Author Topic: Withdrawal Amount Calculation  (Read 6383 times)

pa2016

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Withdrawal Amount Calculation
« on: August 13, 2016, 09:30:09 PM »
I have a question on how the withdrawal amount should be calculated.
I have $800k invested. I also own a home valued currently at $1.5M (I am in Silicon Valley), but I still have a loan balance of $500k on it. So, my equity is $1M, giving me a net worth of $1.8M, correct ?
If the withdrawal rate is 4%, is it calculated as :
1) 4% of $800k invested = $32k

Or

2) 4% of 800k + $1M(my equity in the home) = $72k

???

Thanks !!!

Cheddar Stacker

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Re: Withdrawal Amount Calculation
« Reply #1 on: August 13, 2016, 09:35:40 PM »
1 unless you sell the house, then it would be 2.

PhysicianOnFIRE

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Re: Withdrawal Amount Calculation
« Reply #2 on: August 13, 2016, 09:50:55 PM »
Unless you're receiving income from the home (renters, AirBNB room), then it won't generate any money for you to spend in RE.

If you sell the home, and have $1.8 million invested, you could spend the $72,000 in early retirement at a 4% withdrawal rate. Some of that would be spent on rent. If you don't need to be in the bay area, you can find a home to purchase or rent in areas that are much more affordable.

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forummm

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Re: Withdrawal Amount Calculation
« Reply #3 on: August 14, 2016, 10:03:42 AM »
What they said. You could also buy a $200k house (not in that area of course) and have 4% of $1.6M to fund the rest of your life. Remember to subtract your costs of sale (like realtors) from the home equity.

FernFree

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Re: Withdrawal Amount Calculation
« Reply #4 on: August 15, 2016, 09:39:21 AM »
I've decided to count my home equity (minus a healthy chunk for closing costs and needed repairs/upgrades) in my stache number for the below reasons:

1. Home is in a market that has consistently increased year over year, but not so quickly like some of the bubble markets, so minimal risk that value will decrease in the next few years.  I consider this a plus because it means my stache is diversified and even if the stock market tanks, I could have a relatively good return for the year.
2. My mortgage/taxes/etc. are very low in this house -- lower than renting an apartment in my area.
3. If shit hit the fan, I can sell the house to access the funds and I'm willing to do this.
4.  There are multiple ways to use the house to generate income in the future:
     -Rent out a room
     -Rent the entire house
     -Sell the house

Given all of the above, I think it is fine for me to include the principal in my stache and not work longer than necessary.  Appreciate any feedback on my logic.

I guess part of my thinking is also that the home principle is about 15% of my overall stache, not as scary as it being >50% like the OP's situation.

SunnyMoney

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Re: Withdrawal Amount Calculation
« Reply #5 on: August 15, 2016, 12:47:05 PM »
Are you willing to sell the house someday so you can access the equity?  If so then #2.  Remember, the 4% rule is based on not running out of money for 30 years - it doesn't mean the initial capital is preserved.  So, if you use #2 then someday your liquid capital of $800k may be exhausted and you have to make the capital stored in your house liquid.  Perhaps there are ways of doing that and staying in the house (e.g. reverse mortgage) but just understand that you will probably need to get at that capital someway if you decided to use #2.

FernFree

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Re: Withdrawal Amount Calculation
« Reply #6 on: August 15, 2016, 03:04:55 PM »
Are you willing to sell the house someday so you can access the equity?  If so then #2.  Remember, the 4% rule is based on not running out of money for 30 years - it doesn't mean the initial capital is preserved.  So, if you use #2 then someday your liquid capital of $800k may be exhausted and you have to make the capital stored in your house liquid.  Perhaps there are ways of doing that and staying in the house (e.g. reverse mortgage) but just understand that you will probably need to get at that capital someway if you decided to use #2.

Yeah, I'm planning to either sell or rent it out within next 10 years.  Waiting for kids to grow up and doggies to go on the rainbow bridge first, but will be happy to practice some geographic arbitrage after that and live wherever COL is low.  Maybe that's a good way to determine if you count it or not -- are you truly willing to sell if you need the money?

EndlessJourney

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Re: Withdrawal Amount Calculation
« Reply #7 on: August 16, 2016, 03:17:49 AM »
If you are counting your principal residence in your stache with the thought of downsizing in a financial crush, then I'd figure out what the minimum cost of where you'd most likely move to and take it out of the equation.

So if you are living in a $1M house and are willing to downsize to a $400K house, then I'd say you have $600K to add to your stache.

It's not accurate to say you have the entire value of your principal residence at your disposal to buy food and toilet paper. You'll always need a roof over your head.

Even if you sell your house and rent, you will need to set aside capital to generate additional income to pay rent. Owning vs renting is just commuting the cost, moving it from one column to another.

Cap_Scarlet

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Re: Withdrawal Amount Calculation
« Reply #8 on: August 16, 2016, 03:52:05 AM »
I would calculate your withdrawal rate of how much you need to fund your living expenses.

If you run out of cash then you need to sell the house.

Simple. :)

Mr. Green

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Re: Withdrawal Amount Calculation
« Reply #9 on: August 16, 2016, 03:10:27 PM »
3. If shit hit the fan, I can sell the house to access the funds and I'm willing to do this.
The biggest problem with viewing your house as a spendable asset is this. If SHTF, there's probably a very good chance you either won't be able to sell your house, or you'd be selling it at a significantly reduced price. Consider 2008. Real estate markets were in shambles. It was literally the worst time to sell a house. If you had to, you had to, but it sure would have been nice not to lose 30-50% of however many hundred thousand your house is worth just because of a couple years timing. So if you must include it as "spendable" I definitely would use an amount less than what you'd sell it for today.

arebelspy

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Re: Withdrawal Amount Calculation
« Reply #10 on: August 21, 2016, 03:34:28 AM »
#1 from the OP (stache is invested amount--and, of course, if you're planning to sell the house, you can count that, minus some selling costs and potential taxes on some of the gains), but keep in mind that the mortgage is a fixed amount (i.e. not growing with inflation) and a fixed time period (i.e. the P&I part of the payment will end at some point), so I'd do some slightly more complicated modeling around that on something like www.cfiresim.com

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Classical_Liberal

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Re: Withdrawal Amount Calculation
« Reply #11 on: August 21, 2016, 12:09:38 PM »
The answer to your question is, depends on your intentions.  If you plan to FIRE soon and plan to stay in the house for 10 more years, it is wise to avoid considering the home equity in your withdrawal scenario.  You are essentially choosing to have inflated living costs vs a lower COL area, which requires more savings.
 
Another aspect of your scenario is that you have more than 60 percent of your assets tied up in this house.  I would compare this to having your money tied up in a single company (which may have good financials), but only has a single product they sell to a certain demographic in a small geographic area.  It may do great, or it may not.  Since we tend to be anti debt around here, one advantage to our current economy is often overlooked, ridiculously low long term lending rates.  If I were in your shoes (planning to FIRE soon, but living in current home for at least 10 more years), I would consider refinancing and cashing out a portion of my home equity for diversification purposes.  A 30 year fixed rate at 3.75% allows you to pull some equity without really changing your FIRE numbers; you can take 4%WR from higher liquid assets to offset higher housing payment.  This allows you to diversify your assets into different classes, hence if you get unlucky and the local housing market takes a bit of a shit, the bank shares more of that risk with you.  If you get lucky and the housing market continues rising, you get to take advantage of that anyway when you eventually sell.  It also provides you with liquidity that you currently do not have.

arebelspy

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Re: Withdrawal Amount Calculation
« Reply #12 on: August 21, 2016, 04:32:53 PM »
^This. Almost every person I know lost first their jobs, then their house value tanked by 50% and many were underwater and eventually lost their homes to foreclosure or a short sale during the 2008 crash ( much of their investments too).

Whoah.  Lesson: knowing Spartana is potentially fatal to one's financial interests!  ;)
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SnackDog

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Re: Withdrawal Amount Calculation
« Reply #13 on: August 23, 2016, 07:02:50 AM »
The only logic supporting using the home in the 4% SWR is if you liquidate and invest the proceeds in the stock market on or before retiring.  Otherwise, the equity in the home will appreciate or depreciate at the whim of the local housing market.  This behavior (real estate appreciation rather than stock market behavior) has not been modeled and is not part of any calculation behind the 4% SWR lasting 30 years.

I am in a similar situation and simply use investments as basis for 4% SWR.  I will either have mortgages paid off before retiring or will treat mortgage payments separately.  E.g. if I opt to take out a home equity loan to invest, I will account separately to pay the mortgage.  I do forecast property sales at certain ages (80+) which boost investments in low side portfolio performance scenarios.

mathjak107

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Re: Withdrawal Amount Calculation
« Reply #14 on: August 23, 2016, 07:08:29 AM »
I only plan around what is liquid and  i am not consuming myself.

If i am living in that house and using it than until i decide ivam no longer using it that hose stays out of the calculation
« Last Edit: September 05, 2016, 04:42:16 AM by mathjak107 »

BTDretire

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Re: Withdrawal Amount Calculation
« Reply #15 on: September 04, 2016, 03:46:08 PM »
I don't want to be to hard on you, but, if you need to ask this question,
I suggest you take a step back and spend some more time getting an understanding
about your how your nestegg generates money, your annual spending, how taxes figure in,
and how these all relate to each other.
   I would also recommend you learn all the ins and outs of Firecalc, that alone
will give you some education on how your money will support you.
 Please experiment with Firecalc, lots of catagories to adjust do that and see what effect it has.
http://www.firecalc.com/
 It is a neat program.

mathjak107

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Re: Withdrawal Amount Calculation
« Reply #16 on: September 05, 2016, 04:47:26 AM »
i would agree with that .  i find firecalc and fidelity's calculator are my favorite . fidelity's is a bit more conservative because they use monte carlo simulations to find even worse case scenario's . fidelity also assumes when using  worst case that you get hit year 1  and it deducts off your balance  immediately  .

it also has defaults built in that figure 5.50% inflation on healthcare and long term care costs so they are increased more than just a fixed rate of inflation .

fidelity also uses a formula for looking at inflation vs a fixed rate all the way through like firecalc .

in the end 90%  success in fidelity can be a 95% in firecalc or even higher . but both are close enough to get an idea .

MrMoogle

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Re: Withdrawal Amount Calculation
« Reply #17 on: September 07, 2016, 12:39:14 PM »
If you use your residence as part of your net worth, I'd also include it as an expense.  Say you have 2 options, living in a home you own that's worth $200k, or spending $8k/year on rent.  These should be about equivalent financially.  This is the opportunity cost of owning your home.  The problem is your $200k home isn't usually as valuable as $200k in stocks over time.  Homes increase with inflation, stocks increase at a higher rate.

Personally, I wouldn't use my home in the calculation.