubble decline but on average terms and locations) might be higher than yours as well. All oportunity costs.

 

[Rich_by_the_Bay]

CFB,
Now that you're married, can you really say that? I could live in a tent on the side of a mountain, but with the Princess, I'm afraid loftier digs are a necessity, now. Or are you going to tell us your wife not only works, cooks and looks terrific, but is willing to move into an RV, too? Such luck doesn't normally all fall into one guy's lap...

Well (and amusingly) stated, Bob. Wife wants a house, not an apartment or tent? So much for that "asset" to bolster your retirement cash flow .

 

[justin]

My wife grew up in a straw hut in the jungle (when they had a home). I wonder if she would mind if we moved the family back into one of those...? It should cut down on the taxes and utility bills. And hey, with a dirt floor, I'll never have to vacuum again!

 

[cute fuzzy bunny]

Now that you're married, can you really say that? I could live in a tent on the side of a mountain, but with the Princess, I'm afraid loftier digs are a necessity, now. Or are you going to tell us your wife not only works, cooks and looks terrific, but is willing to move into an RV, too? Such luck doesn't normally all fall into one guy's lap...

She doesnt usually cook but likes to, and is good at it. "Check!" on the other two items. I asked about living in an RV. She said she'd like a bed and a bathroom, everything else is optional. No tents please.

Heck, we could rent a nicer house than we're living in for $1200 a month. At 350-375k to sell the place, it'd take a while to eat that up in rent...

 

[spideyrdpd]

Forget the semantics
Do you guys actually count on the value of your home as part of you retirement assets.
I think everyone agrees its a fall back position. Although many people are like my cousin and have spend the equity in the house on a new kitchen and an inground pool in the backyard.
I would rather have some funds outside of the home. Even if its in a loaded mutal fund Mostly cause if the poop hits the fan I can always get cash out of my fund and continue to pay the mortgage or the tax bill or whatever. Rather than having to jump through the hoops to get another mortgage/ heloc.

 

[youbet]

I think everyone agrees its a fall back position.

Nope, I don't.  So I guess not everyone agrees. 

Our retirement home is modest, but perfect for us, and we need to live somewhere.  Taking equity out of the house isn't in the retirement funding plan.

 

[cute fuzzy bunny]

I almost hate to even bother asking but...what the hey.

So you're sitting in your perfect modest retirement home and due to a series of events you've run out of money.

Do you sell the house, rent another place to live and eat, or sit in the house and starve?

 

[2B]

So you're sitting in your perfect modest retirement home and due to a series of events you've run out of money.

Do you sell the house, rent another place to live and eat, or sit in the house and starve?

The answer to your question is obvious to me and probably to everyone else.

If you're like my in-laws, when ever the question came up their answer was always "they wanted to stay in their home." No problem seemed large enough to force them to sell -- even running out of money. That's the other factor that I think needs to be in everyone's retirement plan. At some point you can't make the right, rational decision. Someone else has to do it for you.

Half of the people over 85 have some form of dementia.

 

[Rich_by_the_Bay]

Do you sell the house, rent another place to live and eat, or sit in the house and starve?

So, you sell it and convert it to traditional "assets" then sign a lease which, in effect, lowers your cash flow by the rental amount, not to mention the fixed indebtedness of having signed a lease.

Has your "net worth" really changed much by selling it? Feels more like cash now, payments for the next xx years. Credit cards anyone?

Compare that to having had that $200K in your mutual fund portfolio.

 

[donheff]

I almost hate to even bother asking but...what the hey.

So you're sitting in your perfect modest retirement home and due to a series of events you've run out of money.

Do you sell the house, rent another place to live and eat, or sit in the house and starve?

My house is paid off. If I run out of cash I go for a reverse mortgage until I am broke -- then I starve. In the meantime, my expenses are much lower than when I had a mortgage - thus piece of mind.

But lets try the alternative:

So you're sitting in your perfect modest rental place and due to a series of events you've run out of money.

Do you what, or sit on the street and starve?

Bottom line - the choice involves trade offs. See the other threads on the topic for details.

 

[youbet]

Do you sell the house, rent another place to live and eat, or sit in the house and starve?

What I said, CFB, is that "Taking equity out of the house isn't in the retirement funding plan."  And it isn't!

All our plans are calculated on staying in this house as long as we want with a conservatively calculated quantity of non-real assets to back that desire up.  We don't list the house as a "retirement asset,"  even as a fall back retirement asset.  This probably caused me to stay hitched to the plow two or three years longer than if I had pencilled in the value of the house as a spendable asset.

On the other hand, we have friends who enjoy their large scale, expensive homes and fully understand that they will be able to downsize and harvest liquid assets to live on later in life.  They've built that into their retirement funding plans and it makes sense to me for them to do that.

Because our hobbies, lifestyle, some family matters, etc., are tied to our home, we planned to not "spend" our home but rather to keep it.  So that's how we planned, and, yes, even worked extra time to have it work out that way. 

You moved the situation from retirement planning to hypothetically dealing with some catastrophe later in life.  That isn't what I was talking about.  But, of course, if I needed money for my family to survive, I'd do whatever it would take including selling blood plasma, working, liquidating non-financial assests (including the house and furniture) and mooching off whoever I could.  Who wouldn't?

But, again, my ER planning was based on not drawing on home equity for living expenses.  I wouldn't necessarily recommend this algorithm for everyone.

 

[cute fuzzy bunny]

Spidey said 'everyone agrees that its a fall back position' and you said "Nope, I don't. So I guess not everyone agrees.". I asked if you ran out of money, would you sell the house, rent and eat. You actually didnt answer the question, but I presume the answer is 'yes'.

That would make it a fall back position. Which would make it a tappable asset. Which makes it part of your net worth. Which made your comment to Spidey seem more of an attempt to argue a point that you didnt even actually disagree with. Which always causes a small short circuit in my brain.

Now that we've gotten past that, can I propose that this is a far simpler equation than we're making it out to be?

We're where we are now, and someday we're all gonna die. In between here and there we have a life to live and parameters around that life. When we die, we may plan to leave something behind for our heirs.

We have a "net worth", which is any tangible asset that can be used, sold or converted to some form of currency. We also have intangible assets like lots of free time. Both our intangible and tangible assets change in value over time due to investments, aging, depreciation.

I have to choose to use tangible and intangible assets to meet the lifestyle parameters I've chosen, or the ones I can afford, until the time I die.

Which tangible and intangible assets are up to each individual to prioritize and will always be different. Some will see their house as simply a place to live and a tappable tangible asset. Some may choose to be sentimental about it and see it as a last gasp tappable asset.

To argue that its not on the table or part of a fall back plan, or that because of what it is, that its not a tappable tangible asset and therefore part of the net worth seems to be a low value exercise.

How it turns into an asset and the resulting cash flow variants is certainly an interesting dialog.

This is probably more "brain wiring" like a lot of other topics. Some people value "certainty" so much it overrides more valuable uncertainties. Some people fear certain things so much they'll create irrational arguments out of bits of unwhole cloth that on the whole look perfectly rational to them. Some people attach great sentimentality to things and others attach none or nearly none.

I think the "home as an asset" thing is as big a divider between how people think as almost any other hot topic discussion item we have here. Whether its sentimentality or some ground up brain wiring that the home is "not on the table" is up for debate.

I regularly look at the value of the home i'm living in and market prices. When that market price rises above or sinks below the value, I start considering options. At various points in our lives, homeownership may not be a priority or a benefit.

 

[Nords]

Half of the people over 85 have some form of dementia.

We're not too sure about the people under 85, either!

I'd sure hate to have to contend with the daily dementia/Alzheimer's pop quizzes. The penalties for failure are way too high.

To argue that its not on the table or part of a fall back plan, or that because of what it is, that its not a tappable tangible asset and therefore part of the net worth seems to be a low value exercise.

That's almost as low a value as attempting to agree on a common definition of "net worth"!

 

[kcowan]

What I see is confusion about planning versus an unexpected calamity. In our case, we sold the house for $750k and use the money in our portfolio to rent a 3300 sq.ft. penthouse for $35k/yr. In the event of an unforeseen disaster like a market meltdown or an expensive illness, we have considered moving from our high cost district to a sunny climate in Mexico, Costa Rica, or Uraguay.

We have traded the uncertain real estate holding and its associated appreciation for more liquid investments along with their attendent risks. We have also gotten rid of maintenance costs, heating, water, sewage, and electricity costs (included in above), and property taxes. So far so good (10 years, 4 retired).

Would I include the value of the house in ER planning if I were to go through it again? Sure because it is an option. To rule it out without considering the alternatives is similar to not shopping around for the best investments. Now having made the decision to stay in the old house also makes sense as long as the extra costs of that decision are acknowledged (such as working a little longer).

 

[Scrooge]

I think the "home as an asset" thing is as big a divider between how people think as almost any other hot topic discussion item we have here.  Whether its sentimentality or some ground up brain wiring that the home is "not on the table" is up for debate.

I think there may well be a rational component to this reluctance to include your primary residence in you list of assets, especially if you don't plan to move immediately after your ER.

First, it can be hard to predict what your home will be worth 20 years from now if/when you may need to tap into it. Second, you don't know how much it will cost you to own/rent elsewhere if you were to move in 2026. Third, moving out of your current house (which you presumably know well) and into another house or apartment may add extra layers of uncertainty, e.g. unpredictable and potentially expensive maintenance like roof replacement or, heaven forbid, foundation work. Fourth, there are various intangibles like living close to your children and grandchildren.

In the end, many folks' subconscious may say: "Oh, forget about it, there are just too many variables here! I'll plan for my retirement without factoring in the value of my house. If and when I face a total financial meltdown, then I'll re-evaluate my options."

Having said that, keeping your house in ER can also add a degree of uncertainty, e.g. rising real estate taxes, although probably not to the extent described above.

 

[Rich_by_the_Bay]

I think there may well be a rational component to this reluctance to include your primary residence in you list of assets, especially if you don't plan to move immediately after your ER.

Well said.

And welcome to the "ground up brain wiring" club .

 

[2B]

I am intentionally not paying off my mortgage so that I'll have more after tax cash after ER to manage my tax rates prior to SS. That means I'm including the cash to pay off my mortgage in my list of assets. I don't see where that's any different than if I included my home's value in my assets.

My assumption is that when I find it hard to keep up my house I'll move to some form of independent living or a close in townhome. At that point any home equity will be part of my liquid assets.

Money is money no matter where it's at or how it's invested.

 

[Scrooge]

I am intentionally not paying off my mortgage so that I'll have more after tax cash after ER to manage my tax rates prior to SS.  That means I'm including the cash to pay off my mortgage in my list of assets.  I don't see where that's any different than if I included my home's value in my assets.

If I understand your approach correctly, you have a certain amount of cash set aside that could otherwise be used to pay off your mortgage, right? And then you add that cash to your list of assets and add the outstanding amount of your mortgage to your list of liabilities, right?

If that is the case, then we are talking about your mortgage loan, which is typically unrelated to the future value of your home. You can predict your mortgage payments 20 years from now (unless it's an adjustable mortgage  ), but it's much harder to predict how much your place will sell for in 2026.

My assumption is that when I find it hard to keep up my house I'll move to some form of independent living or a close in townhome.  At that point any home equity will be part of my liquid assets.

Sure, that works, but the big unknown is what that "home equity" will be when you decide to sell. If I had sold my house 6 years ago, I would have received $200K less than if I were to sell it now. Who knows what it will be worth 6, much less 20, years from now?

Money is money no matter where it's at or how it's invested.

On the one hand, it is certainly true that money is highly fungible. It always makes me cringe when people say things like "Yes, we are spending quite a bit now. But then again, we are making good money and can afford it. Of course, we will have to spend a lot less once we retire and don't have that kind of income." As if money earned now could not be set aside and used in retirement!

On the other hand, the money that you have invested in your primary residence is effectively invested in a non-diversified, potentially volatile and illiquid asset. If you owned 2,000 shares of Microsoft and planned to hold it for the next 10-20 years, how confident would you be that you knew its eventual value?

 

[Scrooge]

And welcome to the "ground up brain wiring" club .

Far be it from me to turn a perfectly good joke into a serious discussion  but whenever I see "cold reason" collide with "ground up brain wiring", I become curious. The former is typically based on the analytical approach to reality and the latter is a shortcut based on digested and internalized experience of previous generations.

There is often something interesting about this collision. The least interesting cases are the ones where "cold reason" is 100% right and "ground up brain wiring" is 100% wrong because previous generations' experience is no longer applicable due to changing circumstances.

However, sometimes "cold reason" underestimates transaction costs or misses something important altogether and that can be a interesting area for further digging.

 

[Rich_by_the_Bay]

Far be it from me to turn a perfectly good joke into a serious discussion but whenever I see "cold reason" collide with "ground up brain wiring", I become curious.

It was just a little poke at CFB's earlier characterization of anyone who disagreed with his POV. We have lobbed this back and forth a few times - just good natured kidding. He's much more entertaining when we keep him on the defensive -- right, Ted? Worst part is that he's alot smarter than I am.

However, I agree with your insight: in stuff like this, rarely does a spreadsheet or pure arithmetic analysis capture all the decision factors. It still needs to pass the "feels OK to me" test among others. A bit like whether to pay off your mortgage, or whether there is a place for immediate annuities.

In this case, my sense is that there are two basic camps: those who feel home equity should be part of the early planning process because it can eventually be converted to cash, while the other camp knows that but feels there are so many uncertainties surrounding such a conversion years down the road (assuming you have no immediate plans to sell) that it is useless to try and plan around it now, just assume it won't happen (and if it does, deal with it then). Voila.