Author Topic: Do you count your house in your net worth for retirement?  (Read 17446 times)

arebelspy

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Re: Do you count your house in your net worth for retirement?
« Reply #50 on: November 30, 2016, 05:25:46 PM »
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.

In either of those cases, if you count it in your ER stache, you're double counting it.

Let's say, for example, I have rentals totaling 1MM in value that provide 60k in cash flow (after all expenses, reserves set aside for capital repairs/maintenance/vacancy, taxes, etc. etc.).

How much should they count towards my ER expenses?  The obvious (and correct, IMO) answer is 60k.

If you count it in your NW though, suddenly it is giving you 60k cash flow AND adding 40k to your WR by adding 1MM to your portfolio value.  It's suddenly telling you you can spend 100k based on that, which is overestimating, IMO.

If you're counting your house to reduce expenses AND counting it in portfolio value to increase the amount you have for a 4% WR, you're double counting it.  If you're going to rent it, decrease your expenses needed by that rent amount, but still don't count its value.
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Bee21

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Re: Do you count your house in your net worth for retirement?
« Reply #51 on: November 30, 2016, 08:18:20 PM »
Hmm, i don't double count it.  I know what you mean though.They are different numbers, which can be considered in different scenarios. For me, net worth is the total value of assets minus liabilities. FiRE funds are those income producing assets which will support us when we stop working. If we decide to use the house as an income producing asset, my fire stache will be different obviously. Just because it is there it doesn't mean that i am double counting it.

Right now we have a high net worth and a sad looking income producing stache. Obviously we are saving aggressively and investing to grow this stache, but it is not enough to support us yet.But if shtf we can restructure the current assets to turn them into income producing assets, so it is good to know that we have this option B.

there was a different thread a while ago which made me come up with different retirement scenarios, and we could totally retire next year if we did something extreme, like move on a boat or to a different country if we restructured everything we own. There are days when we are tempted.But i really like this lifestyle and i want my kids to grow up in Australia.

PizzaSteve

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Re: Do you count your house in your net worth for retirement?
« Reply #52 on: November 30, 2016, 09:20:22 PM »
If you have a concrete plan to monitize home equity with a concrete alterative budget for living expenses than that is a different scenario.  However, you must be ready to pull the trigger and live per the plan.  Otherwise, it is double counting or wishfull thinking.  I dont want to move, so my 7 figure equity is useless.  I have a 10K annual tax liability i need to find an income source to offset...and a nice roof over my head.

aspiringnomad

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Re: Do you count your house in your net worth for retirement?
« Reply #53 on: November 30, 2016, 09:49:59 PM »
Count it. Just count it. It's really, really, painfully simple, and MMM agrees. Net worth = your assets less your liabilities. Also count your imputed rent as an expense. I agree that it's up to individual circumstances and modelling sophistication whether to count home equity towards FIRE stash, but I think it makes a hell of a lot more sense for most to account for it in some manner. You might want to rent during FIRE, you might want to travel, you might want to downsize, move to a lower COL area, or maybe even live in your childhood home if that passes on to you. If you don't count the equity in your current residence you don't allow yourself as much flexibility in planning for these possibilities. And while real estate isn't as liquid as other assets, ~15,000 houses are sold every day in the US. As soon as you sell it, any equity less transaction costs can then be dumped into the market according to your asset allocation.

arebelspy

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Re: Do you count your house in your net worth for retirement?
« Reply #54 on: November 30, 2016, 09:59:56 PM »
Count it. Just count it. It's really, really, painfully simple, and MMM agrees. Net worth = your assets less your liabilities.

Yes.  Every single person in this thread has said to count it in your net worth.  Not a single person disagrees (some hardcore Kiyosaki follower with an incorrect definition of asset would disagree, but no one here, so far).

We all agree: count your house in your net worth.

That's a separate question from counting assets for retirement income (aka your "stache," your investment portfolio, etc.)

And for THAT, most of us are arguing that no, you don't count it in that number.

Quote
Also count your imputed rent as an expense.

This just seems unnecessarily complex, to count an asset that doesn't produce income, for an expense that doesn't exist.

Much simpler is to calculate your real expenses, and the portfolio you have to cover that.

If you want a number to compare to someone, sure, you can impute rent, and see what your budget would be if you didn't have the paid off home.  But for a real scenario in determining your spending, doing imputed rent doesn't make sense.

Quote
I agree that it's up to individual circumstances and modelling sophistication whether to count home equity towards FIRE stash, but I think it makes a hell of a lot more sense for most to account for it in some manner.

Yes, it's accounted for in the lower budget, as we've said.

And if you model more complex, you may count it another way, based on how you plan to access it.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

aspiringnomad

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Re: Do you count your house in your net worth for retirement?
« Reply #55 on: November 30, 2016, 10:25:47 PM »

If you want a number to compare to someone, sure, you can impute rent, and see what your budget would be if you didn't have the paid off home.  But for a real scenario in determining your spending, doing imputed rent doesn't make sense.


It's not most useful for comparing to someone else, but for comparing to your potential future self. It provides a useful gauge of the lifestyle you're "paying" for, and in doing so allows you to better plan for the wide variation in living expenses depending on the location, size, and condition of your living situation. The same way a renter might account for similar variation in rent to improve his or her planning for the future.

Bateaux

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Re: Do you count your house in your net worth for retirement?
« Reply #56 on: November 30, 2016, 10:32:16 PM »
I'm OK with counting homes, boats, cars, rvs...into net worth for their fire sale value.  Investment assets should be making money.  I have no idea what our home would sell for.  The insurance adjuster appraised it at $285,000 but that is way more than I feel it's worth. It's on the books for taxes for much less.   We also own a small rental home and an adjacent acre lot.   Add it all up, all the crap we could sell and our investments we're at 2m.  I don't use 2m for computing the FIRE Calc. That number is 1.6M currently which is mostly mutual funds. I like the big M and little m many use to describe net worth.  When the little 2m becomes a big 2M I'm going to FIRE.
« Last Edit: November 30, 2016, 10:34:05 PM by Bateaux »

SpreadsheetMan

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Re: Do you count your house in your net worth for retirement?
« Reply #57 on: December 01, 2016, 01:40:34 AM »
To FIRE-ify a well-known business saying:

"Net Worth is for vanity, Income-producing Assets are for sanity, but Cash is reality"...


aspiringnomad

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Re: Do you count your house in your net worth for retirement?
« Reply #58 on: December 01, 2016, 10:31:42 AM »
To FIRE-ify a well-known business saying:

"Net Worth is for vanity, Income-producing Assets are for sanity, but Cash is reality"...

No, maybe, and absolutely not.

redbird

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Re: Do you count your house in your net worth for retirement?
« Reply #59 on: December 01, 2016, 12:04:50 PM »
No. I'm FIRE and renting. I don't own any property currently. But even if I did own a house - all owning a house (that you plan to live in - real estate that you are renting for investment reasons is different) does for you in retirement is make cash flow easier. It doesn't help you pay your other bills or buy food.

MilesTeg

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Re: Do you count your house in your net worth for retirement?
« Reply #60 on: December 01, 2016, 01:50:51 PM »
Absolutely. Whether you sell it or just have it paid off it's still contributing to your finances in retirement. Obviously you have to mind cash flow vs assets closely but a paid off house should eliminate the bulk of your yearly expenses.

ender

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Re: Do you count your house in your net worth for retirement?
« Reply #61 on: December 01, 2016, 08:25:23 PM »
Your house equity shows up in two ways.

First, via its effect on your cash flow. A $3M equity house you never tap provides you the same $0/cash flow as a $50k one (ignoring taxes/utilities). But both, if paid off, can reduce cash flow and affect your SWR.

But affecting your SWR through expenses is very different than the equity itself being in your net worth.

The second way it shows up is equity is not included in your actual liquid assets. So if your option is $200k mortgage vs $0 mortgage, you have about 8% a year more in available spend using the 4% portfolio rate with the mortgage (and invested $200k) vs the alternative.

Metric Mouse

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Re: Do you count your house in your net worth for retirement?
« Reply #62 on: December 02, 2016, 05:08:57 AM »
Absolutely. Whether you sell it or just have it paid off it's still contributing to your finances in retirement. Obviously you have to mind cash flow vs assets closely but a paid off house should eliminate the bulk of your yearly expenses.
That depends on things like your property taxes, insurances, repairs and maintenance (and your time to do them) and extra utilities you'd pay that you wouldn't when renting. Some people here pay more just in prop taxes etc... than they would to rent a place. Scary! Plus they are paying those expenses out of a smaller stash and income since much of their money is I vested in the house rather than the market. Now if, like me, you have a paid off house in a HCOL area but with low taxes and expenses that dont really go up, then its easy to get by on a smaller investment income.

Don't forget opportunity cost of that large chunk of change sitting in an illiquid asset!

PizzaSteve

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Re: Do you count your house in your net worth for retirement?
« Reply #63 on: December 02, 2016, 11:33:36 AM »
No. I'm FIRE and renting. I don't own any property currently. But even if I did own a house - all owning a house (that you plan to live in - real estate that you are renting for investment reasons is different) does for you in retirement is make cash flow easier. It doesn't help you pay your other bills or buy food.

While the sentiment is fine, i disagree with the green text.  Depending on your area, owning offers substantial benefits in terms of control and risk management over future cash flows.  Few renters have 20 year leases.  By owning you can limit the risk of future cash flow variability for housing expenses.  You also have substantially more contol over the property (eg can plant food garden and capture value of improvements).

farmecologist

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Re: Do you count your house in your net worth for retirement?
« Reply #64 on: December 02, 2016, 12:00:27 PM »
No. I'm FIRE and renting. I don't own any property currently. But even if I did own a house - all owning a house (that you plan to live in - real estate that you are renting for investment reasons is different) does for you in retirement is make cash flow easier. It doesn't help you pay your other bills or buy food.

While the sentiment is fine, i disagree with the green text.  Depending on your area, owning offers substantial benefits in terms of control and risk management over future cash flows.  Few renters have 20 year leases.  By owning you can limit the risk of future cash flow variability for housing expenses.  You also have substantially more contol over the property (eg can plant food garden and capture value of improvements).


If you own a house ( I'm assuming it is paid off ), and plan to retire on a modest income, property taxes absolutely need to be factored into the equation.   In some areas of the country property taxes are exceedingly, outrageously, high.  We are talking $500+ a month for a relatively modest home.   In reading posts around here, I get the feeling that many people don't factor property taxes in as much as they should.  This may be due to people having property taxes as part of an escrow.  However, once you pay off your house and start paying it directly...it often doesn't feel like anything is 'paid off' at all.   :-)














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Re: Do you count your house in your net worth for retirement?
« Reply #65 on: December 02, 2016, 12:13:37 PM »
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.

Yea I get what you mean, the numbers are not completely accurate since taxes, repairs, etc are on top of the mortgage.

I was rolling them into a general "cost of housing" number. In general, you have to pay to live somewhere, renting or paying a mortgage. So it eliminates the need to pay for housing, pretty much for the rest of your life.

arebelspy

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Re: Do you count your house in your net worth for retirement?
« Reply #66 on: December 02, 2016, 02:50:20 PM »


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.

Yea I get what you mean, the numbers are not completely accurate since taxes, repairs, etc are on top of the mortgage.

Yep.

Quote
I was rolling them into a general "cost of housing" number. In general, you have to pay to live somewhere, renting or paying a mortgage. So it eliminates the need to pay for housing, pretty much for the rest of your life.

Again, due to property taxes, insurance, repairs, etc., it lowers your housing costs, but never eliminates them.  You're still paying to live somewhere.
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Anon in Alaska

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Re: Do you count your house in your net worth for retirement?
« Reply #67 on: December 04, 2016, 06:18:59 PM »

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.

It will if you take in a room-mate.

I'm single and live in a paid-off two bedroom condo. I could get $700 a month renting out the spare bedroom. My household expenses would go up and I might not get 100% occupancy, so I'd probably clear about $600 a month. If currently live on about $1,400 a month, so my condo will cover 43% of my retirement needs. If I trim my expenses a little it might cover 50% of my expenses. I just have to clean it out and fix the whole place up....

And if and when you get really old or frail they might just save your life by being there to call an ambulance for you.

boarder42

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Re: Do you count your house in your net worth for retirement?
« Reply #68 on: December 05, 2016, 12:03:27 PM »

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.

It will if you take in a room-mate.

I'm single and live in a paid-off two bedroom condo. I could get $700 a month renting out the spare bedroom. My household expenses would go up and I might not get 100% occupancy, so I'd probably clear about $600 a month. If currently live on about $1,400 a month, so my condo will cover 43% of my retirement needs. If I trim my expenses a little it might cover 50% of my expenses. I just have to clean it out and fix the whole place up....

And if and when you get really old or frail they might just save your life by being there to call an ambulance for you.

thats completely different than the premise of the OP thats an income property. you could just as easily have said i own 2 one bedroom condos and rent one out and it covers almost half my expenses.  its just an income stream

Syonyk

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Re: Do you count your house in your net worth for retirement?
« Reply #69 on: December 05, 2016, 12:16:40 PM »
Yeah... if I have people living with me, they're likely to be family and unlikely to be paying rent in cash.  Labor, yes.

Since I'm pretty sure things would have to go pretty far south for family for them to want to come live out here. :)

alex@seed4great

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Re: Do you count your house in your net worth for retirement?
« Reply #70 on: December 05, 2016, 05:12:02 PM »
What a great topic! This is my opinion: real estate can be an investment, but it depends how you manage it. First, you can rent it out and get profit. Second, home price may grow with time in some areas and you can sell it later for profit. Third, you can use property tax to offset other tax if you are in a low tax bracket: I wrote in details how to do that in blog at sead4great.com. Of course it is all in assumption that there is no mortgage for your home and it has been completely paid off.

GetItRight

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Re: Do you count your house in your net worth for retirement?
« Reply #71 on: December 06, 2016, 06:04:46 AM »
No, a house is an asset and not an investment (unless you rent it out). I view it as a generally stable but possibly depreciating asset, not something I can "cash out" to retire as I still need a place to live. I'll likely move to a much lower cost of living area upon retirement but that is mostly with regard to property and other taxes, property prices will likely be only slightly less. So, it's of course part of my net worth but I don't consider the value for FIRE purposes.

mickeyj

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Re: Do you count your house in your net worth for retirement?
« Reply #72 on: December 06, 2016, 07:44:59 AM »
Personally, I'm not including my home as an asset in my net worth because my mum and sis stays with me (it's a very Asian thing) and if a financial crisis hits, it's very unlikely that I will sell the home.

But my mortgage loan is considered as a liability though.

Makes it much more sweeter when I became net worth positive this year.