Include home value when calculating FI based on the 4% rule?

[HankWilliams]

Hi folks, Sorry if this question has been asked a 100 times....

Do you include home value (with no mortgage) when calculating for FI based on the 4% rule?
If you're withdrawing 4% of your net worth to live on, it's really your investments right? Not including non-liquid assets like a paid off house right?

Hope I asked this correctly....

I've been working with the Mad Fientist's Excel file I downloaded but just curious what y'all think. Thanks!

[dragoncar]

Assuming a paid off house, you got it.

The only exception is if you are certain you will be selling your, e.g.,  $1 million paid-off house and moving to a new location where homes are $200k.  In that case, you  could consider $800k excess equity as productive assets.

It gets trickier when you've got a mortgage.  In that case, there are a few ways to account for things:

1) You can completely ignore your equity, but count your mortgage payments, which is a very conservative approach because eventually those payments end

2) You can model your equity, for example in cfiresim you can model success rates with monthly expenses that end after X years

3) You can do like I do, and consider your equity as part of your net worth, because this approximates #2 pretty closely without all the extra work.  In this case, you consider your mortgage payment part of your monthly expense and the fact that your equity is increasing discounts the fact that the mortgage will eventually end.  Once you pay off the mortgage, you just go back to #1, though.

4) You can calculate your net worth as if you have paid off your home.  In other words, you subtract your remaining loan value from productive investment value, but don't count mortgages in expenses.  E.g., you have a $1.5 million stock portfolio, $1 million home, $500k equity/$500k loan, 40k non-mortgage annual expenses.  So you hypothesize that if you were to pay off your loan you'd still have $1 million to cover your 40k annual expenses.  But you don't actually have to get rid of the mortgage, assuming your interest rate is below your WR.

[MDM]

If you're withdrawing 4% of your net worth to live on, it's really your investments right? Not including non-liquid assets like a paid off house right?

Correct.

For example, assume you own a $10 million home free and clear but have nothing in the bank and no investments.  In that case, you don't have $400K/yr to spend on bread, milk, property tax, etc. 

Of course, if you sell the $10 million home and buy a $1 million fixer-upper, you can put $9 million into stocks, bonds, cash, etc., and confidently spend $360K/yr on milk, bread, property tax, replating the gold faucets, etc.

[Villanelle]

There's a difference between net worth and retirement funds (aka 'Stache, around these parts).  Your net worth is basically the value of everything you own, minus debts.  So you do include your house, that semi-valuable painting your grandma left you, the furnishings you could probably sell for realistically about $5000, etc.  If you sold everything in your life and paid off all debts, what you are left with is your net worth.

Unfortunately, it's not a very meaningful or valuable number because you can't eat a painting. 

If you are looking to actually withdraw 4% from the pot of money you are calculating, it needs to be money you actually plan on spending.  You can't spend a house.  It does of course reduce your living expenses because you aren't paying rent (or maybe even a mortgage), but that factors in when you look at how much you need to live on (the 4% withdraw amount you are targeting). So you only include those assets you plan on liquidating over the course of your retirement.

Some people plan to downsize.  In that case, they tend to guesstimate the difference between the equity they currently have in their home, and what the second home would cost.  If they have $500k in equity and plan to sell and buy something they feel pretty confident will cost around $350k, then they count $150k toward their stache because that money will be freed up and available to spend.  There is some risk involved, largely because one never knows what will happen with property values/costs.  That's especially true if planning to sell and buy in different markets.  If San Fran prices plummet and Arizona prices skyrocket, a planned $1.5m to $400k swing ($1.1m for the stache) could end up being $1.2m to $500k (0.7m for the stache).  Sizable difference.  But it still allows for at least a back of the napkin calculation. 

[soccerluvof4]

There are plenty of people that would disagree with this because if you sell your paid for home you still need a place to live. So as for my I consider it in my NW but not in figuring or having figured in my 4% withdrawal.

[BTDretire]

 I used to put my house into my stache calculation, but somewhere around a million, I started
thinking about living on the stache and since I'm not selling the home and it generates zero income, I dropped it from the calculation.
 I have a running tab on my computer desk starting in 2011, that I update every 3 months.

[SnackDog]

You can include it and if you end up running out of money at age 80, you will need to liquidate the house and rent, get a reverse mortgage, or trade it to a retirement center for lifetime incarceration. You may still have generous social security you can live on at that stage anyhow since your expenses could be low (if healthcare doesn't bankrupt you).

[Arbitrage]

Not including it; I intend to have it reduce the cashflow needs. 

I suppose that you could consider it to be part of MMM's safety margin in some way. 

That said, I do include current equity in our net worth, especially since the plan is to move away from a HCOLA to a lower-cost area.

[DreamFIRE]

I only use my stash, and NEVER include my house in that calculation, which is why I never calculate my net worth, as it is meaningless for calculating my drawdown.  It's only about the stash that I'm drawing down from.

[SwordGuy]

There are plenty of people that would disagree with this because if you sell your paid for home you still need a place to live. So as for my I consider it in my NW but not in figuring or having figured in my 4% withdrawal.

You're mixing up totally different numbers.

Net worth is the money value of what you own minus what you owe.
Your retirement stash is what will be providing your retirement income.
Your living expenses are what you spend to get thru life.
You are FI if you stash produces more income than your living expenses costs.

If you sell your house, your net worth goes down by the amount of sales costs (realtor commissions, closing costs you pay, etc.)
Your retirement stash goes up by the amount of money you receive.
Your living expenses change by the difference between what your house cost to live in minus what your new lodgings cost.  They might go up or go down.

[Roland of Gilead]

I would include it at fire sale price minus all the costs to sell it.

In the case where you had a paid off $10,000,000 home and no assets, you would likely sell the home and buy or rent a much cheaper place.

I include everything for the 4% rule at the price I could sell it for in a short time.   So a car you could sell to the right buyer for $10,000, you might include at $8,000, A home that could eventually fetch $300,000 you might include at $220,000 to $250,000 depending on your market.

Essentially, you can always choose to sell everything and grab a backpack and toothbrush and become a world traveler.   That is the figure I would use...the sell everything figure.  Then do it and start traveling!  :-)

[wglennreid]

I don't think you should include it.  Isn't it already part of the FI computation as housing expense (maintenance, mortgage, insurance)?  If your income (excluding the house) is less than expenses, it seems you at least have possible options.  For example, you could conceivably sell and buy a smaller house, especially if the house is gone up a lot.  Or if the house is spacious you could rent out a room to get income to cover the shortfall.  Or you could even sell and rent (you would have to redo your expense estimate).