Include your home into retirement calculations?

[leighb]

In figuring out my retirement reality I was wondering if I should include my home in those calculations. When I do include it, I'm freakin' set! I can increase my net worth by 300,000 and retire tomorrow. HUZZAH!

But wait... is my home a retirement investment? There are two correct answers as I see it:

Yes, I plan on selling it and moving to the rust-belt or other developing nation. There I will buy a house for cash and will reinvest the rest.

Heck no, I'm not moving. There's a reason it's cheaper to live some places. Selling my house will just mean that I now have to pay rent that I can't afford. I will gladly work another 10 years to live in the beautiful pacific northwest.

I suppose there's not really a "right" answer. I was just pondering the implications of including my primary residence in those calculations. I see a lot of people including their homes, which is fine. There's plenty of cheaper houses out there.

[thd7t]

You've come to the crux of what is probably going to develop into a semantic argument.  Include your home in your Net Worth.  This is just your assets-liabilities.  Don't include it in your retirement calculations, if you're not selling it.  That's "your number".  However, your answers are correct.

A lot of people include principle payment against their mortgage in their savings rate, because it increases their net worth and because the payment will go away (or be used to finance more money, later).

ETA: Principle payments are counted toward savings rates, not mortgage payments.

[seattlecyclone]

In terms of the assets that you would withdraw 4% from in retirement, don't include the value of the home you plan to live in during retirement. It's not producing an income for you like your other investments. What it is doing is reducing your expenses because your house is paid for, so your stash doesn't have to be as large as it would if you were renting.

[TheAnonOne]

You've come to the crux of what is probably going to develop into a semantic argument.  Include your home in your Net Worth.  This is just your assets-liabilities.  Don't include it in your retirement calculations, if you're not selling it.  That's "your number".  However, your answers are correct.

A lot of people include payment against their mortgage in their savings rate, because it increases their net worth and because the payment will go away (or be used to finance more money, later).

This is pretty important.


I know the MMM crowd loves to simplify everything into a savings rate = time to retire, but there are a few more things to look at. The house payment being one of them. I don't count it as savings because I plan on keeping my payment on my townhouse, or even moving into a slightly bigger single-family. This will likely result in me making payments for many years beyond my FI date. Though, at some time, I will no longer make this payment and will just be that much better off.

[leighb]

I've included my mortgage payments into my saving rate because I plan on paying off my mortgage and not having that expense. Then at that point, what was going to the mortgage, can then being going to actual retirement investments.  If I didn't include my mortgage payments my savings rate would easily be cut in half.
 
I'm struck by how changing one small assumption, like what bucket you consider an asset to be in, can add years onto or take years off of one's retirement date. Or should you include mortgage payments into your saving rate? These are not trivial questions. A savings rate of 30% verse 60% is a difference of 15 years. Including my house as a retirement asset effects things by 10 years.

It's those small decisions/assumptions that allow for some folks to safely retire early and for some to never retire. Then there's another group who retire but then realize the implications of those assumptions. When I started messing around with retirement calculators they simply ask you about your net worth or portfolio value. This is not a simple question. I think there should be at least an astrix or note by those fields so folks know what assumptions they are making.

[thd7t]

This is a little easier to address.  There are only two buckets that matter when it comes to whether you can retire.  The first is your spending (after retirement) and the second is how much you have saved.  The rate that you increase the second bucket is really the way you can determine how fast your progress is.  Just make a goal to have bucket 2 be 25x bucket 1.

Paying the mortgage down goes a long way to the first bucket (lowering spending), which reduces what bucket 2 has to get to.

[BigoteGato]

    I agree with the OP about it being important to decide what "bucket" your payments go in, even more so if you make extra payments. It motivates me more if I categorize the extra mortgage payments as "savings."
   If you don't like that, you can assume you will have your house paid off by the time you quit, and hence have lower expenses. If you won't quite be all done paying for it, you can estimate your retirement date, and assume that you will refinance your house to whatever you owe at that point. That should lower your COL by some amount.

[happy]

I'm struck by how changing one small assumption, like what bucket you consider an asset to be in, can add years onto or take years off of one's retirement date.

You are indeed correct about this. Just so we can all have a laugh at my expense…I was so green at this stuff that in 2012,  a few months after getting into MMM I calculated my net worth for the first time.  I was at my number - and joyously declared I was FI. Until, that is, I set about trying to figure out some cash low to live on and realised that an awful lot of my net worth was in my house ( being an Aussie, - houses are expensive here), and the majority of the rest was in a retirement account that was inaccessible until I was a little older.

So yes, totally agree one needs to think carefully about what figure you are using and why. And how you are going to contract the cash-flow for your annual expenses.

[MDM]

It being a free country and all that, one can calculate a savings rate however one wants - there is no law specifying a particular way.

If you want to estimate "how long until I can...?" or "can I...?" retire, you can ignore the mortgage payment (principal and interest) altogether. 

Let
  E = non-mortgage living expenses in retirement
  WR = planned withdrawal rate as in the Trinity study
  RMP = Remaining Mortgage Principal
  S = "the number" needed for FI, aka the stash.

Then one can calculate/estimate:  S = E/WR + RMP

Only assets that will be drawn upon to pay expenses, and payments directed into those assets, are counted to calculate/estimate current and future values of "S".  The monthly mortgage payment is, as noted above, irrelevant.

Of course there are other ways to do this, and the approach above assumes the mortgage is being used to pay for a home, not a flippable house.  Given that, it is as defensible as other simple methods.

Note that several of the above posts say pretty much this, albeit in slightly different words.

[nnls]

When calculating my savings rate I only counted what was above the minimum mortgage payment.

I know from reading these forums most people think that it would be better to invest this money in shares, but I am wanting to pay down my mortgage as quickly as possible and be debt free so thats what I am doing for the moment.

[Bertram]

In figuring out my retirement reality I was wondering if I should include my home in those calculations. When I do include it, I'm freakin' set! I can increase my net worth by 300,000 and retire tomorrow. HUZZAH!

But wait... is my home a retirement investment? ...

I suppose there's not really a "right" answer. I was just pondering the implications of including my primary residence in those calculations. I see a lot of people including their homes, which is fine. There's plenty of cheaper houses out there.

You are "set" when income >= expenses. Some people tend to leave out the house and leave out the expense connected with it, but IMHO that's just lazy accounting. Personally I am a big fan of including everything, because it prevents you from doing costly mistakes. The house itself is just a depreciating asset like a car or an appliance, it needs constant upkeep/maintenance in regular time intervals to ensure it keeps a value and you can use it. What if somebody that owns a washing machine, a dryer, a fridge and an oven said " I don't need to budget for appliances, because I already own them" - well, we'd think they are silly. No appliance is going to work forever, so you calculate with an average time of use (x years) and expect to either buy a new one (if necessary) or repair it from the money you put aside in that time. A house is basically the same, it's just bigger and more expensive and better maintainable (you can take out/replace most parts over the course of the lifetime).

Just think of yourself as the renter and the house and the plot of land it stands on as separate investments. Assume a calculatory price for rent that fits the neighborhood and the type/value of the house/land and make yourself a fair price, you should be making a couple percent ROI a year on average, update value of the house/land and of rent in regular intervals. Thinking of it this way will make the hidden costs or earnings transparent you have with your house. At worst you just have a bit of extra work, at best you might find out early if it makes more sense to move or to rent if the time comes... but having that aspect of finances transparent is IMHO always better than to leave it out. Even if you are sure you never want to sell it or move, at least you'll know how much it costs/earns you. And there's always some possibility that you may not have a choice in it (natural disaster, fire, etc.). At least you'll have some idea of what it means financially if you do have to move.

[dude]

To me, principal payments are definitely savings -- your home equity can be leveraged for cash in a reverse mortgage or sale.  But I do not include it in my FIRE calculations.  I only include income-producing assets (stocks, bonds, pensions, annuities, rental properties, and cash, even though it's not producing much income these days) in those calculations, i.e., those assets which will fund my expenses in retirement.

[Gone Fishing]

I'll be retiring with a 3.5% mortgage that I intend to ride out to the end, 18 years from now.  So while I don't count the asset itself, I do consider the eventual end of the payments.  I've calculated my withdrawals to cover the entire cash expense of the mortgage payment.  This will result in a substantial "raise" when I pay off my mortgage at maturity, which could technically be worked back into my current withdrawals to "smooth" my spending curve a bit, however I haven't, as I like the idea of getting a "raise" (in addition to COLA) from time to time in retirement.  I look at SS and my small pension in the same way.   

[Tyler]

There are different types of FIRE calculations -- net worth, savings rate, safe withdrawal rate, etc.  You just have to realize that they measure different things and often require different inputs and assumptions. 

Home equity is certainly part of your net worth.  Safe withdrawal rates are based on invested assets (a specific subset of net worth) and things like the Trinity study do not account for your house value.  Savings rate is somewhere in between, but if you're looking at the "shockingly simple math" calculations you should understand that because they're ultimately based on SWRs your home equity should probably be excluded in most cases. 

If you're considering downsizing at retirement, then think of it as moving an additional portion of your net worth to the invested asset bucket to be used for SWR purposes. 

[andy85]

I have 2 line items:

Available Funds - IRA, 401k (etc), Cash, brokerage acct...anything that holds cash (which is what i base my FIRE number on)
Net Worth - Available Funds plus the EQUITY in my house

I also (clearly) track the equity in my house and the percent of net worth due to home equity. So I do consider principal payments a form of saving, yes.