Should home-equity be included when calculating net-worth for retirement?
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ProspectiveBum
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I do not include it, because I'm not sure that we'll sell our house when we're retired. Even if we do sell the house in retirement, I don't know that we'll extract a significant chunk of money from the transaction, since we'll still need to buy another place to live in.
That's probably been the biggest change in my thinking since finding this site. We have quite a bit of equity in our house (it's about half of our assets). While that's great on paper, it's only accessible if we're willing to move to a lower-cost area. So far, we aren't (ask me again in 15 years).
If we end up selling the house and extracting a good chunk of equity, I'll look at it as a nice bonus, but I'm not planning for it. Your situation may be different.
That's probably been the biggest change in my thinking since finding this site. We have quite a bit of equity in our house (it's about half of our assets). While that's great on paper, it's only accessible if we're willing to move to a lower-cost area. So far, we aren't (ask me again in 15 years).
If we end up selling the house and extracting a good chunk of equity, I'll look at it as a nice bonus, but I'm not planning for it. Your situation may be different.
bbbamI
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I include my home's value in my net worth. However, I do not use the value in my retirement calculations.
ziggy29
Moderator Emeritus
I think equity is included in total net worth calculations, but not liquid net worth calculations.
I'd only include *part* of my equity as retirement assets if I had a firm plan to considerably downsize my home upon retirement and convert the proceeds into retirement income. We are already in a home we think we'll retire in, so there's nothing for us to include.
I'd only include *part* of my equity as retirement assets if I had a firm plan to considerably downsize my home upon retirement and convert the proceeds into retirement income. We are already in a home we think we'll retire in, so there's nothing for us to include.
How do people retire anyway? I definitely need an input here. Is it nicer to live in your own home. Or is it better to sell your primary residence and pay monthly rent for one of those nice retirement communities, with sauna, pool, golf course, theatre, etc included.
Anyone here living in those communities, they sound appealing.
Anyone here living in those communities, they sound appealing.
ProspectiveBum
Full time employment: Posting here.
I'm still a loooong way from making that decision, but the problem I have with paying monthly rent in retirement is the lack of cost-certainty. If I own my home outright, I'll have a much clearer idea of what my year-to-year costs will be than if I'm at the mercy of a landlord.
Rich_by_the_Bay
Moderator Emeritus
This has been discussed regularly. My take on the consensus is that home equity is often considered part of net worth for accounting and estate purposes.
However, as a practical matter it is often not included as part of your nest egg for retirement planning purposes, unless there is a definite intention to downsize at a specific time, with a plan to invest the difference as retirement savings at the time of the sale (a planned windfall, so to speak).
However, as a practical matter it is often not included as part of your nest egg for retirement planning purposes, unless there is a definite intention to downsize at a specific time, with a plan to invest the difference as retirement savings at the time of the sale (a planned windfall, so to speak).
that's a really good point I never thought, thanks. You're somewhat dependent of the landlords or community management, they could raise the cost, and not much you could do.
I don't include the home equity in my "FIRE stash" because I don't include payments for housing in my required annual FIRE income. My assumption is that I will live in my home that I own free and clear.
So my FIRE stash is lower, but my annual FIRE income needs are lower as well. In the end I think it works out the same either way, but you just need to be consistent.
So my FIRE stash is lower, but my annual FIRE income needs are lower as well. In the end I think it works out the same either way, but you just need to be consistent.
A house isn't exactly a liquid asset... You can do fancy things like get a reverse mortgage or heloc if needed, or sell it fast and downsize, or whatever. If you're going to include it, be realistic and go with what you could get in a reasonable time frame and not your idealized "my house is worth this much" picture.
It's probably more fun if your house is paid off, but there have been countless discussions on that too.
It's probably more fun if your house is paid off, but there have been countless discussions on that too.
ziggy29
Moderator Emeritus
Agreed. If I thought my house was worth $X, and I was going to downsize to a home valued at $Y (where Y is much less than X), I'd probably only include about (0.75*X) - Y as potential cash out of the downsizing for use as retirement assets. If that. I tend to err on the side of caution and conservatism at all times when evaluating my progress toward FIRE.
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Net worth is defined as the value of liquidated assets minus the value of liabilities.
It can be sold and you can use the proceeds to rent. It can be mortgaged or reverse mortgaged to provide a lump sum or a lifetime income.
There is no retirement or investment calculator that I'm aware of that calculates net worth and excludes home equity from that calculation.
If you leave the home equity out of one side, do you also exclude the mortgage amount as a liability? Come on...
My plan includes a provision where pretty much everything goes wrong, we have a 30 year bear market, and we also live far longer than the good old IRS mortality tables would suggest. In that instance we'd either sell the primary residence and downsize or rent or take a reverse mortgage. Any of those would carry us for another 10-20+ years, which would most certainly be to the end of our lives.
Without making that quite adequate and reasonable set of assumptions, I would have to plan for core portfolio changes and the amount that would be reasonable to retire on as a function of being far more disaster proof and far more long lasting than it most likely needs to be.
About the most effective way to do that would be to have either worked an extra 5-7 years, or to have taken an annuity. The former would have sucked, and the latter would have assured me a lifetime of income and lifestyle at levels lower than what I will likely accomplish on my own.
So...I do understand the emotional aspect of wanting to sweep your house away into some sort of lockbox and pretend it isnt there...but dont create a problem and introduce a solution thats worse than the problem itself, ay?
It can be sold and you can use the proceeds to rent. It can be mortgaged or reverse mortgaged to provide a lump sum or a lifetime income.
There is no retirement or investment calculator that I'm aware of that calculates net worth and excludes home equity from that calculation.
If you leave the home equity out of one side, do you also exclude the mortgage amount as a liability? Come on...
My plan includes a provision where pretty much everything goes wrong, we have a 30 year bear market, and we also live far longer than the good old IRS mortality tables would suggest. In that instance we'd either sell the primary residence and downsize or rent or take a reverse mortgage. Any of those would carry us for another 10-20+ years, which would most certainly be to the end of our lives.
Without making that quite adequate and reasonable set of assumptions, I would have to plan for core portfolio changes and the amount that would be reasonable to retire on as a function of being far more disaster proof and far more long lasting than it most likely needs to be.
About the most effective way to do that would be to have either worked an extra 5-7 years, or to have taken an annuity. The former would have sucked, and the latter would have assured me a lifetime of income and lifestyle at levels lower than what I will likely accomplish on my own.
So...I do understand the emotional aspect of wanting to sweep your house away into some sort of lockbox and pretend it isnt there...but dont create a problem and introduce a solution thats worse than the problem itself, ay?
rogersteciak
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Your own home does not generate income. Only income-producing assets generate income. When your investment income exceeds your living expenses (including taxes) by your desired margin of safety, you are financially free and do not need to work for a living (although you may decide to keep working anyway for non-financial reasons).
Your home is an expense (i.e., property taxes, homeowners insurance, and maintenance) even if your mortgage is paid off. You can sell your home and convert your home equity to cash. You can then use that cash to purchase additional income-producing assets. You will also become a renter, which probably will increase your living expenses (i.e., you will still pay property taxes, homeowners insurance, and maintenance, but those amounts will be part of the rent your landlord collects from you because you and your fellow tenants are now buying that rental property for your landlord).
As far as where and how you live (i.e., retirement community, in your own home, in the snow belt, in the sun belt, whatever), that is a decision you get to make. You can do whatever you want as long as you can afford it. Write down what you want to do, run the numbers in a cashflow spreadsheet, and figure out (by making appropriate adjustments to your plans) how to make everything work out financially within your desired timeframe.
Ronstar
Moderator Emeritus
I have it in my net worth, but I have it as an asset generating cash at 85 years old in firecalc.
RunningBum
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It definitely has been discussed before. Rich In Tampa said it best in my opinion. If you have plans to sell it for retirement, include it. I don't plan to, I don't include it in my retirement calcs just like I don't include my cars, clothes, TVs, etc. But I do sleep better knowing that I have a major asset that is somewhat liquid (moreso than clothes, for example) that I can sell (given adequate time) or borrow against if I see that I'm going to outlive my other assets. I also have no problem with leaving it as an asset for my heirs to sell or keep and use.
megacorp-firee
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As state previously net worth is everything you own minus what you owe, so in the purest sense your home is considered in your net worth.
IMO your home should not be factored in when calculating your 'retirement net worth'. UNLESS you are considering selling it to live on.
simple as that.
IMO your home should not be factored in when calculating your 'retirement net worth'. UNLESS you are considering selling it to live on.
simple as that.
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I'm gonna have to go back to the usual end state discussion.
If you somehow end up broke, would you sit in your living room starving and eventually just lay down and die because the house isnt an asset?
Yeah, I didnt think so. You'd sell the house and live.
So it IS in everyones plan. Its the "fourth and 25, time to punt the ball" play.
So which is better, acknowledging the asset and incorporating it or pretending it doesnt exist and then doing things differently as a result?
Just acknowledging it as I did above turns my firecalc results from 95% to 100%, allows me to spend more money, and means I dont have to change my asset allocation or spending.
Didnt cost me anything. Probably wont use it. But if I have to, it'll foot the bill and nobody will get hurt or be any the worse for wear.
If you somehow end up broke, would you sit in your living room starving and eventually just lay down and die because the house isnt an asset?
Yeah, I didnt think so. You'd sell the house and live.
So it IS in everyones plan. Its the "fourth and 25, time to punt the ball" play.
So which is better, acknowledging the asset and incorporating it or pretending it doesnt exist and then doing things differently as a result?
Just acknowledging it as I did above turns my firecalc results from 95% to 100%, allows me to spend more money, and means I dont have to change my asset allocation or spending.
Didnt cost me anything. Probably wont use it. But if I have to, it'll foot the bill and nobody will get hurt or be any the worse for wear.
RunningBum
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It's in my "4th and 125, I wasn't even playing football much less whatever the hell game this is" plan.
Bestwifeever
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I consider firecalc a way to calculate income, not assets, so I don't include it. I don't include my cars either.
growing_older
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I do not include it in retirement assets, as I figure I am not planning on spending 4% of it's value every year in retirement. Rather if my SWR from investments isn't as safe as I planned or something unexpected happens, then it becomes plan B as a safety net. If I include the full value of the equity in my net worth, then when I figure SWR of those assets, I will be overspending my actual portfolio and in effect forcing myself to liquidate the home when the other assets are used up. Some people may choose to plan like this, but I like a larger margin for error. Lucky heirs.
OAG
Thinks s/he gets paid by the post
After long and arduous consideration (about 30 seconds) I would include the home in the Net Worth BUT only at the REVERSE MORTGAGE value. So if the place and you would qualify for a RM of say $150K, I would include that number in NW. The assumption here is you will always need a place to live (but also assuming you will die at home or at the local hospital) so the maximum value I would use would be the net RM value. Of course you could use a large number if you KNEW you were headed to the underside of the local interstate overpass at some point.
donheff
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
This argument has gone around and around a half dozen times. As CFB points outthere is no question that home equity is part of net worth - net worth is not something you define for yourself. If you want to exclude home equity from calculations about how much income you expect to derive from investments, fine - you are talking about something other than net worth. I do exactly that - I use my non-house investments to figure out my SWR for retirement living. But, like CFB, I also calculate how the home equity can be used to bail me out if a humongous black swan comes flying in.
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Just to clarify this, lets look at three scenarios. I'll just lay out the parameters but I'm too lazy to run the numbers...I think the general idea should be obvious.
1) Do a firecalc using your retirement $, minus the house, plan for 85 years of age since thats when the IRS says most of us will be pushing up the daisies, get your 4%. Works great unless you live past 85.
2) Do the same as above but push it to 90/95/100/120. You've now reduced the risk of living too long, but your 4% is going to be a lot smaller.
3) Do the same as #1, but presume that if you live past 85 your home equity will bail you out via sale/reverse mortgage/heloc/renting a room/whatever. Solves the risk of living too long without forcing you to accommodate a low probability scenario into the rest of your lifes withdrawal rate and spending.
4) Include the home as part of the retirement 'stash', presume the value of the house is "last dollars to withdraw", do the plan to 90/95/100 and look at the detail results to see if there is ever a point during the 'run' where your portfolio value would have dropped to the level where you'd have had to dip into the home equity.
#1 is fine. It ignores the risk and pretends the house isnt part of the equation.
#2 seems silly. You're taking the risk into account but not all the assets to adjust the risk.
#3 is really the same as #1, but you've accommodated the risk with an offsetting asset.
#4 is a lot of work, but some calculator crazed folks will have a blast with it.
1) Do a firecalc using your retirement $, minus the house, plan for 85 years of age since thats when the IRS says most of us will be pushing up the daisies, get your 4%. Works great unless you live past 85.
2) Do the same as above but push it to 90/95/100/120. You've now reduced the risk of living too long, but your 4% is going to be a lot smaller.
3) Do the same as #1, but presume that if you live past 85 your home equity will bail you out via sale/reverse mortgage/heloc/renting a room/whatever. Solves the risk of living too long without forcing you to accommodate a low probability scenario into the rest of your lifes withdrawal rate and spending.
4) Include the home as part of the retirement 'stash', presume the value of the house is "last dollars to withdraw", do the plan to 90/95/100 and look at the detail results to see if there is ever a point during the 'run' where your portfolio value would have dropped to the level where you'd have had to dip into the home equity.
#1 is fine. It ignores the risk and pretends the house isnt part of the equation.
#2 seems silly. You're taking the risk into account but not all the assets to adjust the risk.
#3 is really the same as #1, but you've accommodated the risk with an offsetting asset.
#4 is a lot of work, but some calculator crazed folks will have a blast with it.
rogersteciak
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My cashflow spreadsheet is set up to calculate three types of net worth for me:
(1) Total net worth = assets minus liabilities -- the standard balance sheet taught in accounting class. The estimated fair market value of my house is included, as is the payoff balance of all debts, including the mortgage. Any asset can be sold for a salvage value and converted into cash if desired (the price one can get when selling an asset may or may not be to one's liking, but the sale can still be made nevertheless).
(2) Financial net worth = financial assets minus liabilities -- only taxable and retirement financial assets are included. If I need to raise some cash quickly, I can sell a few shares of stock; I can't sell the front porch and a couple of doors and windows of my house to raise the money. I include all liabilities, including the mortgage, because I could pay off my mortgage by selling financial assets to do so (actually, I paid off my mortgage a while ago, but my spreadsheet still has this calculation structure built into it).
(3) Non-retirement financial net worth = taxable financial assets minus liabilities -- only taxable financial assets are considered because I'm not planning on drawing on my retirement money until I'm 70 1/2 years old (to give it more time to compound). Only taxable financial assets (plus any earned income I make) are available to me under normal circumstances right now to pay living expenses. Liabilities still include the mortgage payoff balance because one can sell off taxable financial assets at any time to pay off the mortgage if desired.
Someday, I may sell my present house and roll over the proceeds into another house in an area that is much less expensive to live. I can also will my house to my heirs or favorite charity. Other types of assets some people have are annuities, whole life insurance, baseball card collections, family heirlooms, and whatever that can always be converted into cash should the decision be made to sell them.
For FIRE cashflow planning, I use my financial net worth because a 4% SWR works. The assets are liquid and can be sold off periodically to raise the money needed to pay living expenses. I consider all income-producing assets to be financial assets (but I only own stocks and do not own any investment real estate or businesses directly).
Between now and age 70 1/2, however, I use only my non-retirement financial net worth because I don't want to tap into my retirement assets right now. I only want to use my taxable financial assets so that my retirement financial assets have a longer time to compound under tax-advantaged circumstances. Once I become 70 1/2 years old, retirement assets become part of my "taxable assets" to the extent I have to take the required minimum distribution each year.
My Roth IRA lurks in the background as "longevity insurance" in case I need additional money when I reach my 80s. I don't factor my Roth IRA in any cashflow planning at the present time, but it's there in case I need it eventually. Otherwise, my beneficiaries will get whatever balance is there when I move on to the afterlife.
(1) Total net worth = assets minus liabilities -- the standard balance sheet taught in accounting class. The estimated fair market value of my house is included, as is the payoff balance of all debts, including the mortgage. Any asset can be sold for a salvage value and converted into cash if desired (the price one can get when selling an asset may or may not be to one's liking, but the sale can still be made nevertheless).
(2) Financial net worth = financial assets minus liabilities -- only taxable and retirement financial assets are included. If I need to raise some cash quickly, I can sell a few shares of stock; I can't sell the front porch and a couple of doors and windows of my house to raise the money. I include all liabilities, including the mortgage, because I could pay off my mortgage by selling financial assets to do so (actually, I paid off my mortgage a while ago, but my spreadsheet still has this calculation structure built into it).
(3) Non-retirement financial net worth = taxable financial assets minus liabilities -- only taxable financial assets are considered because I'm not planning on drawing on my retirement money until I'm 70 1/2 years old (to give it more time to compound). Only taxable financial assets (plus any earned income I make) are available to me under normal circumstances right now to pay living expenses. Liabilities still include the mortgage payoff balance because one can sell off taxable financial assets at any time to pay off the mortgage if desired.
Someday, I may sell my present house and roll over the proceeds into another house in an area that is much less expensive to live. I can also will my house to my heirs or favorite charity. Other types of assets some people have are annuities, whole life insurance, baseball card collections, family heirlooms, and whatever that can always be converted into cash should the decision be made to sell them.
For FIRE cashflow planning, I use my financial net worth because a 4% SWR works. The assets are liquid and can be sold off periodically to raise the money needed to pay living expenses. I consider all income-producing assets to be financial assets (but I only own stocks and do not own any investment real estate or businesses directly).
Between now and age 70 1/2, however, I use only my non-retirement financial net worth because I don't want to tap into my retirement assets right now. I only want to use my taxable financial assets so that my retirement financial assets have a longer time to compound under tax-advantaged circumstances. Once I become 70 1/2 years old, retirement assets become part of my "taxable assets" to the extent I have to take the required minimum distribution each year.
My Roth IRA lurks in the background as "longevity insurance" in case I need additional money when I reach my 80s. I don't factor my Roth IRA in any cashflow planning at the present time, but it's there in case I need it eventually. Otherwise, my beneficiaries will get whatever balance is there when I move on to the afterlife.
