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]

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]

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]

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]

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]

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.