Do you count your house in your net worth for retirement?

[Syonyk]

This isn't something I've seen tossed about much.

Do you consider a paid off home as part of your net worth, in terms of retirement calculations?  It's clearly an asset, but it's not one that will meaningfully contribute to investment income.

[deborah]

This is asked a lot. It depends. Are you going to sell your house and move when you retire? If so, you may want to include it (and also add in the costs of its replacement - whether renting or buying). Otherwise, you might just ignore it in your calculations.

Your stash is what is going to provide you with your retirement income. The 4% rule works - but it assumes your stash is invested in a certain mix of investments. You need to work out what income your own investments are actually giving you. For instance, a house that you live in is giving you NO income. When you retire you may need to think about how you are getting the income you need from your stash, and alter where you have your money invested.

[hucktard]

Yes, your net worth is defined as all of your assets minus all of your debts. That's the definition. But many people don't include the value of their house in their "investable assets", or retirement stache.

[seattlecyclone]

Yes, it's part of your net worth because it's an asset that has value. If you plan to live in it during retirement rather than selling it, it doesn't count as part of your assets that you'll be drawing 4% from. The fact that you have a paid-off house means the invested stash needed to support your lifestyle will be smaller than if you were renting.

[aspiringnomad]

Yes, your net worth is defined as all of your assets minus all of your debts. That's the definition. But many people don't include the value of their house in their "investable assets", or retirement stache.

Yeah, this is been covered a thousand times here and this is the correct answer. But no doubt the debate will rage on anyway.

[Syonyk]

This is asked a lot. It depends. Are you going to sell your house and move when you retire?

Nope!  Planning to stay here. :)

Re "asked a lot" - fair enough.  I haven't run into it in my pottings about this forum.

[voodoo_chilly]

I heard it makes the definition of a small "m" or large "M" in terms of calling yourself a millionaire.

You are a small "m" millionaire if you DO include house and other assets that are not liquid.

You are a Big "M" Millionaire if you only include assets that can be spent immediately (so, NOT including your house)

[arebelspy]

This is asked a lot. It depends. Are you going to sell your house and move when you retire?

Nope!  Planning to stay here. :)

So basically the house value should be counted in net worth (which is a meaningless number, besides for keeping score/tracking progress) but shouldn't be counted in your investable assets that will provide FIRE income (which is a meaningful number).

While the value won't be counted, the value of the paid off home will show up in your budget--by lowering your budget (by having no mortgage or rent, just property taxes/insurance), that paid off home is providing value.  You just count it that way, rather than the strict value.  :)

[chasesfish]

I heard it makes the definition of a small "m" or large "M" in terms of calling yourself a millionaire.

You are a small "m" millionaire if you DO include house and other assets that are not liquid.

You are a Big "M" Millionaire if you only include assets that can be spent immediately (so, NOT including your house)

It felt better hitting the first one compared to the second!

[wiseclam]

I joined this forum to ask this exact question.  What a coincidence!

The answers make good sense to me.  But something is missing. 

First, everyone probably knows this but the home does not have to be paid off, per Synonk’s original question, in order to have value as an asset.  The equity in your home is the asset.  If you have a $100,000 mortgage on a property that could sell for $500,000 then you are sitting on a $400,000 asset (setting aside the details of taxes, real estate commissions, etc.). 

So…  why shouldn’t you count this $400,000 as a retirement asset? 

As deborah says, below, you should NOT include the value of this asset in your retirement plans if you expect to remain in the home or otherwise trade its value for another living arrangement.  Makes sense, as the $400,000 asset is certainly not going to be earning income (even if it is increasing in value) to be used to fund retirement.

This is asked a lot. It depends. Are you going to sell your house and move when you retire? If so, you may want to include it (and also add in the costs of its replacement - whether renting or buying). Otherwise, you might just ignore it in your calculations.

Your stash is what is going to provide you with your retirement income. The 4% rule works - but it assumes your stash is invested in a certain mix of investments. You need to work out what income your own investments are actually giving you. For instance, a house that you live in is giving you NO income. When you retire you may need to think about how you are getting the income you need from your stash, and alter where you have your money invested.

However, this approach seems to leave a huge chunk of potential stash on the table - at least for the retiree who has an asset that is more than they need.  Consider…   you retire, stay in your home, probably pay it off and then what…  die with a $500,000+ asset in your estate?  Why not keep the home and enjoy it during the younger years of retirement with an explicit plan to sell the home later in retirement (like, at an age when you need assisted living and/or when maintaining a home is too much work)?  The proceeds from selling this $500,000 home (probably worth much more after years of retirement?) at an older age can be used to fund the final years of life/retirement, when you’re likely to be spending much less, anyway (http://www.bls.gov/cex/2008/Standard/age.pdf).

Another way of looking at this is to break up retirement into two parts.  For example, let’s say a person is going to retire at age 50 with the above home/asset.  Maybe they consider the first 30 years of retirement their “active retirement” years and then, at around age 80 they enter a less active (and less expensive) retirement period, where they sell the home, move into a smaller condo, a “leisure care” facility” or assisted living.

Am I thinking about this right?

[arebelspy]

Am I thinking about this right?

You're over thinking it.

However, this approach seems to leave a huge chunk of potential stash on the table - at least for the retiree who has an asset that is more than they need.  Consider…   you retire, stay in your home, probably pay it off and then what…  die with a $500,000+ asset in your estate?

...and?

How is that different than, say, renting for 2k/mo (24k/yr x 25 = 600k needed at a 4% WR to cover that) and dying with that 600k that's covering your rent sitting in your estate?

Here's the bottom line: The house IS counted, by reducing your expenses.   Counting it also in net worth would be double counting it, unless you want to up your ER budget to count rent that you would be paying otherwise (nonexistant rent).  Sounds a little silly, to me.

If you sold the home and invested the proceeds, you'd then need to pay rent out of those proceeds... presumably, you'd still be paying that rent until you passed, so you'd need those assets invested, and they'd be sitting there when you die.  Or it could be in the house, if you never sold it, sitting there when you die.  Either way, you need assets covering you until the end, and whether it's invested assets covering a higher budget that includes housing, or a lower amount of invested assets plus a paid off house covering a lower budget with no housing expense, it's six of one, half dozen of the other.

What you need to know is: What will your expenses be in ER?  What will your invested assets be to cover those expenses?

A paid off house cannot cover your other bills (short of accessing that equity in some way).

As you say, two phases could make sense, if you plan to sell.  A lot of people don't want to sell in their old age though.  They choose the home they want to finish out their days in.  They certainly shouldn't be counting that in their income plan (though, of course, it is still part of net worth).

Income in retirement can get complicated, depending on your various income streams, planned sales or acquisitions, pensions, government aid, whatever.  If you know you have a certain complex plan (e.g. selling a home in year X), model that, definitely.

But in the basic sense, a house's value should not be counted in the number you need to FIRE, unless you are getting rid of it at a set point and are modeling that (e.g. downsizing right away).  Otherwise it's value is already counted for your ER in the form of a lower budget.

There are lots of threads discussing this, if you want to read more.  :)

[boarder42]

people get way too tied up in things like this around here.

step 1 figure out what you plan to spend in retirement including your living arrangements.
step 2. take that number times 25
step 3. sum up all of your invested assets you plan to use to fund your retirment if you have a house and plan to stay then its a liability since you are paying taxes and insurance on it. and those costs should be included in step 1. or if you plan to sell figure out what the cost of your apt. or camper or whatever is going to be and include that in step one.
step 4. if step 3's total is bigger than step 2 you're done.

this isnt rocket science.  there isnt some magic way owning your house gets you to FIRE faster.

[CowboyAndIndian]

This isn't something I've seen tossed about much.

Do you consider a paid off home as part of your net worth, in terms of retirement calculations?  It's clearly an asset, but it's not one that will meaningfully contribute to investment income.

I do count my house as part of my net worth (by definition, all my assets minus my debts).

For calculating my annual withdrawal during retirement, I do NOT use the paid off home as part of the calculation. The house does not generate an income  but is more likely a liability in terms of money going out (HOA, taxes, etc).

[Fishindude]

Your house is most certainly part of your net worth, however if you intend to continue living there in retirement it's value does nothing for your retirement income.

[farmecologist]

Of course we count our house in Net Worth...it is an asset. 

That being said, sites like Personal Capital split out 'Net Worth' and 'Investments', so it makes it easy to look at the view you are interested in.

[Syonyk]

So basically the house value should be counted in net worth (which is a meaningless number, besides for keeping score/tracking progress) but shouldn't be counted in your investable assets that will provide FIRE income (which is a meaningful number).

While the value won't be counted, the value of the paid off home will show up in your budget--by lowering your budget (by having no mortgage or rent, just property taxes/insurance), that paid off home is providing value.  You just count it that way, rather than the strict value.  :)

That's what I've been doing - it made sense to me that way.  Thanks!

[arebelspy]

So basically the house value should be counted in net worth (which is a meaningless number, besides for keeping score/tracking progress) but shouldn't be counted in your investable assets that will provide FIRE income (which is a meaningful number).

While the value won't be counted, the value of the paid off home will show up in your budget--by lowering your budget (by having no mortgage or rent, just property taxes/insurance), that paid off home is providing value.  You just count it that way, rather than the strict value.  :)

That's what I've been doing - it made sense to me that way.  Thanks!

Perfect.  No problem.  :)

[aceyou]

If I'm asking myself "what is my net worth", then I definitely count the equity in my house.  When I do my monthly net worth update, gets included there. 

If I'm asking myself "what is the value of my stache", then I only include invested assets (for my wife and I this means our 403B's, our 457's, and our Roth IRA's).  So, when I'm thinking about getting my assets to 25x's my spending for FI, it doesn't count towards that. 

MMM writes about safety margins.  I think of a paid off house as a nice part of the safety margin:
- While I live in it it's a hedge against inflation...rent may go up nationwide, but I don't have to pay rent.
- It's a 5 bedroom house.  If times got rough I could rent out rooms.
- I could sell it and downsize if I wanted to pad my stache if my investments took a dive to help them recover. 
- If I get to the end of life and need extra cash to move into a home or whatever, I could sell it and buy myself some time there.

So, even though it's not part of the stache, it's very valuable, and definitely part of your net worth.   

[Greenback Reproduction Specialist]

So basically the house value should be counted in net worth (which is a meaningless number, besides for keeping score/tracking progress) but shouldn't be counted in your investable assets that will provide FIRE income (which is a meaningful number).

While the value won't be counted, the value of the paid off home will show up in your budget--by lowering your budget (by having no mortgage or rent, just property taxes/insurance), that paid off home is providing value.  You just count it that way, rather than the strict value.  :)

Or another way to look at it is, if a paid off $100k house eliminates $800/mo rent or mortgage payments. Its subtracting $800/mo or $9,600/yr off your budget. Its like it is providing a 9.6% ROI, which is pretty awesome because if you wanted to create the $800/mo income (instead of paying off the debt) you might need to invest more than $100k to do so. For example, 4.8% ROI on $200k invested is $800/mo or $9600/yr.

There are other benefits to having the debt paid off as well. For example, you could rent the house out while you travel and collect $800/mo income, you will have things that subtract from the gross income, but you get the point. If the house is in a good location, the rent might also rise over time, so it can be a good diversified investment that helps keep your income up with inflation over time.

 

[arebelspy]

So basically the house value should be counted in net worth (which is a meaningless number, besides for keeping score/tracking progress) but shouldn't be counted in your investable assets that will provide FIRE income (which is a meaningful number).

While the value won't be counted, the value of the paid off home will show up in your budget--by lowering your budget (by having no mortgage or rent, just property taxes/insurance), that paid off home is providing value.  You just count it that way, rather than the strict value.  :)

Or another way to look at it is, if a paid off $100k house eliminates $800/mo rent or mortgage payments. Its subtracting $800/mo or $9,600/yr off your budget.

Yes if comparing it to a mortgage, no if comparing it to rent, as you'd also have to add in the insurance, property taxes, repairs you wouldn't be responsible for as a tenant, potential HOA, etc. into it to compare it to rent.

Its like it is providing a 9.6% ROI, which is pretty awesome because if you wanted to create the $800/mo income (instead of paying off the debt) you might need to invest more than $100k to do so. For example, 4.8% ROI on $200k invested is $800/mo or $9600/yr.

Sure, in that scenario.  In the scenario where it's a 1MM home saving you 2k in rent, you're getting a 2.4% "return."  Much worse than the 9.6% in your numbers.

It very much depends on the specific information.

That's a discussion for the rent vs. buy threads though.

[patchyfacialhair]

Net worth for retirement? Heck no. It's not an income producing asset more than likely. Unless you plan on selling the home and moving elsewhere..

Net worth in general? Yes, because it's just a random number to put on both the asset and possibly liability column.

[pdxvandal]

Yes, definitely for net worth, not specifically for retirement although it will contribute with some significance to my post-work life.

I just undervalue the house by about $25k in Mint to account for repairs and possible (although highly unlikely) depreciation in a HOT local market. When I sell in 1-2 years, I hope to be pleasantly surprised.

[K-ice]

Net worth for retirement? Heck no. It's not an income producing asset more than likely. Unless you plan on selling the home and moving elsewhere..

Net worth in general? Yes, because it's just a random number to put on both the asset and possibly liability column.

++++
This is exactly what I do.

I also don't count the value of rental properties as I don't plan on selling them.

However, the net rental income, say $10K lowers the amount of other income I need from my stash.

[Linea_Norway]

I count roughly half the value of our paid-off house as spendable/investible money to live off, as we in retirement should move to a less central area where houses cost less than half the price of our house, combined with an even better view.

But of course, being in possession of a paid-off house, makes that you need less money to live off when retired.

Today we have practically 25 x our planned yearly spending, if we count all the stuff that we own. But as we would need a place to live, and need to drive a car, we don't count it as spendable/investable money.

[Metric Mouse]

Count as networth. Doesn't count in the 4% rule of assets though.

[adamcollin]

It depends on your individual requirements.

[wiseclam]

I’m continuing to think about this topic because the black-and-white answer that “your house is part of your net worth but not a retirement asset” seems to miss the mark.  Or at least it misses the mark, partially.  Linda_Norway has an idea that is more in-line with my thinking.  Here’s what she wrote…

I count roughly half the value of our paid-off house as spendable/investible money to live off, as we in retirement should move to a less central area where houses cost less than half the price of our house, combined with an even better view.

But of course, being in possession of a paid-off house, makes that you need less money to live off when retired.

Today we have practically 25 x our planned yearly spending, if we count all the stuff that we own. But as we would need a place to live, and need to drive a car, we don't count it as spendable/investable money.

I guess the reason why I think the black-and-white answers many have offered are insufficient is because no one is asking about the value of the house in question.  What if it’s a $1 million house?  $2 million?  $5 million?  And what if the person who owns this (awesome) house is planning to move into a $500,000 condo?

Shouldn’t the answer take into account the value of a person’s home relative to what they will need in the future?
 

[arebelspy]

I guess the reason why I think the black-and-white answers many have offered are insufficient is because no one is asking about the value of the house in question.  What if it’s a $1 million house?  $2 million?  $5 million?

Irrelevant, unless they plan to tap that equity somehow.

And what if the person who owns this (awesome) house is planning to move into a $500,000 condo?

Shouldn’t the answer take into account the value of a person’s home relative to what they will need in the future?

Sure, and we addressed that.

See, for example, this reply (emphasis added):

As you say, two phases could make sense, if you plan to sell.  A lot of people don't want to sell in their old age though.  They choose the home they want to finish out their days in.  They certainly shouldn't be counting that in their income plan (though, of course, it is still part of net worth).

Income in retirement can get complicated, depending on your various income streams, planned sales or acquisitions, pensions, government aid, whatever.  If you know you have a certain complex plan (e.g. selling a home in year X), model that, definitely.

But in the basic sense, a house's value should not be counted in the number you need to FIRE, unless you are getting rid of it at a set point and are modeling that (e.g. downsizing right away).  Otherwise it's value is already counted for your ER in the form of a lower budget.

Obviously if you plan to sell, you can count it.

The assumption though is that you don't plan to sell, in which case, it shouldn't be counted as providing retirement income (except via reduced expenses by having no mortgage/rent).

[undercover]

Net worth is more or less a meaningless number, so flip a coin. As others have already said, it's great for keeping score, but not much else. All that really matters is the income that your net worth can generate.

Unless your primary residence is going to help you generate passive income, then the value of said house is not worth worrying about per se, unless you find that your most of your net worth is tied up into your home in which case you should consider downsizing/moving and redistributing into liquid investments.

[Metric Mouse]

Net worth is more or less a meaningless number, so flip a coin. As others have already said, it's great for keeping score, but not much else. All that really matters is the income that your net worth can generate.

+1. I'm still amazed at how many threads mention networth though.

[fredbear]

I have a fairly conservative perspective.

1) If it doesn't produce regular income it is not an investment.  This is based on a definition offered by Benjamin Graham.  My house is not an investment.  It counts only as a component of budget, where it is negative - extra negative now because we had to take out a spare mortgage to recover from the flood of 2013, a bit less negative when I get that cleared off in 4 years or so.
2) If I am not willing and able to sell an asset in 5 business days, it's not really mine, and gets moved into my heirs' net worth columns.  With houses, apparently only about 20% of people actually do sell and move out of their "old" house when they are old, and the other 80% die owning it, so most people do not ATM their house.  We don't plan to, so as a matter of fact whatever value it has will be left for the heirs to realize.
3) When I want to appear financially successful on the forum, or when I want a loan, the house magically reappears in my net worth column, where it soothes the fretful apprehension of underwriters.
4) A house has only a handful of exact values in its lifetime: the days it is sold.  Our local assessor is in a desperate search for property-tax revenue, so he values our house compared to sales in the high-end neighborhoods a mile away, 1200 feet above us, with fabulous views of the Rockies from one window, the Great Plains from another.  $975K.  (Our actual views are of a flood-ravaged creekbed and some impassive ponderosas.)  I appeal and appeal and appeal, and get it down to $553K.  Those are his and my datapoints.  Now, my estimate of appraisers was formed in the Savings and Loan Crisis of the early 80s.  They'll say anything and "prove" it too.  They would want me to spend $400 to get a datapoint from them, and I won't do it.  So given this range of values, plus my disinclination to sell just to find out exactly, and a certain interest in precise figures, what value would I use?  Counting your house in your net worth can lead pretty easily to self-delusion, no friend of an investor.

[Cassie]

Having a paid for home or lots of equity gives people choices. YOu can always sell and buy something cheaper or rent. 4 years ago we downsized to our retirement home but when older I would be open to selling and buying a condo if we wanted or needed the $.  Most older people I know did not want a house when they got to 80.

[Seattle Carter]

I am really surprised to hear such vehement dismissals of such a reasonable question.

First of all, the 4% rule isn't perfect. It theoretically provides an infinite stream of income, while leaving the principal largely untouched. This, to many people, is a suboptimal use of funds unless you like the idea of other people spending your money after your dead.

Irrelevant, unless they plan to tap that equity somehow.

Second, there are several completely reasonable ways to tap into home equity. One of them is selling in the future and buying something for less. Another is a reverse mortgage. For people who plan on downsizing when they are older, home equity is simply another one of their investments that just happens to be fairly illiquid. But given that 99% of people count their home as their single largest investment, it seems very strange that some people here are resistant to counting it that way.

[arebelspy]

Irrelevant, unless they plan to tap that equity somehow.

Second, there are several completely reasonable ways to tap into home equity.

Sure. That's why I said unless[/] you plan to tap it.  There are many ways to tap it, including several you didn't mention.

If you are going to do this, plan it out.  Totally valid. Plan out some as a backup plan. But that doesn't make it part of your FIRE portfolio, especially in most circumstances.

But given that 99% of people count their home as their single largest investment, it seems very strange that some people here are resistant to counting it that way.

Most people are terrible with money.

It may be their biggest asset, but it's not a good investment.

(BTW, that's my last favorite JLCollins' episode. It misses on the biggest aspect of a personal residence--a place to live. A home ISN'T a good investment, as his article explains, but it doesn't follow that you should rent. You have to compare renting to owning, and in that comparison, almost everything he lists is 100% irrelevant. Nevertheless, it's a good article for explaining why your home is a bad investment.)

[Seattle Carter]

But that doesn't make it part of your FIRE portfolio, especially in most circumstances.

Why not? I'm not hearing anything persuasive here, other than "that's simply not the way it's done". A person's portfolio could consist of any number of investments, some more liquid than others. So long as you assign reasonable risk and liquidity discounts, I'm not sure why any form of equity (home, business, etc) should be exempt from FIRE planning.

The idea of "don't include it, consider it a nice-to-have buffer" sounds a lot people who set clocks 5 minutes ahead so that they'll leave the house on time.

[Cassie]

When you look into the details of reverse mortgages there are lots of fees, etc so usually not the best solution to a $ problem.

[Seattle Carter]

usually not the best solution to a $ problem.

It's not a question of having a "money problem", it's a question of planning. For example, if someone is 70 years old and has $750k of home equity, it's completely reasonable that they would want to unlock that equity while they are alive. A reverse mortgage, no matter how poorly structured, would generate net new income. Or they could sell the home and simply rent a more reasonable place to live for the remainder of their life. $750k would cover $2000/month in rent for the next 31 years of their life.

If the goal is to define an artificially small stache in order to stimulate good behavior (saving more, working longer) then I guess that's fine from a motivational perspective. But nonetheless, the equity is there and you'll either figure out how to spend it while you're alive or you won't.

[Cassie]

The thing I don't like about reverse mortgages is that if a married couple find that they are both out of the home for 3 months at the same time say for some physical rehab the bank forces the sale of the home. Or for a single person longer then 3 months. If you have a home with a ton of equity it seems it would be better to sell and buy or rent something cheaper or to take a small 30 year mortgage to get some of your $ out provided that interest rates are low.

[Metric Mouse]

usually not the best solution to a $ problem.

It's not a question of having a "money problem", it's a question of planning. For example, if someone is 70 years old and has $750k of home equity, it's completely reasonable that they would want to unlock that equity while they are alive. A reverse mortgage, no matter how poorly structured, would generate net new income. Or they could sell the home and simply rent a more reasonable place to live for the remainder of their life. $750k would cover $2000/month in rent for the next 31 years of their life.

If the goal is to define an artificially small stache in order to stimulate good behavior (saving more, working longer) then I guess that's fine from a motivational perspective. But nonetheless, the equity is there and you'll either figure out how to spend it while you're alive or you won't.

Im confused about your argument.  Of course a house is an asset to be tapped. But if i had a $750k house, and $100k in index funds, i wouldn't have the cash flow as if I had 850k in funds; they could both be considered assests, but only one gives me income during FIRE; the other merely offsets an expense, and not always in line with the amount of capital tied up in said asset.

[arebelspy]

But that doesn't make it part of your FIRE portfolio, especially in most circumstances.

Why not?

Because it doesn't provide income.

The 4% WR is based on assets that you can use for income.

If I have 1MM portfolio, spend 40k with a paid off home (counting all taxes, both income and property, insurance, etc.), that's a 4% WR.

If I count the value of my house (say, 300k), and go "oh, I can spend 4%, that's 52k on 1.3MM!" ... suddenly I'm up to a 5.2% WR on my 1MM.  I'm a LOT more likely to have to hit ER failure.  And yes, I have that 300k house I can tap, but needing to do so after my accounts are way down probably won't save me.

The basic reason you don't count it is that you put together a portfolio to cover a certain amount of spending at a certain withdrawal rate that you're comfortable with.  The house is not a part of that because it doesn't make sense to do so--it makes the numbers wrong, and makes your retirement more likely to fail than if you don't count it.

If you want to count it, but then reduce your WR accordingly (i.e. you do your same 40k withdrawal on the 1.3MM for a 3.08% WR), that's fine, but it's literally the exact same scenario as doing 40k on 1MM, with a 300k paid off house you aren't counting.  And in that case, for consistency's sake and to be using the same language as everyone else, it makes sense to just call it a 4% WR on a 1MM portfolio, with a paid off house.  By adding in the house value and dropping the WR to get the same failure rate, you're adding unnecessary complication for no reason.

Summary: It's not counted because all of retirement withdrawal research is based on investment assets that can be sold to provide income.  The house typically doesn't qualify, except if you plot a specific scenario to sell, reverse mortgage, etc., which we allowed for.  Otherwise, it's just a place you're living, and the withdrawal research for your living expenses from your portfolio is based around just that.

[arebelspy]

usually not the best solution to a $ problem.

It's not a question of having a "money problem", it's a question of planning. For example, if someone is 70 years old and has $750k of home equity, it's completely reasonable that they would want to unlock that equity while they are alive. A reverse mortgage, no matter how poorly structured, would generate net new income. Or they could sell the home and simply rent a more reasonable place to live for the remainder of their life. $750k would cover $2000/month in rent for the next 31 years of their life.

If the goal is to define an artificially small stache in order to stimulate good behavior (saving more, working longer) then I guess that's fine from a motivational perspective. But nonetheless, the equity is there and you'll either figure out how to spend it while you're alive or you won't.

Im confused about your argument.  Of course a house is an asset to be tapped. But if i had a $750k house, and $100k in index funds, i wouldn't have the cash flow as if I had 850k in funds; they could both be considered assests, but only one gives me income during FIRE; the other merely offsets an expense, and not always in line with the amount of capital tied up in said asset.

Right.

I sure wouldn't tell someone who wants to spend $40k/yr in retirement (counting all income taxes, home insurance, property taxes, etc.) with a paid off 1MM home and zero other assets or debts: Congratulations!  With a net worth of 1MM, you can FIRE and spend 40k/yr!

One of the big problems, besides the obvious cash flow one, with that idea is that the paid off home is already providing a place to stay, which is reducing that budget down to 40k.  If you had to sell, even in a magical world where you have no selling costs and no taxes on the sale, and net 1MM, you suddenly need a place to live.  Better hope your new rent is less than your old property taxes/maintenance/insurance.  It may be, if you're moving from a high COL to a low one, and downsizing, but if you aren't moving (the assumption in this case, otherwise you do put the house sale in your detailed plan), you don't count the house, as it's providing that benefit already.  Counting it in your ER plans when you aren't going to sell not only has the cash flow problem MM points out, but is double counting it.

[Seattle Carter]

suddenly I'm up to a 5.2% WR on my 1MM.  I'm a LOT more likely to have to hit ER failure.

You can't include the home equity in one place, but not another to arrive at 5.2%. That's not a reasonable line of thinking. 

Imagine for a moment you had 3 kinds of investments:

• Stocks/funds not in retirements accounts
• Stocks/funds in 401k/IRA/etc
• Home equity

During FIRE (but before the age of 55) you'll tap #1. After the age of 55, you'll be able to tap #2. And perhaps at some time beyond that, you'll tap #3. The point is that with proper planning and some allowance for uncertainty, you can build a stream of income out of ALL of your assets, not just some of them.

I guess I'd simply ask arebelspy this: who gets to inherit your home equity? Because you're clearly not planning on spending it.

[arebelspy]

suddenly I'm up to a 5.2% WR on my 1MM.  I'm a LOT more likely to have to hit ER failure.

You can't include the home equity in one place, but not another to arrive at 5.2%. That's not a reasonable line of thinking.

Ah, but if you're counting it as part of your ER portfolio, it will up the WR on your investment portfolio, and up the failure rate on that portfolio. Yes, at that point you have the house to tap, but as I said, good luck living off that, especially as your living expenses go up as soon as you tap it.

In other words, by counting it, it ups the amount you can spend, which ups the chance of depleting the non-home investment assets, by quite a bit, most likely.

Imagine for a moment you had 3 kinds of investments:

• Stocks/funds not in retirements accounts
• Stocks/funds in 401k/IRA/etc
• Home equity

During FIRE (but before the age of 55) you'll tap #1. After the age of 55, you'll be able to tap #2. And perhaps at some time beyond that, you'll tap #3. The point is that with proper planning and some allowance for uncertainty, you can build a stream of income out of ALL of your assets, not just some of them.

Sure.  I've already said multiple times, if you're planning on tapping home equity (#3), you SHOULD count that in a detailed FIRE plan.

If you want to, knock yourself out. You should count it if you're planning on tapping it.  Seriously, I'm curious how many times I've said this in this thread.  I'd guess at least five, and it makes me wonder if you're even reading the replies.

Yes. Yes. Yes. If you plan to tap the house equity, count it.

If you are going to sell, and downsize, count it.
If you are going to get a reverse mortgage, count it.
If you have some phase where you access it, count it.

It's the case though that most won't plan to sell or reverse mortgage, for good reason.

If you do plan to count it, you should model that in your FIRE withdrawal. You can, and should, for example, put the cash infusion, along with the expense changes (up or down) in cFIREsim.

Either way, it is not part of the initial portfolio you're counting for your WR.  That may mean you have a higher WR initially than later. That's fine. Just model your unique situation.

I guess I'd simply ask arebelspy this: who gets to inherit your home equity? Because you're clearly not planning on spending it.

We have no home equity. Nor home.

If we do when we die, it will go to charity, along with the rest of our estate.

I don't know how that's relevant. It is an asset, and should be counted in net worth, as I've said multiple times.

[Seattle Carter]

In other words, by counting it, it ups the amount you can spend, which ups the chance of depleting the non-home investment assets, by quite a bit, most likely.

At this point I'm simply responding for the benefit of other people reading this thread. If there's a canonical citation that describes this question and provides actual calculations that illustrate why a particular asset class should not be included in your investment portfolio for the purposes of calculating a SWR, I'd love to see it. This isn't limited to home equity, the same question could be raised about ANY asset class.

You mention depleting the non-home investment assets, as if that could happen overnight. You would have literally years if not decades to track the progress of your stash and the value of your home equity and decide, for example, to downsize and use the cash unlocked to replenish your stash.

It's the case though that most won't plan to sell or reverse mortgage, for good reason.

Most? Citation, please? Almost every single older member of my extended family has downsized in later retirement. And those that didn't probably should have.

[liberty53]

At this point I'm simply responding for the benefit of other people reading this thread. If there's a canonical citation that describes this question and provides actual calculations that illustrate why a particular asset class should not be included in your investment portfolio for the purposes of calculating a SWR, I'd love to see it. This isn't limited to home equity, the same question could be raised about ANY asset class.

You mention depleting the non-home investment assets, as if that could happen overnight. You would have literally years if not decades to track the progress of your stash and the value of your home equity and decide, for example, to downsize and use the cash unlocked to replenish your stash.

The reason OP's question incites so much discussion is due to the ambiguous use of the term SWR in the context of retirement planning.

SWR in the strictest sense is associated with the Bengen and Trinity studies which only considered portfolio survival rate when an inflation adjusted need was satisfied by an investment portfolio of U.S. stocks and bonds. It didn't consider other asset classes such as home ownership.

The SWR was determined by these studies to be roughly 4% under the conditions described above.

The simple rule of thumb that retirement is feasible when a "stash" has reached 25 x initial need (4% SWR) is also based on the same conditions (a stock and bond portfolio).

When performing real world retirement planning, the model used must be more sophisticated. For example, pensions, social security, inheritances, intermittent large expenditures, and liquidation of other assets should be considered. Calculators like FIRECalc and cFIREsim provide for this more sophisticated real-world retirement analysis.

Getting back to the specific question of including a house, the most typical case is a retiree planning to downsize from a house to something else. The correct way to handle this would be to use one of the calculators and consider reduced need (expenses) after a house is sold (assuming total expenses were actually reduced), and an increased portfolio (assuming there is net gain after the sale and it's re-invested in the stock/bond portfolio).

In FIRECalc, the reduced need can be input on the "other income/spending" tab. The gain on the sale of the house can be entered in the "portfolio changes" tab (assuming the gain goes in the stock/bond portfolio).

I have found that these two calculators are more than sufficient to cover any scenario one may encounter within reason.

TL;DR - The 4% SWR rule of thumb only considered expenses satisfied by a stock/bond investment portfolio and is generally not sophisticated enough to account for most real-world retirement scenarios, though freely available online calculators like FIRECalc and cFIRESim are sophisticated enough.

[Telecaster]

At this point I'm simply responding for the benefit of other people reading this thread. If there's a canonical citation that describes this question and provides actual calculations that illustrate why a particular asset class should not be included in your investment portfolio for the purposes of calculating a SWR, I'd love to see it. This isn't limited to home equity, the same question could be raised about ANY asset class.

I thought arebelspy explained it perfectly.  If you are going to tap home equity, then count it.  If you never tap it, you can never spend it--that is, you can't withdraw it--therefore don't count it as part of your SWR. 

The above is true regardless if you retire today and tap it tomorrow or tap it 20 years from now.  Just model it based on your unique situation. 

[Seattle Carter]

When performing real world retirement planning, the model used must be more sophisticated. For example, pensions, social security, inheritances, intermittent large expenditures, and liquidation of other assets should be considered. Calculators like FIRECalc and cFIREsim provide for this more sophisticated real-world retirement analysis.

Well said liberty53.

[SugarMountain]

I look at it as risk mitigation.  Yes, the 4% rule is the magic rule around here, but keep in mind that it's based on a study that is primarily America in the 20th century, which was an exceptionally great century for growth and saw us go from horse drawn carriages and no electricity or phones for most people to ubiquitous use of cars, planes, computers, etc.  Will the next 40-50 years see similar productivity increases?  Maybe.  Maybe not.  The Nikkei is still only half of what it was almost 30 years ago.  I wonder how the 4% rule would have worked if you were in Japan and retired in 1989 based on a 70/20/10 portfolio mostly in Japanese stocks.

So, the way I think about it is use the 4% rule for calculating what my spending and stache need to be for ER, but recognize that I have $700k in home equity in today's dollars that I can use in 30+ years when I'm 80 if things go badly.  I can either sell & rent, reverse mortgage, downsize, or whatever.

[arebelspy]

So, the way I think about it is use the 4% rule for calculating what my spending and stache need to be for ER, but recognize that I have $700k in home equity in today's dollars that I can use in 30+ years when I'm 80 if things go badly.  I can either sell & rent, reverse mortgage, downsize, or whatever.

Yeah, it can definitely make a good backup plan.

And I think some would argue (rightfully so) that if you aren't including your home in your withdrawal strategy, you're working too long, especially if you're in a high COL area, and willing to compromise later by moving to a low COL area (if and only if it's necessary, which it probably won't be, since 95% of 4% WR portfolios shoot up to silly numbers).

In cases where your home's value is a good chunk of your NW, I'd absolutely have a plan mapped out to tap it, whether you plan to implement it, or whether it's only a backup if TSHTF.

But for most, I think it'd be more of the latter, and not counted in the "normal, plan A" case.

[Bee21]

I do count it, because a paid off house either decreases your general living costs, or you can turn it into a money making asset by renting it out. Or simply sell it.

But it also makes the calculations tricky. Right now, half of our net worth is tied up in the paid off house. Another large chunk of money is tied up in retirement funds we can't access until we are 60. From the net worth perspective, we are doing really well. From the ERE perspective, we are a long way from getting there if we insist on keeping the house.