Author Topic: FIRE planning, calculators, and sale (downsizing) of primary residence  (Read 2955 times)

Clean Shaven

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I'm running various scenarios through firecalc and cfiresim in order to see where we're at for FIRE planning.  Just wanted to see if anyone can point out any flaws in how I'm looking at this.

Wife and I own one house, no mortgage, no debt.  The house would currently sell for $1 million, ballpark.  To give you an idea of comparative local real estate pricing, it's in a fancypants neighborhood in our city, where you could get a more typical single family house for $350-400K in a nice neighborhood.

We're planning on selling the house and downsizing in another 15-20 years.  For FIRE planning purposes, I'm estimating that we take $500K out of the house equity when downsizing, which then goes into the stash.  I'm calculating these numbers based on present-day-value of $500K, so I am assuming that the real estate prices increase roughly proportionally (between now and sale time in 15-20 years) for both our house and the downsize house.

Mustachians, critique away.  What am I missing?  If you own a home and intend to downsize in the future (or sell and then rent a place to live), are you planning similarly?  Why or why not?

The reason why I'm asking for input:  if I factor in the anticipated future cash influx of $500K, then the FIRE calculators allow for quite a bit higher initial SWR than if I do not.  Since selling/downsizing is definitely part of the plan, it seems wrong not to factor in the future cash influx. 

mathjak107

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Re: FIRE planning, calculators, and sale (downsizing) of primary residence
« Reply #1 on: August 04, 2016, 05:08:24 PM »
my opinion is only plan around the liquid investments you have . items you are consuming stay expenses until the time they are not .

it is always better to plan around a lower swr and take a raise later then not be able to sell and have to take a pay cut . 


« Last Edit: August 04, 2016, 05:09:58 PM by mathjak107 »

tonysemail

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Re: FIRE planning, calculators, and sale (downsizing) of primary residence
« Reply #2 on: August 04, 2016, 05:59:41 PM »
what about taxes?

some people harvest capital gains when the gains exceed the homeowner exemption.

Clean Shaven

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Re: FIRE planning, calculators, and sale (downsizing) of primary residence
« Reply #3 on: August 04, 2016, 10:19:33 PM »
what about taxes?

some people harvest capital gains when the gains exceed the homeowner exemption.
I don't understand this - could you explain further?

Current exemption from capital gains for a couple, selling a house lived in for 2+ years, is $500k.  Do you mean that we should consider selling in order to use the exemption and take the $ out of the house?

tonysemail

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Re: FIRE planning, calculators, and sale (downsizing) of primary residence
« Reply #4 on: August 05, 2016, 05:35:30 PM »
yup, that's what i mean.
you're talking about downsizing from a million dollar house in 20 years.
Think about the capital gains you'll pay in 20 years if your house keeps appreciating.
You can always choose to pay the taxes and defer the problem until then, but I'd at least run the numbers and think about it.
FWIW - my neighbor is 65 years old and in this exact situation.
I have co-workers that trade up their house every so often because we've been in a rising market for homes.

Eucalyptus

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Re: FIRE planning, calculators, and sale (downsizing) of primary residence
« Reply #5 on: August 06, 2016, 12:25:21 AM »
Other ideas that might be a factor perhaps (in no particular order):
-a house in the higher end of the market is usually bigger and thus requires more maintenance. This costs time and money, affecting your savings rate pre FIRE.
-big house pre FIRE is more expensive on utilities, all other things equal. Affects savings rate.
-minimalists are often a fan of small spaces as they make it easier mentally not to fill them with stuff. Not buying stuff saves money. Remove the urges.
-If you get into a smaller space now, you have more time to prepare your living situation there for FIRE.
-I reckon if you made the call to sell a million $ house now and downsize for FIRE, it would be, obviously, a big call to make if you asked any normal spendypants. But, making such a big change, it is a BIG statement to yourselves, that you are clear about your goals to FIRE, and that you will achieve it. You are prepared to do such things in order to FIRE. Doing it now removes that big decision from the motivation/procrastination equation and simplifies things moving forward.
-Being in your smaller FIRE house, you feel and know what its like to live in it, in that exact space. You can much more easily mentally picture Post FIRE.
-Being in your smaller FIRE house, you have time to prepare and invest in things that are moustachian but dependent on that location. Examples could be, making it more off grid in various ways, planning building and using a veggie garden, buying in bulk spare compressors on the cheap for that HVAC unit that is specific to the house (random, yes, but...). If you are in the bigger house, its possible you will put these things off. An enormous veggie garden with fruit trees, for example, might not be desirable in that suburb when it comes to sell. Also the fruit trees take time to establish. Especially in the few years prior to FIRE, some of these you might put off, affecting your savings rate pre FIRE.
-Diversification. If you keep it until FIRE, you would have over half a million in a single asset in a single location. This is a normal issue with real estate investing and is up to you whether that risk is an issue.
-Society might change a bit at the higher class end, who knows. Your million $ house may be less desirable by then. Its more dependent on a small market (in terms of numbers of buyers). It might be more desirable. Many property investors tend to avoid the higher end of town for various reasons, but often it can be more variable in both directions.

Just some things to think about :-)

LAGuy

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Re: FIRE planning, calculators, and sale (downsizing) of primary residence
« Reply #6 on: August 06, 2016, 12:49:13 AM »
what about taxes?

some people harvest capital gains when the gains exceed the homeowner exemption.
I don't understand this - could you explain further?

Current exemption from capital gains for a couple, selling a house lived in for 2+ years, is $500k.  Do you mean that we should consider selling in order to use the exemption and take the $ out of the house?

I don't believe the 500k exemption is indexed to inflation. Could be wrong on that though, I can't find any information on the web saying it is.

mathjak107

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Re: FIRE planning, calculators, and sale (downsizing) of primary residence
« Reply #7 on: August 06, 2016, 01:22:06 AM »
it is not indexed

GreenEggs

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Re: FIRE planning, calculators, and sale (downsizing) of primary residence
« Reply #8 on: August 08, 2016, 08:18:13 AM »
When you downsize are you planning to move to a less expensive home or a smaller home, or both?

I enjoy having my "stuff", but don't enjoy the show off stuff in the expensive neighborhoods.  I like my toys & tools, but they don't need to be brand new or European.


Clean Shaven

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Re: FIRE planning, calculators, and sale (downsizing) of primary residence
« Reply #9 on: August 08, 2016, 11:42:24 AM »
yup, that's what i mean.
you're talking about downsizing from a million dollar house in 20 years.
Think about the capital gains you'll pay in 20 years if your house keeps appreciating.
You can always choose to pay the taxes and defer the problem until then, but I'd at least run the numbers and think about it.
FWIW - my neighbor is 65 years old and in this exact situation.
I have co-workers that trade up their house every so often because we've been in a rising market for homes.

Thanks - worth considering, certainly, but probably not something we are likely to do, for a couple reasons -
1) Moving is a PITA
2) Transaction costs of buying/selling
3) Guessing that the $500K capital gains exemption will increase over time.  I would expect it is inflation or CPI influenced, though not directly tied.

Clean Shaven

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Re: FIRE planning, calculators, and sale (downsizing) of primary residence
« Reply #10 on: August 08, 2016, 11:43:53 AM »
Other ideas that might be a factor perhaps (in no particular order):
<snip>

Thanks!  All very good points.

Clean Shaven

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Re: FIRE planning, calculators, and sale (downsizing) of primary residence
« Reply #11 on: August 08, 2016, 11:46:51 AM »
When you downsize are you planning to move to a less expensive home or a smaller home, or both?

I enjoy having my "stuff", but don't enjoy the show off stuff in the expensive neighborhoods.  I like my toys & tools, but they don't need to be brand new or European.

At downsize time, we expect to move to both a less expensive and smaller house.  Current large house is actually less expensive to maintain, and utilities costs are lower, compared to last house -- it's a lot better built, better insulation and windows/doors, etc.

tonysemail

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Re: FIRE planning, calculators, and sale (downsizing) of primary residence
« Reply #12 on: August 08, 2016, 12:00:18 PM »
that is fair.  I will not do it myself for many reasons.
But in the spirit of furthering the discussion, I'll add that transactions costs are around 4-6%.
The NIIT alone will offset that.
My understanding is the exemption limits have been in place since 1997 when sec 121 was enacted.



Jrr85

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Re: FIRE planning, calculators, and sale (downsizing) of primary residence
« Reply #13 on: August 08, 2016, 01:03:47 PM »
I'm running various scenarios through firecalc and cfiresim in order to see where we're at for FIRE planning.  Just wanted to see if anyone can point out any flaws in how I'm looking at this.

Wife and I own one house, no mortgage, no debt.  The house would currently sell for $1 million, ballpark.  To give you an idea of comparative local real estate pricing, it's in a fancypants neighborhood in our city, where you could get a more typical single family house for $350-400K in a nice neighborhood.

We're planning on selling the house and downsizing in another 15-20 years.  For FIRE planning purposes, I'm estimating that we take $500K out of the house equity when downsizing, which then goes into the stash.  I'm calculating these numbers based on present-day-value of $500K, so I am assuming that the real estate prices increase roughly proportionally (between now and sale time in 15-20 years) for both our house and the downsize house.

Mustachians, critique away.  What am I missing?  If you own a home and intend to downsize in the future (or sell and then rent a place to live), are you planning similarly?  Why or why not?

The reason why I'm asking for input:  if I factor in the anticipated future cash influx of $500K, then the FIRE calculators allow for quite a bit higher initial SWR than if I do not.  Since selling/downsizing is definitely part of the plan, it seems wrong not to factor in the future cash influx.

For most people, I would say don't count it, because I think it's unlikely most people will actually meaningfully downsize.  I have seen empty nesters have trouble downsizing to even a 2500 sq. ft. house because they didn't think it left enough room for grandkids to visit.  Or having trouble moving to a 2200 sq foot 3/2 because it doesn't feel as open as their current 2900 sq. ft. 3/2.  Guessing the odds are much better that people participating in this forum would be willing to downsize, but it's something to think about.

frugledoc

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Re: FIRE planning, calculators, and sale (downsizing) of primary residence
« Reply #14 on: August 08, 2016, 01:59:17 PM »
Dude, a simple "I was wrong" would have sufficed.  What a waste of your time typing that.

Clean Shaven

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Re: FIRE planning, calculators, and sale (downsizing) of primary residence
« Reply #15 on: August 08, 2016, 03:12:48 PM »
Dude, a simple "I was wrong" would have sufficed.  What a waste of your time typing that.

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