how do you include home equity/value in your net worth?

[rigz]

I keep going back and forth on this.

on one hand its tough to include because its not liquid and you cant really use it in retirement. eg, if you have a 300k house paid for and you retire, you dont get that 300k to spend. you still need the house to live in.

on the other hand, having a paid for house (or even equity) must be worth something. if two people retire and both have 1MM in retirement assets, but one has a paid for 300k house and the other doesnt, then the first person is better off.

but how do you account for this? I feel like its tough to count in preparing for retirement but cannot be ignored as well.

[Petunia 100]

I list an estimate of the current market value as an asset, then list the mortgage as a liability.

[rigz]

I list an estimate of the current market value as an asset, then list the mortgage as a liability.

no, i get that.

what im saying is that how does it actually count when preparing for retirement?

suppose you have 300k paid for home or 300k equity. do you then add 300k to you retirement assets? seems like you shouldnt be able to because you cannot use that 300k in retirement (its not liquid and you cant sell the house because you need to live in it).

however, having equity in the house should still count for something as its better to have it, than not. thats where im confused.

[rigz]

i think my thread title was misleading - i know how to calculate for net worth purposes.

i meant for retirement purposes. if a mod could change the title, that would be great.

[bjl584]

Unless you plan to sell it, then you probably shouldn't count it. A house is more of a place to live in than it is an investment. Even if you sell and have the equity, you still need a place to live. The equity will be dumped into a new home, go toward rent, or pay for assisted living.

Rental properties or buying houses to flip is a different animal, but your primary residence really isn't an investment per say. Some people count it in their net worth, I don't. It's just my personal preference.

[rigz]

Unless you plan to sell it, then you probably shouldn't count it. A house is more of a place to live in than it is an investment. Even if you sell and have the equity, you still need a place to live. The equity will be dumped into a new home, go toward rent, or pay for assisted living.

but shouldnt it count for something?

if two people retire with the following assets:

A: 1MM in retirement, 300k paid for home
B: 1MM in retirement, no home

isnt A better off? isnt there value in that? the only thing i can think of is A has lower monthly expense (B pays rent, A doesnt)

Rental properties or buying houses to flip is a different animal, but your primary residence really isn't an investment per say. Some people count it in their net worth, I don't. It's just my personal preference.

thanks

[Petunia 100]

When you estimate your monthly expenses, part of that is rent/mortgage payment (the principal & interest part). If you own a home with no mortgage, that is one large expense not on your list.

And of course the equity is a potential source of revenue. If there is a true need to use the equity, the house can be sold, mortgaged, or reverse-mortgaged.

So yes, Person A is better off than Person B.

[disneysteve]

but shouldnt it count for something?

if two people retire with the following assets:

A: 1MM in retirement, 300k paid for home
B: 1MM in retirement, no home

isnt A better off? isnt there value in that? the only thing i can think of is A has lower monthly expense (B pays rent, A doesnt)

Not necessarliy. Person A may not have lower expenses. He/she has property taxes, insurance, maintenance, utilities, etc. Person B might be living in a less costly rental property with lower expenses.

My mother sold her house 6 years ago and moved into an apartment. Her monthly expenses dropped by hundreds of dollars in the process. Owning a home wasn't an advantage for her at all.

I do not count home equity in retirement planning as I fail to see any relevance to the number.

[scfr]

Yes, it certainly counts for something. If my next door neighbor & I retired on the same day with the same amount of financial assets and similar expenses but my car & house are paid for and hers aren't, I'm definitely in better shape than she is. And if I'm saving up to buy a new car, the day I go out and pay cash for it my net worth doesn't suddenly take a huge hit. Why shouldn't I do my net worth statement the same way a business does it's balance sheet and include the value of my non-financial assets?

I do my net worth this way, which is a "look at it BOTH ways approach":

1. List Financial Assets (Bank Accounts, Treasuries, IRAs, 401Ks, etc), then do a sub-total*.
2. Add Non-Financial Assets (house & cars), and then do a total. I don't include things like jewelry, art or collectibles because the amount is minimal and for me personally it's not worth the effort to calculate. But if someone had a collection of antique cars or expensive jewelry or art, I think they would be wise to include the value as long as they are extremely realistic about what they would actually net for it.

*I actually separate Post Tax and Pre Tax Financial Assets, but that's for another thread.

[bjl584]

But the question was about net worth, not about retirement planning.

A business counting buildings, equipment, and other assets as net worth is on thing. An individual investor counting those things is something else. They are playing by different sets of rules and doing it for different reasons.

I think that a lot of people lump their house's value into their portfolio to make themselves feel richer than they really are. I guess there is nothing wrong with that, but it could open up a door for someone to seriously underestimate what they will need in retirement. If you have $700K in investments and a paid for house worth $300K, then you are technically a millionaire. But, you really don't have a million dollars that you can readily draw from in retirement, because almost a third of your assets are locked up in real estate.

[scfr]

you really don't have a million dollars that you can readily draw from in retirement, because almost a third of your assets are locked up in real estate.

And as I said, my approach is a "Look at it both ways" one ....


And I personally believe that you SHOULD look at what percentage of your net worth is in your non-financial assets, and should have a target for what you want it to be at retirement ... but I have drawn a lot of flack from others on this site for suggesting something so "ludicrous." Of course, I still personally think it's important and my aim at retirement is to have it be not more than 15% of total net worth.

[autoxer]

It certainly is part of your net worth, but shouldn't be considered part of your retirement income sources unless you plan to downsize. My net worth is a snapshot of current assets, fixed assets, retirement funds and debt. I don't use my net worth figure as a retirement goal, just the liquid assets in my retirement funds.

[MonkeyMama]

I think it's very individual. We have a relative who rents in old age (sold her house) and I often thought she would have been better staying in her house (or downsizing a bit) and hiring a chef and a maid. She rents a "closet" which includes board and maybe some cleaning services, but it's $3,000 per month. It's nothing special and not assisted living, but is just an expensive region. Her expenses of home ownership were about $3,000 per YEAR, in comparison. A house would be worth a lot in that case. (I understand she wanted to downsize, but financially it seems to be a bit of a mess - hindsight 20/20 maybe. For reference, I absolutely never rented in that city without roommates - it was cheaper to buy a home when we were 23 than to rent. & I mean ALL costs considered, and even with very expensive real estate).

Our parents do not plan to downsize but each have $500k - $800k each when they sell their modest homes (in same region) - which would obviously be quite useful for nursing home or retirement home type expenses.

We do plan to downsize, and our current dream home in the same neighborhood would be $300,000 cheaper. (IT's a condo, and no one wants a condo in this city since it is relatively inexpensive. Since we are from a more expensive region, we have come to prefer condo living. So we can use those cicrcumstances to our financial advantage. Oh - this $100k condo is like 2000 square feet and 4 bedrooms - it's nothing terribly drastic but just taking advantage of market conditions and a personal preference that is different from the herd). No final retirement decisions will be decided until this downsize is executed - I wouldn't have a clue where the market really will be in 10-ish years, which is when we want to downsize. It will depend on market conditions at that time.

Limiting real estate to a percentage of net worth is somewhat impossible given the regions we live in and are from. I think it's worthwhile not to be too real estate heavy, but if your house is worth 20 times what you paid for it, then it is what it is. Obviously we all have a different perspective based on the regions we live in and our own circumstances. We missed the real estate boom due to age, but still experienced large amounts of property appreciation very early on as homeowners ($350k in a couple of years on current home). So, I don't waste a lot of time trying to limit my real estate exposure. What's important has been to not pay too much for our home.

[Bob B.]

I have a spread sheet for personal net worth. It includes my house (market value in the asset column, and mortgage in the liability column). It also includes my retirement account in the asset column. It also includes my other assets and liabilities.

It's neat to see a net worth number, but it's meaningless for me to use for any projections for retirement.

I'm also 40, so still a long way from retirement.

That being said - when I run any projections, analyses, dreaming, etc. concerning my retirement, I completely ignore the equity in my home. In my opinion, the equity I have in my home is completely irrelevant to my retirement scenario.

Unless and until I sell my home and use the net proceeds to fund my retirement, it, again in my opinion, has absolutely no bearing on my retirement readiness.

[disneysteve]

And I personally believe that you SHOULD look at what percentage of your net worth is in your non-financial assets, and should have a target for what you want it to be at retirement ... but I have drawn a lot of flack from others on this site for suggesting something so "ludicrous." Of course, I still personally think it's important and my aim at retirement is to have it be not more than 15% of total net worth.

You can't control the value of your home. What if there is another real estate boom and the value of your home doubles in a short period of time? That will throw off the percentage of your net worth represented by the house even though nothing has actually changed in your financial situation. What difference does it make if the house is 15% or 20% or 50% of your net worth as long as the other portion (financial assets) are sufficient to provide for your needs?