Simple question: House value included in Stash or not?

[videogamemaker]

I feel quite silly about this, but don't quite understand if the formula of "save 25x annual living expenses" includes house value, or not.

Should one have a paid off house + 25x annual living expenses, or a paid off house included in that 25 x annual living expenses? 

[Ottawa]

I feel quite silly about this, but don't quite understand if the formula of "save 25x annual living expenses" includes house value, or not.

Should one have a paid off house + 25x annual living expenses, or a paid off house included in that 25 x annual living expenses?

Generally 25x relates to available investable cash at time of FIRE.  However, it could be more 'complicated' than that. 

If you required 40K annual expenses, you could achieve this through other ways than just 1,000,000 cash (4% rule).

Perhaps you get 20K in rental income.  Then you would require 500K in investable cash.   

However, if you plan on selling your house in FIRE and releasing a certain quantity of investable equity...then you would include that amount in your 25x.  For instance you are selling a 600K home (mortgage free) and downsizing to a 200K apartment.  You will release 400K...which supplement your stash of 600K to make 1,000,000...

Perhaps you have a pension plan that starts giving you 40K annually at 60...but you are FIREing at 40.  Now you may only need 20 years worth of cash, or 400K.

[Roland of Gilead]

Include the equity in the house because you can always sell it and downsize or reverse mortgage, etc.

[stevesteve]

Stash can mean many things.  If it means net worth then you count it.  If it means assets that you will use to bring you yearly income then don't (unless you're going to sell it and invest).

For thinking about retirement, I don't think of my house as an asset that could earn money for me but I also don't think of rent on the expenses side.

[Mega]

House is a purchased asset that decreases you expenses, or increases your income as homeowner equivalent rent, depending on how you want to look at it.

(E.g. It would cost me $2500 a month to rent where I live ($30,000 a year). To generate this income in retirement at a 4% safe widthdrawal rate, I would need $750,000. Since my house only cost $360,000, this long term purchase decreased my FIRE number by $390,000.)

Ps, yes I know I am not taking into account property taxes and maintenance in the above. It is an example only.

[Emg03063]

If you're comfortable doing a reverse mortgage to unlock the equity in retirement, then include it.  If not, then don't.

[samburger]

House is a purchased asset that decreases you expenses, or increases your income as homeowner equivalent rent, depending on how you want to look at it.

(E.g. It would cost me $2500 a month to rent where I live ($30,000 a year). To generate this income in retirement at a 4% safe widthdrawal rate, I would need $750,000. Since my house only cost $360,000, this long term purchase decreased my FIRE number by $390,000.)

Ps, yes I know I am not taking into account property taxes and maintenance in the above. It is an example only.

Nope. It decreased your FIRE number the whole cost of the rent, so $750k. Right now I rent for $9,000/year, which I'll need $225k at 4% to sustain in FIRE. My total FIRE number is $700k.

If I bought a house right now in full, I could shave the cost of rent off my FIRE number, bringing it down from $700k to $475k.

To the OP: I'm not interested in a reverse mortgage for my ideal calculations, and I'll buy a home to live in. The equity doesn't count in my stash calculations because it's not income producing.

If it doesn't produce an income, it's just a thing I own.

[Roland of Gilead]

If it doesn't produce an income, it's just a thing I own.

BRK-A stock doesn't produce you any income.  Would you not include it in your investments?

[soccerluvof4]

I included it in my total net worth but to be safe at a fire sale price and when i think of retirement I mentally dont think of it in my equation but on paper i do since easy enough to deduct out. For example My house today is worth 560k and my Vacation property is close to 400k and both owned outright BUT in my real estate i have it listed as 8ook total as opposed to 960k.  Perhaps dumb but lets me think of things more conservatively and thats what lets me sleep at night. So whatever works for you! You can manipulate numbers all sorta ways so I chose ultra conservative.

[Roland of Gilead]

I included it in my total net worth but to be safe at a fire sale price and when i think of retirement I mentally dont think of it in my equation but on paper i do since easy enough to deduct out. For example My house today is worth 560k and my Vacation property is close to 400k and both owned outright BUT in my real estate i have it listed as 8ook total as opposed to 960k.  Perhaps dumb but lets me think of things more conservatively and thats what lets me sleep at night. So whatever works for you! You can manipulate numbers all sorta ways so I chose ultra conservative.

That is also how I include our home equity in our net worth/investments.  I know it is a (poor) hedge against inflation, but then again so are most bonds right now.  I value it at what I could sell it for on craigslist in about one week...about 60% of true market value.

[soccerluvof4]

haha! ^+6 Totally!

[MDM]

...don't quite understand if the formula of "save 25x annual living expenses" includes house value, or not.

In a word: "not".

See http://en.wikipedia.org/wiki/Trinity_study and related links for the origin of "save 25x" (aka withdraw x/25x = 4%).

You can add "what if?"s to your heart's content (e.g. "what if I sell the house and move in rent free with my kids?") that could change the answer, but as others have said the simplest answer is "no, don't count your house value in your retirement Stash."

[videogamemaker]

Thanks everyone for the input. I understand much more clearly now, even though I know it is not a hard and fast rule.

[samburger]

If it doesn't produce an income, it's just a thing I own.

BRK-A stock doesn't produce you any income.  Would you not include it in your investments?

Of course not. Stocks can only be bartered for breakfast cereal and Smartwool socks. It has personal value to me, but it doesn't count in the stash.

[Thegoblinchief]

I do, partly because I have to list the mortgage in the liabilities section. Once the mortgage is gone, I will probably remove the housing line item (highly illiquid, non income producing) or as others have noted, list it as a "fire sale" item.

At the very least, discount 10% of an estimated fair market value for commission, closing costs! and negotiating room when selling.

[Tyler]

...don't quite understand if the formula of "save 25x annual living expenses" includes house value, or not.

In a word: "not".

See http://en.wikipedia.org/wiki/Trinity_study and related links for the origin of "save 25x" (aka withdraw x/25x = 4%).

You can add "what if?"s to your heart's content (e.g. "what if I sell the house and move in rent free with my kids?") that could change the answer, but as others have said the simplest answer is "no, don't count your house value in your retirement Stash."

+1

It's important to note the 4% SWR was calculated by studying the historical returns of stocks and bonds, but not real estate.  So including home equity in your SWR calculations violates one of the basic assumptions the number is based on.  Do this at your own risk.  When your home equity is a significant percentage of your assets (as it is for most people), I think calculating this way is especially misguided. 

I personally only count my liquid investments in my retirement calculations.  A paid-off house greatly reduces my expenses, which helps the numbers a lot. 

[bobmarley9993]

I would include it if you can extract the equity and invest it.

For example, assume you have a house that's worth $500k and have it paid off.   If you are willing to move to a smaller/more remote house that is only $250k and invest the remaining funds then I would include them.  So assuming there's $40k lost between fees and slightly lower sale price, in this case you would have $210k that you could extract and invest.   I would count that $210k as part of my stash and in fact that is what I do (of course my housing figures are different).   For some people, it can have a significant impact on the number of years of savings they have.  You just have to be realistic with yourself as to whether you are really willing to move and what your house value really is.

[MooseOutFront]

I do not include it. My mortgage payment is part of my annual expenses that I need to cover by 25x in investments. The equity in it I just see as the room I have to move without increasing the morrgage expense in the future. Basically my current house value is my FI house budget.