Author Topic: Thinking ahead: Percentage of 'stache to spend on housing in retirement?  (Read 4462 times)

begood

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We are probably six to ten years from downshifting. At that time, we will not have a house to sell (living in employer-provided housing now, lost 20 years of equity in home sale in 2009). I do see us settling somewhere (NC is the most likely spot, followed by VA or DE) for a stretch long enough to make purchasing a home a reasonable thing to do.

I have found any number of calculators that tell me how much house I can "afford" based on my down payment and debt info (answer: "too damn much house, you greedy bastards") but nothing that suggests a safe percentage of net worth to spend on housing straight up.

So...

20%?
10%
5%

Our portfolio is a bunch of mutual funds, some life insurance cash value, and some cash. We'd have to sell taxable funds to buy a house outright.

Getting a sense of how much is a reasonable amount to spend might inform where we landed. If we should really only spend 5%, then I imagine we'd be looking farther from major metro areas. If we went up to, say, 15%, I think we could be closer to major metro areas.

I realize it's kind of an unusual situation. We should be able to purchase a house and not have a mortgage. The question is how much we should feel comfortable spending to do that. Any opinions?

tomsang

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Seems like you can "afford" as much house that provides you positive value.  I would think that this is very different for each person. Some people love their house and invest a lot, while others consider it a place to sleep and don't want to have much tied up in their bed. I would figure out how much I want to spend on a house and then figure out how much I need to support my lifestyle.   

begood

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Seems like you can "afford" as much house that provides you positive value.  I would think that this is very different for each person. Some people love their house and invest a lot, while others consider it a place to sleep and don't want to have much tied up in their bed. I would figure out how much I want to spend on a house and then figure out how much I need to support my lifestyle.   

That's interesting, tomsang. I hadn't really thought about it like that before. To me, a house is more than a place to lay my head. Right now, it's also my office, so I spend most of my life within its walls. In a downshift, I'd hope to keep working from home some, and volunteer some, so maybe fewer hours at home then than now.

One thing that has changed over the past few years is that I no longer give a rat's patoot about how my house looks to others, and my idea of the "right size" house is about half what it used to be. I'd be delighted to find a well-kept 1300-1400 SQF house to buy for 10% of my net worth. I can't do that in the Philly 'burbs, but I could do it in western Virginia, western Maryland, central Delaware, and most of NC, including the major metro areas.

I'd rather buy the house I want in a different area than live in something I can afford but don't like in a HCOL area. At that time, I'd happily move to get the right house at the right price.

Cheddar Stacker

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So the non-mustachian rule of thumb is don't spend more than 25% of gross income or 33% of net income on housing.

Don't kill me here guys and gals as I'm just musing, but I would put the mustachian FIRE level rule of thumb around 15% of NW/SWR Income. Since you will likely not pay a lot of taxes, gross vs. net likely won't matter. So as an example:

$1.5M Net Worth
$60K @ 4% SWR
$225K Home purchase price (15% of NW)
$9K/year if renting or with mortgage (15% of SWR)
$750/month if renting or with mortgage

That may be substantially more (or less) house than you need, but I think it would be a decent rule of thumb.


begood

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So the non-mustachian rule of thumb is don't spend more than 25% of gross income or 33% of net income on housing.

Don't kill me here guys and gals as I'm just musing, but I would put the mustachian FIRE level rule of thumb around 15% of NW/SWR Income. Since you will likely not pay a lot of taxes, gross vs. net likely won't matter. So as an example:

$1.5M Net Worth
$60K @ 4% SWR
$225K Home purchase price (15% of NW)
$9K/year if renting or with mortgage (15% of SWR)
$750/month if renting or with mortgage

That may be substantially more (or less) house than you need, but I think it would be a decent rule of thumb.

Thank you, Cheddar Stacker! That's close to the ballpark figure I've had in my mind -- less than $250K -- but I hadn't figured out a way to assign any reasoning to the number beyond, "Sounds about right."

The rental rates are really startling, though, since I could not begin to get a rental house in my current area for 9K/year. Try $24K/year. For a 3/2 condo. Of course, I can't buy a house I want to live in for $225K here, either, so I guess it makes sense rental rates would be high too.

I realize this is purely a philosophical exercise at this point. Who knows what the housing market will look like in ten years? But I went (because this is how my brain works) to zillow.com and checked out houses for sale at or below $225K, and I could happily settle in any number of them in places in North Carolina like Greensboro, Durham, Mooresville, Matthews. Middletown, DE, is as far north as I got, and even there with a little stretch it looks like we could get a decent house.

Ynari

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This only really works if you start with a stash and work backwards...  most people start with their expenses (including housing) and work forwards to figure out how big their 'stash should be before moving forwards.  Arguably, if your stash (excluding value of home) covers your non-home expenses, and your home is paid off, then any value of house is fine.  If you've got a mortgage, you should factor repayment of that in to your retirement costs (like you would for rent if you didn't own a house).

That said, 15% seems like a decent rule of thumb if you have a scalable cost of living  (i.e. you're equally frugal for housing, food, and other purchases)...  My desired post-FIRE income for just me is under 20k, which means 500k stash, which means 75k for my portion (1/2) of a house at 15% of NW.  I factored in a 125k mortgage for 2 people into my FIRE calculations/retirement budget, as that's ballpark the number I'd be looking at for a home.  So, anecdotally, 15% is my number.

But if I decided I wanted to put 150k toward the house (for a 300k house total) without changing anything else about my budget, then my FIRE budget would go up by about 3k per year from the mortgage, meaning my 'stash would have to be around 575k (do you see that?  The amount of house went up by 75k, and so the amount of stash I need went up by 75k), but the 15% guide would say I shouldn't put that 150k (26% of NW) towards the house, I should only put 86k.

I'd totally be OK spending twice as much/26% of NW on a house if that was my priority in life.  It isn't, so I'll stick to the 15%...

Ybserp

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I like the idea of a rule of thumb for this, and I've not seen one anywhere else. It seems to me that a more nuanced set of guidelines would include more than just the house price. Things like utilities and property that often get considered 'fixed' costs are not really fixed. We just only get to significantly change them up when we decide how big of a place to buy and select the tax region to live in.

Maybe 15% of NW for the one time home purchase and another x% each year for the recurring annual utilities and taxes that scale based on that house choice?

begood

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I like the idea of a rule of thumb for this, and I've not seen one anywhere else. It seems to me that a more nuanced set of guidelines would include more than just the house price. Things like utilities and property that often get considered 'fixed' costs are not really fixed. We just only get to significantly change them up when we decide how big of a place to buy and select the tax region to live in.

Maybe 15% of NW for the one time home purchase and another x% each year for the recurring annual utilities and taxes that scale based on that house choice?

That's a good idea, Ybserp. We currently pay our utilities and renter's insurance, but property taxes and homeowner's insurance would be an additional chunk.

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This only really works if you start with a stash and work backwards...  most people start with their expenses (including housing) and work forwards to figure out how big their 'stash should be before moving forwards.  Arguably, if your stash (excluding value of home) covers your non-home expenses, and your home is paid off, then any value of house is fine.  If you've got a mortgage, you should factor repayment of that in to your retirement costs (like you would for rent if you didn't own a house).

I know we're a little backward, freznow, starting with the stash and trying to figure out how to add housing costs in. That's why I came to the hive mind here - I hoped some bright person would help put hard  numbers to my amorphous musings, and sure enough, Cheddar Stacker to the rescue!


Thegoblinchief

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Based on the conversations I've had with the Alchemist, I wouldn't be surprised if 30% or more of our NW will be tied up in land. Our lifestyle is cheap, but acreage isn't.

Ybserp

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There's a rule of thumb for general budgeting that if you keep your total fixed expenses under 50% of your take home, everything else fits luxuriously in the remaining half.

So...
If you've chosen to live on $20k/yr (picked to make the math easier), you need $500k in your stash for that. But maybe you actually have a $700k stash. But you don't want to spend the whole available $200k on a house, because all the utilities and insurances and so on need to fit under $10k/yr. So you run numbers and ask for home seller's utility bills to work out how much house you want that still keeps all the fixed expenses under half of your 4% of the remaining stash after house purchase.

begood

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There's a rule of thumb for general budgeting that if you keep your total fixed expenses under 50% of your take home, everything else fits luxuriously in the remaining half.

And my job for today is figuring out what our fixed expenses are now... I know the majority of them, but I'm sure there are a few I'm missing. Those really should be proportionately less in our downshift stage since if all goes well, we won't have to spend money on tuition or clothes for a fast-growing girl! ;)

Quote
So the non-mustachian rule of thumb is don't spend more than 25% of gross income or 33% of net income on housing. [...]

So for example:

$1.5M Net Worth
$60K @ 4% SWR
$225K Home purchase price (15% of NW)
$9K/year if renting or with mortgage (15% of SWR)
$750/month if renting or with mortgage

I think the 15% NW for an outright purchase is a great benchmark to try to meet. But if the normal Joe standard is to spend no more than 25% of net/33% gross for housing, couldn't the rent or mortgage payment (if necessary) be closer to those percentages than to the 15% and still be considered within reason? Even in the LCOL places I'm looking, I'm having trouble finding rents for $750 that aren't in sketchy areas.