Author Topic: Thinking about housing in retirement  (Read 1801 times)

sockfight

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Thinking about housing in retirement
« on: September 18, 2016, 01:43:59 AM »
Hello,

My wife and I discovered MMM a couple of months ago, and we've been voraciously reading the articles and adopting strategies. We've generally been frugal savers anyway, but it's been inspiring to see all of the next-level advice here and most importantly to realize we could actually aim for the early retirement dream.

My question concerns how to think about housing costs in the context of retirement planning, and I apologize if I come across as confused. To begin, I've read the major MMM article that talks about the 4% rule, essentially that if you can live on (spend) 4% of your net worth per year, you can retire. My wife and I, who are in our early 30s, are fortunate to have approximately 900K in assets, currently invested 85% stocks and 15% bonds. From the article on MMM's own situation, as well as other posts here, one would think that's well in the range where one could retire, if annual spending was under 4% of 900K. In fact, we are both pseudo-retired now, in that we took a career break a year ago to do some slow travel, and we're currently contemplating re-entering the workforce here on the other end of it, just as we've come across the MMM treasure trove of retirement ideas.

We've crunched spending numbers, and it seems like our annual spending *other than rent/mortgage payment* just fits into 4% of our assets. To be fair, we were living in a city before, and I'm sure we could reduce spending if we lived elsewhere. However, we do not currently own a home. It seems obvious that if rent is an ongoing expense, it clearly must be counted in tabulating annual spending. Likewise, if we bought a house with a small downpayment and had an ongoing mortgage payment, that would need to be factored in to annual spend. In a third scenario, if we bought a house for cash to avoid an ongoing payment, liquid assets would drop by the amount of the house. All of these scenarios seem to radically impact the safe-spend calculation. However, figuring out how to think about housing doesn't seem to be a road block for MMM or others here, so I must be missing something.

For example, do you count the value of your house in your total net worth for the purpose of the 4% rule, even though it's not a liquid asset that you can take dividends from? For instance, suppose we bought a 400K house, leaving 500k of assets in investments. Do we consider our spending cap per the 4% rule to be 4% of 500k or 900k? And would it make the most sense to buy outright vs. have a mortgage or rent, anyway? Or are all of these choices equivalent?

Thank you, I would really appreciate any input that would help frame the right way to think about potential early retirement and/or additional earning needed, starting from a place of non-home-ownership.

badbear

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Re: Thinking about housing in retirement
« Reply #1 on: September 18, 2016, 03:09:21 AM »
The 4% withdrawal rate was found based on an amount of invested assets. I would not include home equity in the amount used to calculate your withdrawal amount.

sockfight

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Re: Thinking about housing in retirement
« Reply #2 on: September 18, 2016, 03:44:49 AM »
I suppose, then, that I'm having trouble squaring MMM's own math. His articles seemed to talk about retiring at about the 600K point, seemingly including home equity, and then living on about 25K annual spending, but also with a not-paid-off mortgage :-)

badbear

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Re: Thinking about housing in retirement
« Reply #3 on: September 18, 2016, 03:47:14 AM »
If I remember correctly, they also had an investment property that they were collecting rent from. A $25k spend rate requires a $25,000 * 25 = $625,000 portfolio. For them, some of that was in the rental property, and his wife continued to work for a couple of years.

undercover

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Re: Thinking about housing in retirement
« Reply #4 on: September 18, 2016, 06:13:47 AM »
MMM's story - http://www.mrmoneymustache.com/2011/09/15/a-brief-history-of-the-stash-how-we-saved-from-zero-to-retirement-in-ten-years/ (hint: he's never had to fully rely on the 4% rule himself)

But no, of course your house doesn't pay you to live in it...it's quite the other way around. You might buy a house with the possibility of renting a few extra rooms out if needed though - that's something I like to plan for myself.
« Last Edit: September 18, 2016, 06:41:40 AM by undercover »

boarder42

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Re: Thinking about housing in retirement
« Reply #5 on: September 18, 2016, 07:06:29 AM »
its pretty simple

1. figure out what you spend not including housing
2. decide where you want to live and how you want to fund it
2a. rent - include this cost in your annual spend - if you arent at the 4% rule yet you will have to save more to get there
2b. buy house outright - if that leaves you with 500k then if your spending is under 20k great if not keep saving til your savings reach the 4% SWR level
2c. buy a house with a mortgage - in this scenario i would seperate the cost of the house in total from your networth its likely overkill but you'd put 80k down and have 320k still invested but ear marked for the house and 500k to live on .  so its a similar scenario to 2b.  but it leads to more likely chance of your money lasting forever due to the market gains of the 320k being invested.

but really the 2 should be seperated ... i really dont understand your confusion...

post your numbers.  you posted 2/3rds of the equation you're missing the how much do you spend part ... assuming a 400k house is your only option.