Lifetime income vs. net worth

[kjpliny]

I'm not sure why you wouldn't want to include home value in this exercise. My wife and I paid off our home as fast as we could, which limited the amount we could save in after tax investments. Living in the northeast, our home is a substantial percentage of our net worth. Our last home was purchased in cash, and we have put another $200k into it...also all cash.

[2017ish]

Quote:

Originally Posted by kjpliny I'm not sure why you wouldn't want to include home value in this exercise.... Living in the northeast, our home is a substantial percentage of our net worth....

My thought process is that we need to live somewhere and, when we sell, we'll buy another place in the same region with proceeds. Thus, not part of spendable funds. Plus, we have home on acreage in development path; valuation is tricky and I'm not willing to hire an appraiser to narrow the uncertainty.

If I were in your situation, and I planned eventually to move to a low cost of living area (and it is an easy to value house), I might include part, but not all, of the home value in my financial planning.

[MarieIG]

Quote:

Originally Posted by kjpliny I'm not sure why you wouldn't want to include home value in this exercise. My wife and I paid off our home as fast as we could, which limited the amount we could save in after tax investments. Living in the northeast, our home is a substantial percentage of our net worth. Our last home was purchased in cash, and we have put another $200k into it...also all cash.

For this exercise, yes I would include home equity from the marital residence (fair market value) in net worth. I did not bother with vehicles or other types of personal property.

(In my calculations - since I was only looking at my earnings, I decided to divide by 1/2 - so as to give spouse 1/2 the value.) I paid off the house, but DH paid other bills which allowed me to pay off the house . . DH was the higher earner. Of course, calculations could also been done as a couple.

This exercise - is not part of my financial plan for retirement, which considers investible assets and related income as one component, and puts housing costs in the expense column as there are significant costs involved in maintaining the home. With regard to net worth, for example, if I had purchased dirt cheap what turned out to be a very valuable piece of art that I never intended to sell, that would add to my net worth; but would not be part of my retirement plan (other than for estate purposes).

Edited: I re-read the initial post. I see that OP does not want home value included. Ok, more math. That removes approx. 13% from NW earned by me.

[Gumby]

Quote:

Originally Posted by kjpliny I'm not sure why you wouldn't want to include home value in this exercise. My wife and I paid off our home as fast as we could, which limited the amount we could save in after tax investments. Living in the northeast, our home is a substantial percentage of our net worth. Our last home was purchased in cash, and we have put another $200k into it...also all cash.

If we sold our home, we could rent a very nice apartment just from the property tax, insurance, utilities, maintenance and upkeep that we would no longer pay (especially the tax). We would not need to touch the sales proceeds. People who don't live around here cannot appreciate how steep the real property taxes are.

I consider our home to be source of funds for our eventual buy-in to a CCRC.

[ArmchairMillionaire23]

Quote:

Originally Posted by kjpliny I'm not sure why you wouldn't want to include home value in this exercise. My wife and I paid off our home as fast as we could, which limited the amount we could save in after tax investments. Living in the northeast, our home is a substantial percentage of our net worth. Our last home was purchased in cash, and we have put another $200k into it...also all cash.

I can see, for some who live in HCOL areas (God help me, I've started using abbreviations) that their home value could be a big part of their net worth. But referring back to The Millionaire Next Door, one of their 'rules' is:
"If you're not yet wealthy, but want to be someday, never purchase a home that requires a mortgage that is more than twice your household's total annual realized income." You mentioned being able to use cash for your home and all the improvements but not everybody can say that.
We bought our home 11 years ago for $42K. We put $12K down and took out a mortgage for $30K since our previous home hadn't sold yet and we didn't want to completely drain our emergency funds. We paid it off in 10 years. With the $20K of improvements we put into it we might get $70K if we want to sell it and live somewhere else after we retire. It's not a big part of our net worth.
So that's why I didn't include it in my comparison. But if someone has a paid-off home worth seven figures, and plans on retiring in my neck of the woods where they could find a place to live for under six figures, then by all means they could and should include it in their retirement planning. Like someone else on this site likes to say, "YMMV". (ah! another abbreviation!)

[kjpliny]

Quote:

Originally Posted by Gumby If we sold our home, we could rent a very nice apartment just from the property tax, insurance, utilities, maintenance and upkeep that we would no longer pay (especially the tax). We would not need to touch the sales proceeds. People who don't live around here cannot appreciate how steep the real property taxes are. I consider our home to be source of funds for our eventual buy-in to a CCRC.

I agree that the owning vs renting expenses can almost be a wash. Our property taxes are over $16k per year, and if you add utilities, insurance, landscaping and maintenance over the years, this can add up to a lot of money. Owning is nice since you control your environment and can do what you want to the property.

We expect to move to a lower cost of living area when we retire in a few years, so these costs should go down quite a bit depending on where we move. The option to sell the house and rent in a new area for a bit might also have benefits, where we're not necessarily locked into a large purchase if we find the area or lifestyle isn't what we expected. This large asset definitely comes into our calculations when considering retirement and investing options.

[Perryinva]

If I followed the no mortgage more than twice your yearly income rule, I sure as $hit wouldn’t be retired already! Did anyone here actually follow that advice? My first home purchase, in 1985 at age 26, carried an almost 4 times my income mortgage & the rates back then were horrible! Plus I had too much consumer debt on top of that. My initial down payment back then was only $10k and I carried PMI as well. I used the equity and appreciation from that and every subsequent house (6) to upscale in size & cost, and never paid PMI again. Even today I carry a mortgage that is $100k more than twice my yearly income. But my equity in the house is more than 3 times what the total cost of my first house was and 3 times larger square footage and I never once had to come up with more cash to purchase the next home. They essentially paid for themselves. (Of course, there was the occasional short term transfers amongst accounts until the previous home sold if needed. And on the last home I went for a 15 year mortgage at the last refi that was maybe 7 years mature.) By keeping more invested, I can easily pay off this place anytime, & with no tax consequences either. Of course, I did always purchase homes requiring sweat equity to appreciate like they did, until this one, and always bought & remodeled with resale in mind, and always in predictably great selling areas. After my first home, none were on the market for more than 3 weeks, and most sold in days for more than asking. Some luck was involved but really how much since I followed the same formula for 35 years.

[Andre1969]

I've kept track of lifetime W2 earnings, and it looks like, as of the end of 2019, my investible assets are at 1.28x W2 earnings.

Not too shabby, I guess. My first year of W2 earnings is 1986, so 2020 will be my 35th year...no more years with zeroes in the calculations! So, 2021 will replace one of those crap early years. Although, ironically, 2021 is when I'm going to retire, if I get my way.

[Gumby]

Quote:

Originally Posted by Perryinva If I followed the no mortgage more than twice your yearly income rule, I sure as $hit wouldn’t be retired already! Did anyone here actually follow that advice? ...

We've only ever had this one house, but the initial mortgage was just twice our income at the time we bought it. We thought that was prudent. Although we refinanced 5 times for better rates, we never took any cash out. We also paid it down aggressively over the years and were mortgage free 23 years after we started. In retrospect, given that our home has probably increased in value at little over the rate of inflation, I think it was wise. We were never 'house poor" and we had plenty of money to invest in equities, which usually did better over that period.

[finnski1]

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Originally Posted by Perryinva If I followed the no mortgage more than twice your yearly income rule, I sure as $hit wouldn’t be retired already! Did anyone here actually follow that advice?

We did but mostly by coincidence.
1st house in 1990 was just under 2x our household income and 2nd and last house (which we built) was only about 1.5x.

[LRDave]

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Originally Posted by Gumby I'm like Jimmy Buffett - "I made enough money to buy Miami, but I pissed it away so fast." If you don't count the present value of our two COLA'd pensions, when we retired in 2019 our net worth was about 50% of our lifetime earnings.

Gumby looks at 40

[chassis]

@ArmchairMillionaire23 The idea in the original post is a good one to help setting net worth target at retirement. And, it is one of many ways to set a target.

Over my investing career of 30 years, I have used several target setting methodologies. Lately I like the calculators offered by any of the top tier financial firms. Vanguard, Fidelity and Merrill Lynch are several examples. Portfolio success % analysis and long term income statement modeling are also good in my view. Income statement modelling forces you to have some comprehension of living expenses and taxes, which are important parts of financial planning.

One statistic, metric or KPI does not tell the whole story. Use several tools to guide your path.

[Andre1969]

My first mortgage was in 1994, about 3.4x my W2 wages for that year.
My second one was actually an HELOC, on a family property that I "inherited" early when Grandmom put my name on the title. When I first took it out in 2005, the limit was about 3.3x my W2 wages that year. By the time it converted to a fixed mortgage in 2015 (and I had it maxed out, borrowing on the cheap, and investing), it was about 2.3x my W2 wages.

When I bought my current house in 2018, the mortgage was about 5.8x. As interest rates dropped though, I ended up refinancing, twice, with the second one just a couple months ago. It'll probably come in around 5.3x my W2 income this year.

[Perryinva]

I guess I never imagined that anyone would buy, live in, work from and retire in the same house or even 2. That is so far outside my realm of possible living, I am quite surprised! Maybe someone should start a poll on that, if there isn’t already one done.

[HarveyS]

Quote:

Originally Posted by Perryinva If I followed the no mortgage more than twice your yearly income rule, I sure as $hit wouldn’t be retired already! Did anyone here actually follow that advice?

I did, and I feel that is one reason why I am able to be retired today. I've owned 3 houses and everyone one of them had a purchase price (not mortgage) less than 2X my gross pay. We did not include spouse earnings as the plan was for DW to stay home with kids. This served us well as we unfortunately lived in three areas with zero home appreciation over the time we owned the homes.
I can see the benefit of leverage if you are getting appreciation. In my case, in three high property tax states, leverage would have raised my expenses and hindered my savings ability.

[calmloki]

Fun but the devil's in the details. I made diddly squat working for others and got into rental real estate (IRS "unearned income") early. If I subtract our homes from our net worth and use the tax man's "real market" or "true cash" value for our rental property and then reduce that property value by a 1/3 for tax at sale and then divide THAT number by two because we are a couple it works out that my lifetime earnings are 4.2% of my individual net worth. No Porsche or expensive dive vacations though.. OH - and 70YO here.

[NgineER]

We are at 94% lifetime income vs. net worth. But our rental properties are included in the net worth calculation. To be fair, they were all purchased in the last five years, so not too much recapture and taxes yet. Also valuing them based on 100xmonthly rent which based on the last three years of market development is likely 20% below market value.

[Time2]

Quote:

Originally Posted by Perryinva I guess I never imagined that anyone would buy, live in, work from and retire in the same house or even 2. That is so far outside my realm of possible living, I am quite surprised! Maybe someone should start a poll on that, if there isn’t already one done.

My parents did! Bought in 1955 for $6,000, borrowed $1,000 from the seller years later to add on two rooms, (one was my bedroom). Mom died in 2012, now my sister lives in it.

[ArmchairMillionaire23]

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Originally Posted by Time2 My parents did! Bought in 1955 for $6,000, borrowed $1,000 from the seller years later to add on two rooms, (one was my bedroom). Mom died in 2012, now my sister lives in it.

Thanks for all the greatly differing replies so far. It's neat to see such diversity among households at varying stages of (pre) retirement and from so many different locations and between contrasting costs-of-living areas.

And this isn't the only metric I'm basing retirement. This was just a fun idea I had. FWIW, my liquid net worth vs. my lifetime earnings ratio was around .904 at the end of 2019 (the latest SSI info I have)
Like mentioned before, I'm hoping it will be up to around 1.2 to 1.3 around the time I plan to retire in 2025 at 54-55.

[Gumby]

Quote:

Originally Posted by LRDave Gumby looks at 40

Sadly, that point is long past. But I am still a pirate.