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I couldnt agree more with this statement. I chose to finance 100% of the purchase price of my retirement home. The fixed monthly payment (PITI) fits into my monthly budget and I earn a higher interest rate on the freed funds than my mortgage rate.
Yeap. I still have a mortgage but it’s only 30% of my house. When I get SS, I should be able to live comfortably even with a mortgage. Too many people bragging about a paid off mortgage. I brag about having a mortgage.
OP, 6 times sound good. My heirs will be happy. Maybe we should have blow your dough thread.
Any household, as they approach and plan for retirement... should assess how their net worth is allocated. Whatever that total number might be the housing allocation should be limited (eg: NTE 25% as I described)... so that more of their wealth can be invested for income and to have the benefit of lower M2M expenses.
For my calculations I don't count my equity in my house (or the total value of my house) and only consider investments and cash in determining whether my nest egg, utilizing a standard 4% withdrawal, can sustain full retirement expenses on a yearly basis over a period of 30 to 40 years. While I could sell the house I'd still need to live somewhere, and the house isn't paying out cash, so while it's an important asset, it's not one I actually count for a F.I. determination. The investments and cash have to do all the heavy lifting and F.I. is only reached when they can.
however the Bengen 4% study assumed withdrawals in the same proportion as your portfolio, not withdrawing100% bonds.. selectively choosing which asset class to withdraw based on the market may render the study inaccurate!
other studies were done and whether you use a bucket system with a cash bucket or draw off the pie maintaining a constant allocation with no extra cash ,results were pretty much the same .. if anything using the cash bucket has done just slightly worse then no cash bucket since dollar for dollar when duration's are matched bonds tend to outperform cash .
when stocks are down it is always bonds that will get sold when you keep a constant allocation and rebalance .
For my calculations I don't count my equity in my house (or the total value of my house) and only consider investments and cash in determining whether my nest egg, utilizing a standard 4% withdrawal, can sustain full retirement expenses on a yearly basis over a period of 30 to 40 years. While I could sell the house I'd still need to live somewhere, and the house isn't paying out cash, so while it's an important asset, it's not one I actually count for a F.I. determination. The investments and cash have to do all the heavy lifting and F.I. is only reached when they can.
I agree in part and disagree in part.
For my calculations, I also use the 4% SWR based on my investments only to determine how much I'll need. So, in the example I used upthread, if I know I will need $4000 a month (including taxes) and that I will get $2500 a month from SS, $600,000 in savings with allow me to make up the difference with a withdrawal of $24,000 a year.
Still, I'm not ignoring the equity in my house, which will be paid off (not via acceleration but the required schedule). It's there as a last resort if I'm in the 1% for whom the SWR of 4% still ran through my money at the latter stage. It's also there at any point when I decide to downsize and buy a place for half the cost (and adding $300,000 to my portfolio.)
Another consideration where home equity really counts is if we see a plunge in stocks (like 2008) and the govt temporarily halts the RMD. I saw this with my dad at the time.....he wasn't required to withdraw ANY money from his IRAs at the bottom (can't remember if it lasted for one year or two), so he set up a home equity LOC and withdrew enough money to see him and Mom through the next year or so. When the market came back, then he sold enough to live on and pay back the loan. (The interest was nominal compared to how much upside he would have lost out in had he been required to sell at the bottom of the crash.)
no money not liquid yet and available should be counted when stress testing the portfolio portion ... that is based on just what it is at any point in time ...
when the day comes the money tied up in real estate is deployed then it gets added in , as invested , and counted. helocs were shut down all over the place in 2008-2009 so counting on that for support can be a bad idea .
when markets crash , and cash is needed it is not equities that would get rebalanced and sold it is bonds and fixed income that would be sold off ... i never get this selling at the bottom stuff since a 50/50 mix has more then a decade of liquidity with no stock selling
For my calculations I don't count my equity in my house (or the total value of my house)
and only consider investments and cash in determining ...
... in determining your Net Worth? Whatever makes you happy.
Quote:
The investments and cash have to do all the heavy lifting...
And if you have ENOUGH to do that lifting... then the discussion might actually be moot (for you).
But it's not moot for most retiree's and remains an important calculation for all...
especially so the high % of retiree's that will need much/most of their equity cash to produce income...
and the reduced M2M expenses of a smaller property (or none at all).
Quote:
It's that simple ...and largely WHY so many retiree's will plan the gain capturing that downsizing allows.
Last edited by MrRational; 03-02-2019 at 04:53 AM..
For my calculations, I also use the 4% SWR based on my investments only to determine how much I'll need. So, in the example I used upthread, if I know I will need $4000 a month (including taxes) and that I will get $2500 a month from SS, $600,000 in savings with allow me to make up the difference with a withdrawal of $24,000 a year.
Still, I'm not ignoring the equity in my house, which will be paid off (not via acceleration but the required schedule). It's there as a last resort if I'm in the 1% for whom the SWR of 4% still ran through my money at the latter stage. It's also there at any point when I decide to downsize and buy a place for half the cost (and adding $300,000 to my portfolio.)
Another consideration where home equity really counts is if we see a plunge in stocks (like 2008) and the govt temporarily halts the RMD. I saw this with my dad at the time.....he wasn't required to withdraw ANY money from his IRAs at the bottom (can't remember if it lasted for one year or two), so he set up a home equity LOC and withdrew enough money to see him and Mom through the next year or so. When the market came back, then he sold enough to live on and pay back the loan. (The interest was nominal compared to how much upside he would have lost out in had he been required to sell at the bottom of the crash.)
stress testing a portfolio is to see what the maximum safe amount the portfolio can contribute to the party if needed ....
what you draw is another story ...
so if i need a 100k a year and i have 20k in pension and 40k in ss , my 1 million dollar portfolio needs at least 40% in equities to generate 40k inflation adjusted ..
if i don't need th full 40k i just don't draw it , but the stress testing of a portfolio is to see the safe maximum it can be called on to produce .. so it has nothing to do with ss , pension , alimony , money tied up in real estate , rental income , etc
that is all outside the portfolio and the stress testing of the portfolio . that stuff just gets added to the grand total .
no money not liquid yet and available should be counted when stress testing the portfolio portion ... that is based on just what it is at any point in time ...
when the day comes the money tied up in real estate is deployed then it gets added in , as invested , and counted. helocs were shut down all over the place in 2008-2009 so counting on that for support can be a bad idea .
HELOCS were shut down for people who had limits close to the value of the house, a prudent move by lenders in light of dropping values. The collateral was shaky.
But every case is individual. I had a small HELOC (with no outstanding balance) set up previously just for emergencies. It was something like $100,000 max on a home worth over $500,000, and it remained open throughout that period.
And while home equity money isn't liquid, it's readily available via a reverse mortage. Last resort, but it still is a factor.
helocs were closed in many cases because banks had no more money to loan , regardless of equity .. my sisters was closed and she had plenty of equity ... ...we sold two co-ops in 2009 here in nyc ... both took 6 months to close on because after sending commitment letters , when the closing dates came the lenders said they had no funds to loan ... this happened repeatedly with multiple banks that were tried
so helocs were closed in many cases regardless..
today you need to have the same criteria to get a heloc as a mortgage .. run in to trouble credit wise with medical debt and you can be denied a heloc .
helocs were closed in many cases because banks had no more money to loan , regardless of equity .. my sisters was closed and she had plenty of equity ... ...we sold two co-ops in 2009 here in nyc ... both took 6 months to close on because when the closing dates came the lenders said hey had no funds to loan ...
so helocs were closed in many cases regardless
Didn't realize that. Thanks.
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