Author Topic: Factoring in Home Equity into Retirement  (Read 3439 times)

ep

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Factoring in Home Equity into Retirement
« on: July 05, 2013, 07:17:08 AM »
Hi all,

What's the proper way to factor in your home equity into retirement? Obviously a mortgage doesn't contribute to your cash flow until it's completely paid off (or if you sell your house for an appreciated value), so I'm assuming any money you pour into it is just so that in 30 years or something you will have the benefit of not having to pay for a home - correct? So in that sense, my down payment is doing nothing for me until that point where my mortgage is paid off. 

I ask because MMM includes home equity in his 'stache when he retired in 10 years or so, but for most people, even if they do retire in 10 years, their mortgage likely won't be paid off for another 20 years. It seems like a down payment is just a step in a backwards direction up until that point when you actually pay off that mortgage. Am I thinking about this correctly?


plainjane

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Re: Factoring in Home Equity into Retirement
« Reply #1 on: July 05, 2013, 07:27:56 AM »
This is a topic which gets kicked around a lot in the forums.

I feel that until you pay off that mortgage it isn't a factor in your retirement net worth if you are planning to continue living in it.  You can take it into your retirement calculations that you will see a substantial decrease in cost of living once the mortgage is paid (so perhaps your stash doesn't need to be big enough to cover all your current expenses forever, because in x years you'll need a smaller amount).

Other people say that once the mortgage is paid off you could look at your home as a low-risk investment that gives you the amount that you'd otherwise be paying for your living space. 

In any case, IMO the market value of your home is really only meaningful if you're planning to sell & downsize/move.  (The down payment is decreasing the cost/time of paying off the home, but I agree it is a long term play unless you sell.)

ep

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Re: Factoring in Home Equity into Retirement
« Reply #2 on: July 05, 2013, 07:33:39 AM »
Thanks Jane - that's also an angle I was looking at, that I can retire once I have enough money to hold me for the # years I still have my mortgage, than the amount can go down a significant amount.

Gerard

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Re: Factoring in Home Equity into Retirement
« Reply #3 on: July 05, 2013, 07:45:51 AM »
In any case, IMO the market value of your home is really only meaningful if you're planning to sell & downsize/move.

I think it's worth keeping "market value" and "equity" separate in these types of discussions (although, yeah, I get that increased market value means more equity!). Building more equity in your house (through extra mortgage payments, 'cause it's hard to increase market value yourself*) does have some meaningful value while you're still there in that a HELOC secured by home equity is better than a cash emergency fund, especially when you're not using it. Plus, I guess, you could live with a slightly smaller investment 'stash (i.e., a higher SWR) if you knew you could deal with a bad year by briefly dipping into the HELOC rather than selling investments. (Anybody want to comment on this? I'm thinking the kind of person who pays off a mortgage rather than buying investments might be too conservative to want to go back into debt during retirement...)

*You can increase market value through repairs and renovations, of course, but these often don't pay back in full and don't pay back at all if you live in an undesirable area.

arebelspy

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Re: Factoring in Home Equity into Retirement
« Reply #4 on: July 05, 2013, 08:33:05 AM »
It's fairly simple, IMO.  My answer to factoring in home equity/thinking about it in your stache:
You don't.  Most often, stache means your portfolio, that can generate income.

Add up all your expenses (this includes mortgage/rent).  You need ~25x that invested (assuming a 4% SWR).

If your house is paid off, then you'll have lower expenses (but also a lower stache, due to it being tied up in home equity).

Taken from previous discussion on this topic here, for further reading: http://www.mrmoneymustache.com/forum/real-estate-and-landlording/how-to-think-about-home-equity-in-the-'stash/
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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ep

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Re: Factoring in Home Equity into Retirement
« Reply #5 on: July 05, 2013, 09:07:12 AM »
Ah thank you. I tried searching, but obviously not well enough >_<

arebelspy

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Re: Factoring in Home Equity into Retirement
« Reply #6 on: July 05, 2013, 09:38:05 AM »
Ah thank you. I tried searching, but obviously not well enough >_<

No worries.  Welcome to the forums.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.