Home Value as % of Net Worth at Retirement?

[scfr]

Using the following assumptions:
- You own (or will own) your own home.
- You plan to have your mortgage completely paid off by the time you retire.
- You have no pension. Your retirement will be funded by your own savings, plus (hopefully) Social Security.

At the time you retire, ideally what percentage of your net worth would be represented by your home? Why?

I'm thinking for myself it would be something like 15%, but I don't have a concrete reason why. It's just a "feeling" ... I think the percentage is low enough that I would feel that I'm not "house rich, cash poor." I hope to never have to use a reverse mortgage to fund my retirement.

[maat55]

There's alot of guess work in this question. I have more than twenty years left so there are many variables.

[scfr]

I realize this is very much a "think outside the box" question.

I just can't stop thinking that there needs to be a new "rule of thumb" regarding how much house one should buy, and it ought to factor whether or not you are on track as far as retirement savings, and what your savings trajectory is.

For example, if you have 2 households with similar incomes and total debt as percentage of income, but one household has only 1/2 the savings as the other house and saves a much smaller percentage of their income, wouldn't it make sense that they ought to own a much less expensive house?

[LivingAlmostLarge]

10% or less. It shouldn't be much, I would rather have liquidity. Personally I hope to someday soon (next 5 years) have enough in cash to have paid off our home.

[b4freedom]

No more then 20%. Let's assume my home was worth $250k and I was going to retire tomorrow. That'd mean that I'd have $1mil in other assets to live off of in retirement.

But, then again, it all depends on your goals and strategies. If I had a $1million home and $250k in investments and I planned on selling my home and moving to a $250k home then what does it matter? It depends on what you want and what your strategy is.

With that in mind, I think too many people expect to live off of the equity in their homes.

[noppenbd]

I have heard the 20% figure as well.

[disneysteve]

I think that is a meaningless figure since the home's value is of no significance to the retirement plan, but since you asked...

I just did a quick calculation because I never really thought about it before. If we build a nest egg of $2.5 million and our home appreciates at 5%/year, we'd end up with a home worth $675,000. That is a total of $3,175,000. The home's value would be about 21% of that total.

[MonkeyMama]

I think it is a meaningless figure also. Not only should it be no significance to a retirement plan, but a home's value can fluctuate MUCH. I guess that is my perspective from a HCOLA perspective.

Likewise, I find that figure rather useless. I think it is more important that when you buy a house that it is in your range of affordability.

I understand you are trying to decide how much to spend on a house now. Which is probably a better question - how much of your net worth should you spend on a house, as you near retirement?

But figuring out where your house should fit in retirement (particularly if you bought in your 20s/30s) seems a rather useless exercise.

I think my parent's house is about 50% of their net worth, but they paid off their "starter home" ages ago and have the financial freedom to cash in their house and move just about anywhere else (would be cheaper). Their retirement savings is very fine. Likewise, we bought our home in our early 20s. We felt it was very affordable. I could care less what percentage of our net worth it will be in 40 years. It just doesn't matter.

I'd rather take a house that appreciated 1000% in 20 years, like our parents.

It probably depends largely where you live too. What that ratio ends up as. As my example shows. We have a lot of relatives in Kansas and NC. I wouldn't expect their homes to be more than 10% of their net worth (if that). Some of their cars cost more than their homes.

[disneysteve]

Originally Posted by scfr

For example, if you have 2 households with similar incomes and total debt as percentage of income, but one household has only 1/2 the savings as the other house and saves a much smaller percentage of their income, wouldn't it make sense that they ought to own a much less expensive house?

Yes, but the existing rules of thumb already account for that by designating that no more than a certain percentage of income should go to overall debt servicing (I think it is 36% but I'm not positive). So the family with limited debt can spend more on a home and the family with more debt should spend less. Plus the family with more savings can afford a larger downpayment.

[noppenbd]

I do think it is relevant. Having a large portion of your net worth represented by the equity in your house is not diversified IMO. Look at boomers who planned to use the equity in their house to retire on. Say you only had $250K in retirement savings with $750K in home equity, planning to downsize or borrow against that equity to finance a large portion of your retirement. If you lost 20% of that equity in the housing bubble you are going to be cash strapped in retirement.

Would I use 20% as a planning target? Not really, because I think it will be the natural result of good savings habits and not saddling yourself with a large house payment.

[disneysteve]

Originally Posted by noppenbd

I do think it is relevant. Having a large portion of your net worth represented by the equity in your house is not diversified IMO. Look at boomers who planned to use the equity in their house to retire on. Say you only had $250K in retirement savings with $750K in home equity, planning to downsize or borrow against that equity to finance a large portion of your retirement. If you lost 20% of that equity in the housing bubble you are going to be cash strapped in retirement.

I don't have any control over the value of my home (other than keeping up with proper maintenance and repairs). In my answer above, I assumed 5% price appreciation. What if this neighborhood sees a huge spike in growth and my home actually appreciates 10%/year? That won't have any impact at all on our retirement savings but it would greatly change the percentage of net worth represented by the home. So what? It doesn't mean a thing.

[noppenbd]

Originally Posted by disneysteve

I don't have any control over the value of my home (other than keeping up with proper maintenance and repairs). In my answer above, I assumed 5% price appreciation. What if this neighborhood sees a huge spike in growth and my home actually appreciates 10%/year? That won't have any impact at all on our retirement savings but it would greatly change the percentage of net worth represented by the home. So what? It doesn't mean a thing.

I disagree. I understand it doesn't change your retirement planning or your ability to fund your retirement. But from a gross portfolio perspective it is not desirable.

I hold that any one asset that grows to be a large fraction of your net worth is not diversified. If you had a large run up in one of your asset classes of your retirement accounts you would want to rebalance, right? It is not really practical to do that with your house, but I think it is important to know that you are overweighted in real estate. So in that case maybe you wouldn't want to go buy a rental property, but rather increase other investments. Or if you owned REITs in your investments you might reduce your exposure to compensate.

[disneysteve]

Originally Posted by noppenbd

If you had a large run up in one of your asset classes of your retirement accounts you would want to rebalance, right? It is not really practical to do that with your house, but I think it is important to know that you are overweighted in real estate. So in that case maybe you wouldn't want to go buy a rental property, but rather increase other investments. Or if you owned REITs in your investments you might reduce your exposure to compensate.

I think that makes sense to some extent and see your point there. I just don't happen to count our home as part of our investment portfolio or asset allocation, so I don't look at it that way. We've had the "is your home an investment" discussion here a few times so I guess it depends on your answer to that question.

[anonymous_saver]

I don't know yet, since I am saving up for my first home currently. However, I would say that even though my house will technically be a part of my net worth, I never plan on counting it as part of my retirement money. I will only consider various retirement accounts that I have. Yes, at some point I may downsize when I get older, but I don't really see the money that I have in my house as money that I can or will eventually spend... so I guess my answer is 0%? Sorry if that explaination was confusing. Blame it on my small breakfast I had this morning.

[jIM_Ohio]

Originally Posted by disneysteve

I think that is a meaningless figure since the home's value is of no significance to the retirement plan, but since you asked...

I just did a quick calculation because I never really thought about it before. If we build a nest egg of $2.5 million and our home appreciates at 5%/year, we'd end up with a home worth $675,000. That is a total of $3,175,000. The home's value would be about 21% of that total.

I agree with this....

the percentage is meaningless. If someone LBYM, they might have a small house and 8 figure portfolio.

At same time someone on a coast might tell you their house is 20%, 30% or 50% and the downsize of the house is needed as part of retirement plan with similar 8 figure portfolio.

The calculation depends on numerous factors:

1) how early a person retires. If two people with same house making same salary retire, but one person retires 20 years before the other, the person which retired first needs a lower percentage (because porfolio is larger to last 20 years longer).

2) where a person lives. See example above.

3) how early a person started saving. I started saving at age 23 and have a house valued at 350k+ right now which will be paid off prior to retirement. My portfolio will be able to compound faster because of the early investments, so a house valued at 3X our annual income now seems expensive, but we also set aside 16% of our income for retirement and are only 35 yo right now.

4) How much the house appreciates. You could build the same house I have in another location (west coast) and it will appreciate faster than houses which are smaller. So my house might appreciate 2% per year, where as same house on a coast appreciates 5% per year. Do you base the calculation off purchase price or value at retirement. This variable is why this premise is too complicated.

[jIM_Ohio]

Originally Posted by noppenbd

I disagree. I understand it doesn't change your retirement planning or your ability to fund your retirement. But from a gross portfolio perspective it is not desirable.

I hold that any one asset that grows to be a large fraction of your net worth is not diversified. If you had a large run up in one of your asset classes of your retirement accounts you would want to rebalance, right? It is not really practical to do that with your house, but I think it is important to know that you are overweighted in real estate. So in that case maybe you wouldn't want to go buy a rental property, but rather increase other investments. Or if you owned REITs in your investments you might reduce your exposure to compensate.

REITs return and the value of my house will not correllate. For starters REITs would probably be owned because of a dividend stream, and I don't see my house paying me dividends any time soon. I would not lower REIT exposure because my house was 20-30-50% of my portfolio.

Consider that REITs can be diversified into commercial real estate, foreign real estate, vacation real estate etc... all those sectors would not correllate to the value of my house in Ohio.

If my wife owned a $1M diamond necklace, that would not stop me from investing in diamonds or commodities.

[jIM_Ohio]

Originally Posted by noppenbd

I do think it is relevant. Having a large portion of your net worth represented by the equity in your house is not diversified IMO. Look at boomers who planned to use the equity in their house to retire on. Say you only had $250K in retirement savings with $750K in home equity, planning to downsize or borrow against that equity to finance a large portion of your retirement. If you lost 20% of that equity in the housing bubble you are going to be cash strapped in retirement.

Would I use 20% as a planning target? Not really, because I think it will be the natural result of good savings habits and not saddling yourself with a large house payment.

This is how I would answer the question. Regardless of house value, a person needs good savings habits to retire with proper risk assessment.

A person's net worth does not determine if they can retire.
A person's financial independance does. In the 250k/750k case, I would argue the person is not financially independant and could not retire.

[disneysteve]

Originally Posted by jIM_Ohio

A person's net worth does not determine if they can retire.

And the percentage of net worth represented by the home doesn't matter either. If my home was 50% of my net worth, but that net worth was $5 million, I could retire just fine. If the home was 20% of net worth and the net worth was $3.125 million, I could also retire just fine. In both examples, the investment portfolio is $2.5 million.

[tripods68]

Since scfr asked the question, it is obviously relevant to him.

I'll try to be specific. The home equity does add value to your retirement nests eggs, if for instance, paid off your home and decide to cash out. It wouldn't be prudent to expect home value to go up year-after-year since it increases uncertainty in retirement planning. But it adds certainty if you have paid off your home outright. Anything that adds value to the home would simply be "icing on the cake". Downsizing is very common; kids are all grown and hopefully moved out after college. So you decide to rent or buy a condo instead. Those gains eventually becomes part of your estate. It is true, millions of Americans uses their equity gains from selling their homes as part their nest eggs. So we can't discount this fact. However, no one else is better of knowing what you will need to fund retirements better than yourself. That percentage will change year-after-year as you climb up in corporate ladder (i.e salary increases, bigger stock options awards, and bonuses) as you get closer to your retirement age. Your decision to retire will also be based on build asset mixtures and returns over the years (i.e., 401K or ROTH). Have you achieved the kinds of returns you expected with your asset allocation mixtures? If so, is that enough to retire on with your expected Social Security benefit less expenses? How aggressive can you be on your asset allocations to reach your goal?

I still go back to the traditional way to best gauge what you need upon retirement. How much do you make now, and how much of that you will need to live on comfortably upon retirement? Can you and your wife retire on one income at a lower percentage? Keep in mind, you won't be paying anymore social security, no defer comp, no SDI, union dues etc, house paid for. You will also be saving gas and the wear and tear of your car. Whatever that percentage is (50%, 60% or 80%) that should be the goal you should aim for. I guess, you need to be consistent saver no matter what life throws at you. Easy to talk a lot harder to execute.

[feh]

I'm not sure why you would want to have a target percentage. In general, I want to have as much saved/invested as possible.

The size/value of your house should be determined by what you need, rather than a percentage of your net worth.

If I were to retire tomorrow with a net worth of $5 million, I wouldn't be looking for a $1 million home. Such a home is simply not necessary. (Note: I live in the Midwest, not California).