what all do you consider in your portfolio for SWR calculations

[fisherman]

If you owned two homes and planned to sell one several years down the road, 10+, would you consider its value in you portfolio for SWR calculations? I would think the only safe way to do this would be to use the tax appraisal and then not inflate its value so that it might still be worth at least that amount when you actually sold it. Additionally I would assume the SWR for the portfolio would have to still be around 4% without factoring the value of the second home so that the account is not depleted to quickly.

The problem with the above assumptions is a 4% SWR without the second homes value factored in becomes a very small SWR once the second home is sold. I realize that provides a future cushion but is it at the expense of current possible living?

Thanks in advance for any help in clarifying this.

 

[W2R]

If you owned two homes and planned to sell one several years down the road, 10+, would you consider its value in you portfolio for SWR calculations? I would think the only safe way to do this would be to use the tax appraisal and then not inflate its value so that it might still be worth at least that amount when you actually sold it. Additionally I would assume the SWR for the portfolio would have to still be around 4% without factoring the value of the second home so that the account is not depleted to quickly.

The problem with the above assumptions is a 4% SWR without the second homes value factored in becomes a very small SWR once the second home is sold. I realize that provides a future cushion but is it at the expense of current possible living?

Thanks in advance for any help in clarifying this.

I would not include it, though I think most people here probably would.

The reason I would not include it is that I believe most homeowners (including myself, I suppose) have a highly inflated opinion of what their homes are worth. For that reason, I think that getting an completely objective and correct value for a home is very difficult without selling it. With something like a mutual fund or REIT, you know exactly what it is worth from day to day, so I would include them whereas I would not include the house. YMMV!

 

[youbet]

All you can really do is value your total net worth today using "reasonable" numbers and go from there. In your case, add your second home to your investment portfolio, compare that to your target, and you'll know how far you have to go. The value of the second home will fluctuate and the value of the holdings in your investment portfolio will fluctuate.......and there's not a heck of a lot we can do about that beyond prudent diversification.

The value of your real and financial assets at RE time is what really counts. You can have a plan to get there (and hopefully do), but only time will tell if the real estate market and the financial markets fully support your plan or not. So, be conservative and flexible. I hope your real estate assets appreciate beyond your wildest dreams, but plan for less and hopefully be pleasantly surprised.

 

[rocketdog]

I don't think I would include it either. You could compute the SWR without it, and when you do sell the house you can take the 4% SWR from the sale price and tack that on to the SWR from the original portfolio. That way you won't deplete the original portfolio with an unsustainable SWR, but you will enjoy the benefits of the extra income when you sell the place.
We actually have a bunch of land we intend to sell some day, and that's how we'll be handling it, I think.

 

[twaddle]

I would think the only safe way to do this would be to use the tax appraisal and then not inflate its value so that it might still be worth at least that amount when you actually sold it.

Yeah, that's basically what I do -- use an ultraconservative valuation since it's an illiquid investment. I also include it as part of my asset allocation, and I have a specific target for real assets in my allocation.

 

[cute fuzzy bunny]

Every net worth calculator I've ever seen includes reasonably valued real estate holdings, cars and personal belongings.

I can sell a house. Rent it. Take a loan on it. Reverse mortgage it.

Tough to make it much more liquid than just writing a check against a HELOC or having someone come to your house with some papers, then pumping your checking account full of money.

My last emergency plan should we run out of money, social security dries up, our pensions falter and we live just too darn long is to reverse mortgage the house or sell it and rent. If none of that happens, Gabe can have the house.

 

[donheff]

Why not make a conservative estimate of when you would sell it and how much it will be worth and plug that number as a one time windfall into Firecalc. Since you plan to sell it it is an investment - just not one you plan to tap today.

 

[rayvt]

I think that including your house in the SWR calculation is mainly a means of adding a phantom value in order to justify a higher withdrawal rate. We are not talking net worth, we are talking of an investment portfolio to get your living expenses from. You can't live in your house and withdraw money from it at the same time--it's not a liquid asset. You have to live somewhere, and if you are living in the house you are already "consuming" it, so including its value in the SWR calculation is double-counting.

However, the original question was "how to I account for an illiquid asset that won't become liquid until several years down the road?" I would say to be very, very conservative. You never know when the country might decide to extend a street right along your backyard----which happened in my old neighrborhood 2 years ago. Or the land behind you gets rezoned for a shopping center.

 

[RunningBum]

Don't forget to include real estate commission, and any income tax if the second house doesn't qualify as a primary residence (live 2 of the last 5 years in it). Be very conservative, and based on that conservative price make sure you really know what your final cut will be.

Like CFB, I've got my primary house paid off, and it's much bigger than I need, so my final emergency plan is to sell it and live smaller. But I don't include it's value in my SWR calcs.

 

[cute fuzzy bunny]

.You can't live in your house and withdraw money from it at the same time--it's not a liquid asset..

You may certainly live in a house and withdraw money from it, as I've described. You may rent part of it out, withdraw an amount under a home equity line of credit, establish a first, second or third mortgage, or take a reverse mortgage on it.

But lets be clear. You're 80 years old, living in a paid off house, and are running low on cash. Do you turn off the lights and the gas and sit there waiting for someone to come and ask you for the keys?

I think not.

We've now established that there is value, the primary issue at this point is determining the means and rates of payment.

Its certainly not the first, second, third or fourth option for an early retiree. But do you exclude it and work an extra 7-10 years to be certain of a plan that works until you're 100 because one finds putting the home on the list of rentable or salable, valued items distasteful? Would it be simply implausible to sell your $250,000 home and rent for $1200 a month in any one of 20 million perfectly lovely homes in 20 million lovely areas?

What inhibits one from choosing a "payments for life" reverse mortgage on their property, if it means a lifetime of living in the home, paying the taxes and utility bills and eating well?

My home is worth roughly a half million, and will probably pace inflation to a reasonable level over the next 30-40 years. I can live off of that for 20 years quite comfortably. Easy decision.

Hope I never have to make it...

 

[bamsphd]

If you owned two homes and planned to sell one several years down the road, 10+, would you consider its value in you portfolio for SWR calculations?

Are you renting out the second home, or using it for your own enjoyment?

If you are already renting out the second home, then it goes in the SWR rate portfolio. It is part of the pile of assets you have working for you.

If you are keeping the second house for your own enjoyment, then I would go with the rule that "a luxury once sampled becomes a necessity." The luxury of a second house enjoyed for 10+ years will definitely be perceived as a necessity at the end of those 10+ years! So no, I would not count that house as part of my SWR portfolio.

I might sneak it in as a contingency plan to finance an extended nursing home stay for the last spouse alive. That could save some long term care insurance premiums, which would lower the retirement budget requirements.

When/if the day comes that you downsize one or both houses, assuming you add the surplus money to your SWR portfolio, then you can recalculate your SWR. Though you might also need to add long term care insurance to your budget!

Obviously I am not in the group that advocates planning on a lower standard of living as one ages. With wages having historically grown faster than the CPI, using a CPI adjusted SWR will probably slowly lower my relative standard of living anyway. I'm not going to plan on intentionally lowering my absolute standard of living as well.

 

[fisherman]

Thanks for all the great advice

The opinions expressed are most of the different thoughts I had also. It really helps to have such good feed back.

A little more info the 2nd home is paid for and we rent it out as a vacation rental since it is on a lake. It rents quite well that way and we could rent it full time if we ever need to or choose to. I have a few other rentals so being a landlord is something I am use to doing.

I have looked at it as a one time windfall in the future and also considered selling our primary home and moving to the lake at a later date. This is the most likely option and one that will help us with capital gains also.

Since we are renting it I am for now just including the rental income and not the value of the 2nd home in the portfolio calculation. This seems to be the safest way.

If we stop renting it then I will seriously consider moving or selling if the market is good at that time.

Thank you all for your great advice.

 

[kcowan]

Many people retire and move to their lakefront home, downsizing their city home and maybe just maintaining a condo for the winter months. So taking the difference between your current home and a condo then netting the rental might be very conservative if that is your plan.