How to account for housing expense?

[ordway]

I've been trying to figure out how much my husband and I need to ER. Figuring on pulling out an annual income of $30,000, I figured somewhere in the vicinity of $700K would probably be a reasonable number to shoot for. We don't have a mortgage now (we rent) but when we ER I do want to own a house. I was figuring on accounting for that cost pretty much the same way as our rent now - just as a budget item, part of what adds up to the $30k of expenses.

On the other hand, my husband pointed out that in order to buy a house, we'd need to put a down payment down, so that's $50K or more that would get taken out of our nest egg (and so would not be earning money for us like the rest of the nest egg), and therefore it would set us back - so we really need more money to retire than the straight "how much nest egg to get $X income" would suggest.

It seems to me, though, that something doesn't click there. After all, that down payment is having the effect of lowering one's monthly mortgage payments, right? So you could consider that it's earning the rate of the mortgage for you. Or am I totally confused?

In any case, I'd like any thoughts on how a house purchase affects plans for ER.

(I still think that with saving $60-80K per year, and steadily investing in a broadly diversified portfolio, that it should be possible to amass our necessary ER sum in about 5 years. But with the market going sideways and/or down this year, it's discouraging.)

 

[Bob_Smith]

Holly, if it were me I'd subtract the cost of the house from the total nest egg. In other words, if I had $700,000 total and wanted to buy a house for $150,000, in my mind I'd have a retirement nest egg of $550,000.

I have a slightly similar situation. Although I already own a house, I plan to upgrade to a house that costs about $60,000 more. I continued working until I had the extra $60,000, and I plan to pay cash for the house. I have absolutely no desire to have a mortgage. I'm done paying interest. There are many ways to look at this, but that's my 2 cents.

 

[BigMoneyJim]

Holly, the down payment hypothetically does earn returns via appreciation in value.

I think the answers to your question should be interesting. I think it boils down to whether you consider your house a spendable asset.

If I read you right, you are planning on a retirement where you have a monthly mortgage payment? Either way the "Should I pay off the house" threads might be useful for you. There are two or three bouncing around somewhere.

 

[ordway]

I've been reading the various house threads with interest - there's a lot to think about!

In our ER situation, I would be considering the house as a place to live, not an appreciating asset (because in order to cash out, I would have to move, which would defeat the purpose of settling down, no?)

Bob_Smith, in the case of subtracting the total house cost from the total nest egg, in that case I would also calculate my required nest egg with a lower necessary withdrawal, right? Ie. if my $30K expenses includes housing costs right now, I assume I will need $700K. If I didn't have a mortgage/rent payment, that would cut down the annual expenses to $20K. For $20K, I would only need around $500K in a nest egg. (Egads! We're almost halfway there!) To that $500K I would add however much it would cost me to buy a house.... adding say $200K to the total.

I think I just worked myself around in a circle to where I came from.... but I think I see how I got here this time

It does highlight just how much of an impact the friggin' humungous cost of a house has on things! Especially if we stay somewhere in southern California (presumably in one of the cheaper spots... since we will be able to live somewhere with no employment opportunities... Man, it would be ideal for us if the housing bubble were to really pop with a bang in the next couple of years!)

 

[charlie]

Holly,

That housing bubble is real and will burst eventually.
Why not rent now and wait until it happens?

Like Bob_Smith, I prefer to think of my home as not
part of my nest egg. It is there as a back-up if all
else fails.

Cheers,

Charlie

 

[Hyperborea]

The whole "should you have mortgage or should you pay the house off in retirement" debate comes down to whether you want to minimize the worst case results or you want to take the odds on the other than worst case.  The worst case is that you have a mortgage and the investments that are to pay that mortgage bring in returns below the cost of the mortgage (perhaps much below).  You minimize this by not having the mortgage.

Which one you choose depends on how much you fear the worst case (psychological), how likely you think it is to happen, and how badly the worst case will damage your retirement.  Pretty much a personal choice and from the earlier discussions the individual answers are all over the board.

There is of course the third option of not having a home - i.e intercst or the Terhorsts.

 

[Bob_Smith]

Bob_Smith, in the case of subtracting the total house cost from the total nest egg, in that case I would also calculate my required nest egg with a lower necessary withdrawal, right?

Yes, that's right. If you own a house there will be no mortgage payment to include in your expenses. I still have quite a few house expenses though (property tax, maintenance, insurance, and heat/utilities).

 

[sgeeeee]

hi Holly,

It sounds like you understand the accounting part of the planning process. Somehow you have to role all investment values and expense values to the same reference time. You can look at the house as a fixed lump expense that reduces your nest egg and also your future budget costs. . . or you can look at the house as a fixed, non-inflating expense moving forward.

But here's a problem you encounter if you want to consider the house as a fixed, non-inflating expense moving forward: You don't have a mortgage yet and you don't know what the mortgage rates (and therefore the payments) are going to be when you get to the point of buying a house. If rates start rising, your planned mortgage budget could be insufficient 2 or 3 years from now. Then you would have to work longer to build your nest egg or settle for a lesser home. Depending on how fast and how long rates rose, you could find yourself chasing a moving target for quite awhile.

Many people are in a position where keeping a low interest mortgage (at rates that were at historical lows a few years ago) is a good move. It is highly likely to improve their income and safety over the next 25 to 30 years. But in your case, you could find yourself in a very high mortgage rate environment a few years from now that would make it very difficult (and probably unwise) to keep a mortgage.

It's probably a good idea to run the numbers both ways and keep your options open, but my guess is that you will want to buy your house outright if you have to wait for a couple of years or more to make the purchase.

 

[Beachbumz]

From a financial standpoint, salaryguru is right on. I think from a mental standpoint, you will be much better off with no mortgage in retirement, but you definately need to factor in the maintenance and ever increasing property taxes, etc. to your budget.

 

[John Galt]

We have our home in Illinois, a ranchette in Texas, and
a condo, also in Texas. No mortgages on anything.
Now, I am pretty sure someone could make a case
for carrying debt on these properties and investing
in something which would give us a net positive return.
Don't want to. The psychological advantage of having
all real estate debt free is more important. Now, if I was
20 years younger.................

John Galt