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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)
In 2008 in my area property values plunged in lock step with the stock market.
Another consideration where home equity really counts is if we see a plunge in stocks...
Quote:
Originally Posted by 1insider
In 2008 in my area property values plunged in lock step with the stock market.
In most areas prices retracted from their prior highs.
The subtext in all this is distinguishing between the utility value aspect of having a residence...
vs just about every other reason people will cling to for owning any specific property.
In 2008 in my area property values plunged in lock step with the stock market.
Yes, but if the house is paid off, you are living with minimal housing expenses as compared to the retiree who will have to keep sending in rent payments
I amend my comment about considering home equity: what you should factor in is if you have a paid off house. Again, the example asking who is in better shape:
1) The 65-year-old with $600k in investments and a paid-off house of $600k (net worth $1.2 million)
2) The 65-year-old with $600k in investments, no home ownership, and rent payments (net worth 600k)
I just don't see how one can ignore one's ownership of property when evaluating his overall financial situation.
Yes, but if the house is paid off, you are living with minimal housing expenses as compared to the retiree who will have to keep sending in rent payments
I amend my comment about considering home equity: what you should factor in is if you have a paid off house. Again, the example asking who is in better shape:
1) The 65-year-old with $600k in investments and a paid-off house of $600k (net worth $1.2 million)
2) The 65-year-old with $600k in investments, no home ownership, and rent payments (net worth 600k)
I just don't see how one can ignore one's ownership of property when evaluating his overall financial situation.
It doesn't work that way!
Instead look at two individuals who are 65 years old. Both start even with $1.2 million. #1 buys a $600K house and retains $600K in investments. #2 takes buys the same house but takes out a mortgage at 4% for the amount of the house, hence retaining $1.2 M in investments. Both invest in 60:40 mutual funds and make an average of 7.5% annually. So #2 makes more on his/her investments. The difference averages 3.5% (7.5-4%) on the $600K. Over 10 or 20 years the difference is huge. Of course, investments mean some risk and variation from the average returns. That is true of any investment strategy but it is highly likely that even in the short term investment returns will be better than putting your money in a mattress.
There is another factor. If an emergency occurs, #2 has additional money on hand whereas #1 would need to sell the house to recover the money or try for a HELOC.
Instead look at two individuals who are 65 years old. Both start even with $1.2 million. #1 buys a $600K house and retains $600K in investments. #2 takes buys the same house but takes out a mortgage at 4% for the amount of the house, hence retaining $1.2 M in investments. Both invest in 60:40 mutual funds and make an average of 7.5% annually. So #2 makes more on his/her investments. The difference averages 3.5% (7.5-4%) on the $600K. Over 10 or 20 years the difference is huge. Of course, investments mean some risk and variation from the average returns. That is true of any investment strategy but it is highly likely that even in the short term investment returns will be better than putting your money in a mattress.
There is another factor. If an emergency occurs, #2 has additional money on hand whereas #1 would need to sell the house to recover the money or try for a HELOC.
But you're comparing individuals with the same net worth, which is something else entirely.
The question was whether home ownership should be a factor. So let's say I'm have $600,000 on the eve of retirement and my friend has the same. Difference is: I own my own house, and she is renting (paying $2000 a month in a so-so neighborhood).
I am clearly better off financially than she is. You can't just ignore the fact I own my own house. It will save me on rent payments (lowering my monthly expenses) and does provide an emergency fund since I can always sell it to raise cash.
I just don't see how one can ignore one's ownership of property when evaluating his overall financial situation.
Agreed.
Quote:
...but if the house is paid off, you are living with minimal housing expenses
as compared to the retiree who will have to keep sending in rent payments...
Maybe. Maybe not. And how does one define a term like 'minimal'?
Whether we own outright or not we still have to pay property taxes and insurance plus all the other expenses
associated with ownership and the more the property is worth the higher every one of those expenses will be.
Then we get into the ever increasing need to hire out all of the work as time marches on.
It's at this point in the reckoning that the importance of the % of monthly net income budget comes into play.
Whether that total amount is paid to the order of X or to the order of Y really doesn't matter.
Instead look at two individuals who are 65 years old. Both start even with $1.2 million. #1 buys a $600K house and retains $600K in investments. #2 takes buys the same house but takes out a mortgage at 4% for the amount of the house, hence retaining $1.2 M in investments. Both invest in 60:40 mutual funds and make an average of 7.5% annually. So #2 makes more on his/her investments. The difference averages 3.5% (7.5-4%) on the $600K. Over 10 or 20 years the difference is huge. Of course, investments mean some risk and variation from the average returns. That is true of any investment strategy but it is highly likely that even in the short term investment returns will be better than putting your money in a mattress.
There is another factor. If an emergency occurs, #2 has additional money on hand whereas #1 would need to sell the house to recover the money or try for a HELOC.
I agree with your premise (my retirement home is 100% financed) but not your numbers. The spread is much thinner in reality. To presume a 60/40 allocation will yield 7.5% is unrealistic. For me, having total access to my funds is the major advantage.
... in determining your Net Worth? Whatever makes you happy.
Go back and read what I actually said again. I said nothing about "net worth." I specifically said F.I., twice. Financial Independence. Calculating F.I. is about one's investments that can be withdrawn to fund living expenses. And I explained why I don't count my house for that, because I still have to live somewhere, and while the house certainly has value, it's not a liquid/cash-producing asset.
Go back and read what I actually said again. I said nothing about "net worth."
I know. And I pointed out how seldom one can get to exploring that sort of FI notion
absent having substantial NW underlying it all. Even if some at the far end don't need to care how it's counted.
If you're truly at the far end (rather than just avoiding the underlying)... good for you.
As with jrkliny, I wish you both all the happiness and satisfaction you can stand.
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