Question about Calculating Primary Residence into Portfolio

[donheff]

Skimming through it sounds like most people are advising you as I would to look at expenses and sources of funds to meet them. Your portfolio (and pensions, SS, etc.) are your sources of funds. Your mortgage is an expense, but one that will stop at some point. Your house is a static asset but a very useful one as it gives you a rent free place to live (after considering taxes and maintenance).

Unless you plan to sell and switch to rent in the foreseeable near term, leave the house equity out of the ER equation. It's still in your net worth since it will pass to your beneficiaries when you kick but won't be a source of funds unless you are planning on a reverse mortgage in which case, you are probably pulling the plug to early.

If you think in those terms it is pretty easy to make the calculations. Take a hard eyed look at expenses over a few years back and figure out what they will be if you retire. Taxes will continue but will be quite different. No payroll taxes, lower income taxes over the short term, ramping back up when you take RMDs. Once you have the expenses figured out take the same hard eyed look at sources of funds. Pensions - when, how much, any COLA? SS - when and how much? Portfolio - how much, how diversified, what is your view on a SWR? That last figure, SWR from your portfolio, will answer whether your are in good shape to ER. Take some time on that one.

 

[padlock]

Not to be a contrarian, but I do consider a percentage of our primary residence as part of our retirement portfolio. That's because our current house is too big for empty nesters, and we will definitely be downsizing in the future.

Whether you should or not really depends on what you plan to do in the future.

 

[Montecfo]

But of course my net worth includes the value of my house and my mortgage. They legally are mine and I need to manage them. I always find the question what to include in one’s net worth weird. Add up the value of everything you legally own, and subtract all legal debts. That’s your NW.

The OP asked about whether to include his home in his portfolio not his net worth.

 

[skyking1]

Hopefully it does not come to that for you, or me.
But is an alternative to think on if it does. You would also be offloading responsibility for the maintenance.

This is how I view the home we are building. It is the place to live until I get tired of the maintenance. If our fortunes are up when that happens, perhaps we will extend our time there a bit by paying for the maintenance.
If not, it will make for a considerable nest egg addition for a rental lifestyle.

 

[Car-Guy]

I've always counted my homes/properties in my NW. (Even my primary home) Ex. If I have a million dollar+ home/property, I can sell it off (downsize) and buy/rent something else for a lot less and have the rest in cash. To me, NW is all assets minus liabilities. Pretty simple. Where it gets controversial (to me anyway), is should you count things like annuities, or not.

 

[rmorris50]

The OP asked about whether to include his home in his portfolio not his net worth.

I interpret portfolio to be your asset inventory which is captured as part of your NW tracking. The question really should be should he assume his home produces future cash flows to support his retirement. Which could be done a number of different ways. Only OP can answer his own question.

 

[rmorris50]

I've always counted my homes/properties in my NW. (Even my primary home) Ex. If I have a million dollar+ home/property, I can sell it off (downsize) and buy/rent something else for a lot less and have the rest in cash. To me, NW is all assets minus liabilities. Pretty simple. Where it gets controversial (to me) is should you count things like annuities, or not.

I kinda answer the question this way - do you have a legal asset in your control that you can sell. So I would not include a pension unless it has a cash value you can roll to an IRA. I would not also include social security or alimony in NW. Nor a SPIA with no cash value. But I would include those cash flows in my retirement projection analysis.

 

[Car-Guy]

^^^^
I hear you but where it gets to be a question in my mind is, "for a very simple example", two guys retire today from the same company. The first guy takes a lump sum retirement settlement for $1m, the second guy takes the lifetime annuity. The first guy is now a millionaire (NW), does the second guy have no NW.

 

[OldShooter]

^^^^
I hear you but where it gets to be a question in my mind is, "for a very simple example", two guys retire today from the same company. The first guy takes a lump sum retirement settlement for $1m, the second guy takes the lifetime annuity. The first guy is now a millionaire (NW), does the second guy have no NW.

The second guy's NW is the NPV of the annuity, probably around same as the cash option $1M.

 

[rmorris50]

^^^^
I hear you but where it gets to be a question in my mind is, "for a very simple example", two guys retire today from the same company. The first guy takes a lump sum retirement settlement for $1m, the second guy takes the lifetime annuity, w/o survivorship. The first guy is now a millionaire the second guy has no NW.

That would be correct! My mom lives strictly on social security. She has zero NW but she does have cash flow. It’s def possible to be worth nothing but have CF.

This is why it’s really useful to have both a NW calculation and a separate cash flow analysis. In my mind it’s hard to have a complete financial picture without both.

 

[W2R]

In a sense, I suppose it does. But if it ever came to that, I would just sell the whole thing outright and move into an apartment. The avoided property taxes, insurance, utilities and maintenance alone would rent me a very nice place. The sale proceeds would just be icing on the cake.

This post is interesting! I wondered if it would apply for me, so.....

I just added up my annual property taxes, insurance (homeowners, wind&hail for hurricanes, flood), utilities (electricity, water, natural gas), and maintenance. After dividing by 12 (months), all of this comes to a little less than $800/month. (I admit that I didn't include the cost of my new roof last year, which should last longer than I'll live).

So, what can I rent for $800/month in my suburb? There are almost no apartments available for that price, and those that are under $1000/month, are not "very nice place"s; they are ~500sf one room studio apartments, all in seriously dangerous crime-ridden areas, with no assigned parking or laundry.

I have no doubt that what you say is true! That said, I am glad I don't have to rent an apartment here these days.

Thanks, this was a fun exercise! Math/arithmetic helps keep my mental capabilities up to speed as I age.

As for the original question, I don't count my home's value in my portfolio; I regard it as part of my net worth. I don't use my net worth calculation for anything except posts on this forum.

 

[Gumby]

This post is interesting! I wondered if it would apply for me, so.....

I just added up my annual property taxes, insurance (homeowners, wind&hail for hurricanes, flood), utilities (electricity, water, natural gas), and maintenance. After dividing by 12 (months), all of this comes to a little less than $800/month. (I admit that I didn't include the cost of my new roof last year, which should last longer than I'll live).

So, what can I rent for $800/month in my suburb? There are almost no apartments available for that price, and those that are under $1000/month, are not "very nice place"s; they are ~500sf one room studio apartments, all in seriously dangerous crime-ridden areas, with no assigned parking or laundry.

I have no doubt that what you say is true! That said, I am glad I don't have to rent an apartment here these days.

Thanks, this was a fun exercise!

To put some numbers to it: Our yearly property tax is $13,832, homeowner's insurance is $4320, basic utilities (electric, natural gas, water) are ~$7000, maintenance and repair varies widely on a 165 year old house, but averages no less than $5000/year over the long haul. So that's $30k per year or $2500 per month. That would rent a 900+ sqft 2 BR apartment in the new apartment complex about three blocks from my house.

 

[rmorris50]

The second guy's NW is the NPV of the annuity, probably around same as the cash option $1M.

The more I think about it the more I think it makes sense to include the NPV of the annuity in your net worth. You have a legally binding contract to the payments. Heck in theory you could probably even securitize the payouts to a third party for a lump sum. But given all that it’s a very illiquid asset. Some companies do allow acceleration of the payouts in certain non medical situations - think tornado blows down your house.

 

[W2R]

To put some numbers to it: Our yearly property tax is $13,832, homeowner's insurance is $4320, basic utilities (electric, natural gas, water) are ~$7000, maintenance and repair varies widely on a 165 year old house, but averages no less than $5000/year over the long haul. So that's $30k per year or $2500 per month. That would rent a 900+ sqft 2 BR apartment in the new apartment complex about three blocks from my house.

For me, in 2022:

$2,121 property tax
$3,561 house insurance (flood, homeowners, wind&hail)
$2,072 utilities (electric, natural gas, water)
$618 maintenance and repairs

Total is $8,373/year, or $698/month

So I'd have less than $700/month for rent, not less than $800/month! Eek. If I divide the roof cost by 20 (assuming it would last 20 years), that only adds $50/month so the results are the same. apartments dot com lists no apartments in my suburb that are that cheap, and only one 450 sf studio with rent that cheap in a not so good neighborhood in the next suburb over.

Sounds like rentals are a much better deal in your part of the country than they are, here!

 

[lemming]

In mind games I have played to myself
I never considered my home as part of my retirement number BUT always felt happy about a positive equity number.
I did not pay off my mortgage when I retired. (It was sudden and for ill health reasons)
I felt cash poor at the time and stripping a lump sum out to reduce monthly expenses seemed wrong. My interest payments were under 100 per month and the tax consequences of a sale of stock would have been higher that that.
If your current mortgage is high enough that you would be underwater in a bad market I would consider penciling in that number against your net worth.

 

[Montecfo]

The more I think about it the more I think it makes sense to include the NPV of the annuity in your net worth. You have a legally binding contract to the payments. Heck in theory you could probably even securitize the payouts to a third party for a lump sum. But given all that it’s a very illiquid asset. Some companies do allow acceleration of the payouts in certain non medical situations - think tornado blows down your house.

Present value. Yes they are contracted. We went through this some time ago here on the board and discovered they are not easy to sell or transfer, they are not an asset on strict accounting rules etc.

If it does not end on death, then it would appear to have asset value.

But of course, most of us view ourselves as a "going concern" and thus for practical purposes it can make sense to value it as an asset on some basis, with a life equal to life expectancy.

 

[gayl]

No. The reason is the house does not generate retirement income. And you will live somewhere always.

Agreed & in that my kids live in this city, I'll be staying here. Fortunately I burned my mortgage a while back so I just consider my property tax / insurance.

 

[TheWizard]

OP mentions he presently meets the 4% swr for retirement income and has to work another few years to get to 3.5%.

I agree with most preceding postings on primary residence value, so my comment is for the OP not to aim too low on how much monthly income to target in retirement.

Depending on how you total up your current expenses just prior to retirement, you might want to target a DESIRED income of 50% more. This allows a new car every so often as well as more travel in retirement with all that free time...

 

[rayvt]

I like not having a mortgage, it knocks over $1k a month off our expenses.

A mortgage taken out or refi'ed into in the last few years costs about 2.5%. Currently many banks are paying 4.5%-5% on a savings account.

Foregoing $1500 a month in order to avoid a $1000 expense doesn't seem like a great plan.

 

[Montecfo]

Low cost mortgages make a lot of sense, even in retirement.

I have one. 2.69%. No plans to pay it off.

It is an ARM.

 

[Retired Expat]

I don't count primary residence in my net worth to decide retirement.

Take the simple case, person has a $1.25M home, and $100K in savings, no pension, I don't think they can retire. But a person with a 100K home and $1.25M in savings could.

Remember the 4% "rule" was based on people retiring at age 65, if you retire many years earlier then it's more like a 3.5% rule.

I think people are missing the mark on this. Your house may or may not be an investment asset depending your plans. If you are close to retirement and intend to sell and go live on a small country farm that costs a fraction of your current home and cost of living is much less than this is very much part of your retirement assets. If you are young and expect you will move and upgrade a bunch of times still I wouldn’t treat this as a “retirement asset”. Except perhaps in your very long term planning with the caveat that the value may crash like a stone as well.

I sold my big house in LA and moved to Uruguay. The surplus got invested and grew quite a bit. I always knew I would be using the money in the house as a retirement asset so always included it in my calculations.

If preparing a balance sheet the house is an asset, the mortgage a liability. If you just want a Net worth you take the sale value less the mortgage and any costs anticipated in selling. There are lots of ways to slice it but they all pretty much get to the same place