Do you count your residence as part of your asset allocation?

[MrMoneySaver]

I'm trying to figure out the right asset allocation for my retirement funds, and my wife's as well. Right now we are somewhere around 85 percent stocks (domestic and international index funds, mostly) and the rest is bonds. I'm struggling with how much to hold in bonds. We're both 41 years old.

However, about half out net worth is tied up in home equity. (I'm not saying this is a good thing.)

Should I think of the retirement funds independently, or should I think of it all as one portfolio, with the house being similar to cash/bonds? If the former, I was thinking of doing an 80/20 mix of stocks/bonds. If the latter, I probably wouldn't want to hold much in bonds at all.

[jgoody]

For me personally, I tend to think of my house as "other" and not part of net worth/asset allocation. 
I happen to live in the Cascadia Subduction zone, so one reason I wouldn't liken my home equity to a bond is that my perceived risk is much higher than a bond holding.  It's also one of the reasons I don't count it towards net worth.  Anyway, that's the way I look at it.

[keyvaluepair]

You have to live somewhere & unless you plan to move to a lower cost area (or rent the house), it doesn't count.

[Tyson]

You have to live somewhere & unless you plan to move to a lower cost area (or rent the house), it doesn't count.

Right on.  For FIRE, home equity doesn't count. 

Re: the ratio - I'm staying closer to 90/10 during accumulation phase, and as I get closer to retirement I'll shift enough toward bonds to cover 3 years of living expenses.  That way if there's a crash, I can weather it without too much difficulty.  And I plan to have my house paid off before FIRE.  Once I'm done with work, I don't want a mortgage hanging over my head....

[GuitarStv]

You have to live somewhere & unless you plan to move to a lower cost area (or rent the house), it doesn't count.

Right on.  For FIRE, home equity doesn't count. 

As was previously mentioned, if you're planning on selling your home and moving to a place with much lower cost of living I think that home equity (minus the average cost of a house in the area you're planning to move to) should probably be counted towards your savings.

Ex:
Dude owns a one million dollar home in the expensive city where his job is.  He has 500 grand invested in stocks.  Upon retirement he's planning to move to an area where the average price of a similar home is 500 grand.  This guy can figure that he has about a million dollars saved for use in retirement.  It would be silly to ignore that.

[Tyson]

You have to live somewhere & unless you plan to move to a lower cost area (or rent the house), it doesn't count.

Right on.  For FIRE, home equity doesn't count. 

As was previously mentioned, if you're planning on selling your home and moving to a place with much lower cost of living I think that home equity (minus the average cost of a house in the area you're planning to move to) should probably be counted towards your savings.

Ex:
Dude owns a one million dollar home in the expensive city where his job is.  He has 500 grand invested in stocks.  Upon retirement he's planning to move to an area where the average price of a similar home is 500 grand.  This guy can figure that he has about a million dollars saved for use in retirement.  It would be silly to ignore that.

True.  I just don't think that's very many people.  But maybe it is.... we should do a survey!  ;-)

[boarder42]

i think you're asking the wrong question... a better question would be how can i get half of my networth currently tied up in an asset that i can typically get a loan on for around 4% for 30 years out and working for me.

[triangle]

I consider my home most closely aligned to the REIT investment category. Similar to a Bond only in that it should have a more stable resale value and if rented out should generate steady income. But with yearly taxes and maintenance and being necessary for living I do not consider it as part of my retirement plan.

I agree with your thoughts on holding minimal retirement savings in bonds. I would especially avoid long term bonds given their price and your age.

[MrMoneySaver]

I consider my home most closely aligned to the REIT investment category. Similar to a Bond only in that it should have a more stable resale value and if rented out should generate steady income. But with yearly taxes and maintenance and being necessary for living I do not consider it as part of my retirement plan.

I agree with your thoughts on holding minimal retirement savings in bonds. I would especially avoid long term bonds given their price and your age.

What bond percentage do you see as reasonable at our age?

[triangle]

I consider my home most closely aligned to the REIT investment category. Similar to a Bond only in that it should have a more stable resale value and if rented out should generate steady income. But with yearly taxes and maintenance and being necessary for living I do not consider it as part of my retirement plan.

I agree with your thoughts on holding minimal retirement savings in bonds. I would especially avoid long term bonds given their price and your age.

What bond percentage do you see as reasonable at our age?

One could argue that it should be zero, though I am not recommending that you should hold zero. I am older than you and have some bonds and they are about 15% of my retirement holdings.

Where I hesitate in not recommending bonds to anyone regardless of their age, is considering how long the current bull market has been running. If I had a lump sum of new money to invest today I would put much more than 15% of it into short-to-intermediate term bonds while I dollar cost averaged into the market in an effort to play it safe. I consider bonds as a way to preserve capital in a stock market downturn and hopefully keep up with real inflation. But if bought and held for 25+ years I would not consider them as a way to fund a robust retirement since their growth should be limited when compared to stocks.

[boarder42]

I consider my home most closely aligned to the REIT investment category. Similar to a Bond only in that it should have a more stable resale value and if rented out should generate steady income. But with yearly taxes and maintenance and being necessary for living I do not consider it as part of my retirement plan.

I agree with your thoughts on holding minimal retirement savings in bonds. I would especially avoid long term bonds given their price and your age.

What bond percentage do you see as reasonable at our age?

One could argue that it should be zero, though I am not recommending that you should hold zero. I am older than you and have some bonds and they are about 15% of my retirement holdings.

Where I hesitate in not recommending bonds to anyone regardless of their age, is considering how long the current bull market has been running. If I had a lump sum of new money to invest today I would put much more than 15% of it into short-to-intermediate term bonds while I dollar cost averaged into the market in an effort to play it safe. I consider bonds as a way to preserve capital in a stock market downturn and hopefully keep up with real inflation. But if bought and held for 25+ years I would not consider them as a way to fund a robust retirement since their growth should be limited when compared to stocks.

This is poor market timing advice. The level of the market should not dictate your AA. Don't time the market. Pick an AA and stick to it.  The market is barely high for people ratios and shiller when you remove 08&09. The market could go flat for 2 years and not drop.  No one knows.

[Indexer]

Your house, like your car, or any other tangible material possession, is a use asset.

It is not an investment and it is not part of your asset allocation. If you get rental or investment properties in the future revisit this line of thought at that time.

This is poor market timing advice. The level of the market should not dictate your AA. Don't time the market. Pick an AA and stick to it.  The market is barely high for people ratios and shiller when you remove 08&09. The market could go flat for 2 years and not drop.  No one knows.

+1  Well at least the part about not market timing. The CAPE ratio is still high even if you exclude 2008. However, that does not mean the market will crash anytime soon. It could stay elevated for many years or go even higher. Whether CAPE is high or not you should still pick an AA and stick to it.

What bond percentage do you see as reasonable at our age?

How close are you to retiring? A 41 year old retiring at 65 should have a different AA than a 41 year old retiring at 42.

[ixtap]

I live on a boat. Not only do I not count it, my target number allows for replacement above and beyond a 4% SWR.

[MrMoneySaver]

How close are you to retiring? A 41 year old retiring at 65 should have a different AA than a 41 year old retiring at 42.

Probably looking at the 50 to 55 range.

[triangle]

I consider my home most closely aligned to the REIT investment category. Similar to a Bond only in that it should have a more stable resale value and if rented out should generate steady income. But with yearly taxes and maintenance and being necessary for living I do not consider it as part of my retirement plan.

I agree with your thoughts on holding minimal retirement savings in bonds. I would especially avoid long term bonds given their price and your age.

What bond percentage do you see as reasonable at our age?

One could argue that it should be zero, though I am not recommending that you should hold zero. I am older than you and have some bonds and they are about 15% of my retirement holdings.

Where I hesitate in not recommending bonds to anyone regardless of their age, is considering how long the current bull market has been running. If I had a lump sum of new money to invest today I would put much more than 15% of it into short-to-intermediate term bonds while I dollar cost averaged into the market in an effort to play it safe. I consider bonds as a way to preserve capital in a stock market downturn and hopefully keep up with real inflation. But if bought and held for 25+ years I would not consider them as a way to fund a robust retirement since their growth should be limited when compared to stocks.

This is poor market timing advice. The level of the market should not dictate your AA. Don't time the market. Pick an AA and stick to it.  The market is barely high for people ratios and shiller when you remove 08&09. The market could go flat for 2 years and not drop.  No one knows.

Market timing? I suggested dollar cost averaging into stocks/funds with any unexpected income. It is a risk management approach which may not maximize gains but should not maximize losses either. But I also lean towards value investing with a margin of safety, who believes that market corrections can not be predicted but should not be ignored after long periods of good returns where stock prices have increased (percentage wise) faster than the economy is growing. But regardless of any short term concerns the market should be higher over the long term, especially decades from now.

I certainly do not suggest that one exit stocks currently held in their retirement account and wait for some lower entry point, regardless of current market levels or short term volatility swings such as sharply heading higher or lower. I think long and steady is the wise approach. Where long is not just about avoiding trading between market sectors but also weighting the portfolio towards stocks and away from bonds.

[talltexan]

Suppose you live in a paid-for house (no mortgage) which you have no plans to sell.

Your house is a bond that pays you an amount of money each month equivalent to what it would cost to rent it. Subtract taxes/insurance/maintenance, and then value that stream of payments using a risk-free rate (perhaps the 10-year treasury yield).

[triangle]

Suppose you live in a paid-for house (no mortgage) which you have no plans to sell.

Your house is a bond that pays you an amount of money each month equivalent to what it would cost to rent it. Subtract taxes/insurance/maintenance, and then value that stream of payments using a risk-free rate (perhaps the 10-year treasury yield).

A paid-for house also reduces the amount of yearly income tax owned. At least when compared to selling that house and investing the lump sum into some incoming producing assets such as stocks, bonds, REIT, etc in order to cover the new rent payments. Since that newly added income would be taxed at one's highest marginal tax rate, making home ownership look more attractive than a basic Rent vs Own comparison might otherwise suggest.

[Notch]

Suppose you live in a paid-for house (no mortgage) which you have no plans to sell.

Your house is a bond that pays you an amount of money each month equivalent to what it would cost to rent it. Subtract taxes/insurance/maintenance, and then value that stream of payments using a risk-free rate (perhaps the 10-year treasury yield).

Or more simply, ignore the value of your house for FIRE/AA calculations.  The 'free' rent it gives you is already included as a reduction on your annual spending.

[PizzaSteve]

I'm trying to figure out the right asset allocation for my retirement funds, and my wife's as well. Right now we are somewhere around 85 percent stocks (domestic and international index funds, mostly) and the rest is bonds. I'm struggling with how much to hold in bonds. We're both 41 years old.

However, about half out net worth is tied up in home equity. (I'm not saying this is a good thing.)

Should I think of the retirement funds independently, or should I think of it all as one portfolio, with the house being similar to cash/bonds? If the former, I was thinking of doing an 80/20 mix of stocks/bonds. If the latter, I probably wouldn't want to hold much in bonds at all.

I would not consider your paid off home as part of your asset allocation.

My FIRE calculations consider income/withdraw rate of total invested wealth vs the expense level we need to maintain the standard of living we want in our community of choice. 

In terms of allocation of investments, the closer to 'barely enough' you are, the more likely you would likely be better served by a take risk via leverage/100% stocks strategy (assuming you have an adequate backup plan).  The closer you are to 'oversaved, won the game regardless' then i would advise less volatility via something like an 'age in bonds' strategy.

Either way, the home is only relevant if you plan to use it as collateral for a leverage play.  That said, have a backup plan if you use leverage and an (unlikely) crash costs you your home and a big chunk of your savings.

[talltexan]

really there seem to be four categories of assets (from most relevant to Net worth to least relevant):

CashFlow-generating assets (like a rental property, or high-dividend stock fund)
Non-cash-flow assets that are intended to support expenses
Housing

Depreciating assets (like cars/tools) that are useful, but don't factor into supporting explicit expenses.

[MrMoneySaver]

Thanks for your ideas, everyone. I thought it all through and read up a bit more on asset allocation. I decided not to let the house factor into the asset allocation. Although I do think talltexan's strategy of valuing the house like a bond makes a lot of sense and technically seems like the "right" way to me.

In the end, I think we'll increase our bond holdings in our retirement accounts rather than let the house count as a bond-type holding. I'm just not ready to stomach a crash and possible multiyear bear market while holding 90 to 100 percent stocks. It would be bad enough at 20 percent bonds, but at least I'd know I did what I could. We weathered 2008 and 2009 at close to 100 percent stocks, but our accounts were smaller then.

[Livewell]

I count it as an illiquid part of net worth, it’s an asset we own.

It’s not part of my asset allocation or FIRE calculations. 

However I do consider the equity as part of our backstop, we could always downsize or move to a LCOL area.

[Car Jack]

Stuff that I consider in my asset allocation would include anything that I can rebalance with.  With a house, what would you do?  Sell off the porch to purchase more stock?

No, I don't include it.  But I don't know that I'll sell my house in retirement either and downsize.  There are so many costs in selling/buying and moving that scenarios I've run usually end up with me in a smaller house and saving zip.

I do include my house value in my net worth.  What is the net worth number used for?  Nothing I can think of.

[MrMoneySaver]

I do include my house value in my net worth.  What is the net worth number used for?  Nothing I can think of.

Excluding you from Social Security and Medicare someday, probably.

[talltexan]

Stuff that I consider in my asset allocation would include anything that I can rebalance with.  With a house, what would you do?  Sell off the porch to purchase more stock?

No, I don't include it.  But I don't know that I'll sell my house in retirement either and downsize.  There are so many costs in selling/buying and moving that scenarios I've run usually end up with me in a smaller house and saving zip.

I do include my house value in my net worth.  What is the net worth number used for?  Nothing I can think of.

Let's say there's a bear market and your stock portfolio drops substantially. At some point, would you consider selling your (paid for) house, putting that money into investments, and renting for one or two years while stocks recover?

[PizzaSteve]

Stuff that I consider in my asset allocation would include anything that I can rebalance with.  With a house, what would you do?  Sell off the porch to purchase more stock?

No, I don't include it.  But I don't know that I'll sell my house in retirement either and downsize.  There are so many costs in selling/buying and moving that scenarios I've run usually end up with me in a smaller house and saving zip.

I do include my house value in my net worth.  What is the net worth number used for?  Nothing I can think of.

Let's say there's a bear market and your stock portfolio drops substantially. At some point, would you consider selling your (paid for) house, putting that money into investments, and renting for one or two years while stocks recover?

Nope.  Too big a risk of 'catching a falling knife'.  How do you know bear market is over?

Might sell a home if I ran out of all other funding sources, to eat (or do a reverse morgage type deal, as long as price and fees were fair).

[keyvaluepair]

If you hold a smaller set of funds - max 4, then you can weather the downturns just fine by pulling the trigger. In 2008, it was pretty clear that the market was going to tank. I sold all my mutual fund holdings and bought back in after a year. You're fairly young and it seems early to be holding big bond holdings at this stage. I'm 53 and I have about 25% bonds. And have been glad that I didn't go too heavily into bond when I hit 50.....

Opinions are entirely mine.....

[FLBiker]

Agree with the majority -- I don't consider house as part of net worth or asset allocation.

[Dicey]

For asset allocation, we completely ignore it. For NW,  it was ignored in the accumulation years until rental houses were acquired and FI/FIRE was achieved. Now that we have other homes in a lower COLA we know well and could easily move into, we do count the value of our residence in our NW. Mostly just for fun, in a "Man, this shit really works" kind of way.

[BTDretire]

I did it the other way, I counted my home in my networth until I got a pretty high networth. I then decided I can't spend my house so I romoved it from the calculation.
 As a last resort, if somehow we went broke the house would be a source of money whether by selling of getting a reverse mortgage. But, if we go broke, I'd think the kids would take care of us. :-)
In any event, I think it has zero to do with AA.

[MrMoneySaver]

I do count the house as part of net worth. To me that's part of the definition of net worth -- assets minus liabilities. Some people say a house isn't an asset because of this reason or that reason, but to me an asset is a "thing you own." And a house fits that. So definitions of net worth that don't include it are a stretch.

But as I said, I won't let it influence AA.

[Exflyboy]

Another homeowner that will have to rebuild after the huge Earthquake in the Cascadia subduction zone.

The house and property is about 14% of our total NW.

So while its fun to add up it has zero bearing on asset allocations (which is 80/17/3.. stock/bond/cash) and we are FIRED. Rental income from our house is roughly 60% of our annual expenses.