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Question about Calculating Primary Residence into Portfolio
Old 04-26-2023, 10:14 AM   #1
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Question about Calculating Primary Residence into Portfolio

Hi all,

I have a few questions I was hoping to get some guidance on...I am new to the forum and I have been working on calculating the value of my current portfolio and expenses and depending on how I value a few items, I've either reached financial independence or I have a few years of work ahead of me

My questions concern my primary residence:
1. Should I consider the appraised value of my primary residence part of my portfolio? (currently I'm not considering it part of my current portfolio)
2. If I don't consider primary residence part of my portfolio, should I deduct the outstanding balance on my mortgage from my portfolio (current approach is to not consider my primary residence as part of my portfolio AND to not subtract the outstanding balance on my mortgage from my overall net worth)
3. Should I consider the monthly mortgage payment as a monthly expense? (currently I'm considering it as a monthly expense)

If 1. I don't consider the value of my primary residence and 2. ignore the outstanding balance on my mortgage and 3. include monthly mortgage payment as a monthly expense, then I've reached FI using the 4% rule.

However, there are lots of ways to look at this. If I subtract the loan from my net worth, then I have about $250K to go. If I don't consider the monthly mortgage as an expense, then I am about $200K beyond financial independence.

I realize it doesn't matter much either way, but I'm curious to know how this community would consider these variables. Thanks for your help!

Ely
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Old 04-26-2023, 10:29 AM   #2
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... However, there are lots of ways to look at this. ... I realize it doesn't matter much either way, but I'm curious to know how this community would consider these variables. ...
Houses go into the net worth statement as do non-margin debts like mortgages. Portfolio is only investments and any margin loans. But like you say, it doesn't matter much. I had to update the documentation on a standby HELOC a couple of years ago; that's the last time I even looked at net worth.
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Old 04-26-2023, 10:47 AM   #3
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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.
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Old 04-26-2023, 11:04 AM   #4
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I don't count primary residence in my net worth to decide retirement. ...
Agreed. The portfolio is retirement. Net worth has little use except in banking relationships.
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Old 04-26-2023, 11:14 AM   #5
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Thanks all - so in the portfolio you wouldn't consider primary residence nor would you consider the mortgage loan, correct?
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Old 04-26-2023, 11:15 AM   #6
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and you WOULD consider the mortgage payment in monthly expenses, correct?
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Old 04-26-2023, 11:22 AM   #7
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I think the answer depends on what conclusion you are looking to reach.

Your monthly mortgage and taxes need to be considered in your income/expense calculations. The value of your real estate and subsequent mortgage balance need to be reflected on your balance sheet, but as mentioned, that's a statement of net worth, not so much "portfolio."

I think the answer to your question depends on the question you are asking. What are you trying to accomplish?
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Old 04-26-2023, 11:24 AM   #8
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Originally Posted by elycohn View Post
Hi all,

I have a few questions I was hoping to get some guidance on...I am new to the forum and I have been working on calculating the value of my current portfolio and expenses and depending on how I value a few items, I've either reached financial independence or I have a few years of work ahead of me

My questions concern my primary residence:
1. Should I consider the appraised value of my primary residence part of my portfolio? (currently I'm not considering it part of my current portfolio)
2. If I don't consider primary residence part of my portfolio, should I deduct the outstanding balance on my mortgage from my portfolio (current approach is to not consider my primary residence as part of my portfolio AND to not subtract the outstanding balance on my mortgage from my overall net worth)
3. Should I consider the monthly mortgage payment as a monthly expense? (currently I'm considering it as a monthly expense)

If 1. I don't consider the value of my primary residence and 2. ignore the outstanding balance on my mortgage and 3. include monthly mortgage payment as a monthly expense, then I've reached FI using the 4% rule.

However, there are lots of ways to look at this. If I subtract the loan from my net worth, then I have about $250K to go. If I don't consider the monthly mortgage as an expense, then I am about $200K beyond financial independence.

I realize it doesn't matter much either way, but I'm curious to know how this community would consider these variables. Thanks for your help!

Ely
Youíre overthinking this. The primary residence is part of your net worth but not part of your portfolio. Your mortgage payment is part of your monthly expenses. If your portfolio provides enough to meet your expenses and you can handle unplanned expenses, like a new car or roof, then yes, you are financially independent.
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Old 04-26-2023, 11:28 AM   #9
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Thanks KOQ - very helpful. Right now I'm really trying to determine if I am freed from the need to take on high income jobs that I don't get much fulfillment from

One other question - in the income/expense calculation, would you include passive income that you receive now but may not receive 20 years from now? I'm thinking things like rental income from an investment property. I haven't included that income in my calculation of monthly expenses.
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Old 04-26-2023, 11:52 AM   #10
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20 years from now? What is the probability you will continue to receive the passive income? I can't say what you would do because I'm not in your head and don't know your circumstance.

I tend to view income due to portfolio growth conservatively, and growth of expenses aggressively. Plan for the worst, hope for the best.

Direct answer to your question, I think one way or the other the rental property (as an example) gets included, somewhere.

You either have the income in 20 years, or by then you've sold the asset and potentially have invested the proceeds, which hopefully is spinning off income from dividends or interest in a saving account.

You can forecast your future using any assumption you'd like to consider. It's your forecast.
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Old 04-26-2023, 11:59 AM   #11
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Thanks all - so in the portfolio you wouldn't consider primary residence nor would you consider the mortgage loan, correct?
No. The reason is the house does not generate retirement income. And you will live somewhere always.

But if you plan to RENT in retirement, then you could include the property value net of the mortgage in your net retirement assets.

Non-home net worth is the metric.

(I recall when I first realized that as a young guy I was bummed since most my net worth was in the home).
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Old 04-26-2023, 12:00 PM   #12
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... would you include passive income that you receive now but may not receive 20 years from now? ...
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... You can forecast your future using any assumption you'd like to consider. It's your forecast.
Nobody knows what will happen over 20 years. Probably the biggest unknown is inflation and whether the recent 2-3% honeymoon is predictive or anomalous. WADR, @elycohn you are tiptoeing towards a classic "Garbage in, gospel out" situation. Be careful.
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Old 04-26-2023, 12:02 PM   #13
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and you WOULD consider the mortgage payment in monthly expenses, correct?
Yes, I would. I could quibble and say you can possibly exclude the part that repays principal, since that is a payment that increases your net worth.

But for budget, you still need to be able to pay it.
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Old 04-26-2023, 12:18 PM   #14
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Net worth is net worth and cash flow is cash flow. House and mortgages are part of your net worth. Your NW may or may not produce cash flows that contribute to your retirement cash flow analysis, depending what assets your NW is invested in.
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Old 04-26-2023, 12:27 PM   #15
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I would not count primary home in "portfolio". If you have any longish term left on mortgage, say 15+ years, then I would count mortgage payment as a regular expense. I personally would not even do FI calculations before primary home is paid off.
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Old 04-26-2023, 12:36 PM   #16
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3. I still had a mortgage when I retired and considered the payment an expense. I figured on a a Lean FIRE so did consider the underlying value as an option. I assumed I would have to downsize or trade laterally to a two family for the income. (Mr. Market was very friendly and Iím still here though.)
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Old 04-26-2023, 12:55 PM   #17
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One other question - in the income/expense calculation, would you include passive income that you receive now but may not receive 20 years from now? I'm thinking things like rental income from an investment property. I haven't included that income in my calculation of monthly expenses.
IMHO, the answer is "No, I would not." My approach has always been to make very conservative estimates and assumptions when entering my data into tools such as FIRECalc. For example, I enter 50% of my expected Social Security income, I enter $0 for inheritance, I don't include any of my DW's current or projected income, etc. I then look at the amount FIRECalc says I can spend at the 99% historical confidence level and reduce that by 15% to get my personal "safe spend" number.
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Old 04-26-2023, 02:39 PM   #18
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The main reason I don't count my house as part of my portfolio is that I can't sell off bits and pieces of it as and when I need money to pay my monthly bills. It is, however, part of my net worth.
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Old 04-26-2023, 05:00 PM   #19
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The main reason I don't count my house as part of my portfolio is that I can't sell off bits and pieces of it as and when I need money to pay my monthly bills. It is, however, part of my net worth.

Isn't that more or less in effect what a reverse mortgage does?


I would not count the house, I have to live somewhere. I would count mortgage payments in expenses if I had them. Same Reason.



I like not having a mortgage, it knocks over $1k a month off our expenses.
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Question about Calculating Primary Residence into Portfolio
Old 04-26-2023, 05:13 PM   #20
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Question about Calculating Primary Residence into Portfolio

In my cash flow analysis I do not assume my house produces any cash and thus cash flow. I also assume I carry my mortgage for the full 30 years, since itís 2.5% fixed rate.

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 oneís net worth weird. Add up the value of everything you legally own, and subtract all legal debts. Thatís your NW.

Cash flow projections (aka analyses ) which are used in retirement planning, are a whole different animal. They are extremely assumption based about what you think will happen in the future. How you manage you assets (captured in your net worth) will determine how much future cash flow they may, or may not, contribute to your cash flow projection.
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