View Full Version : Net worth and housing
I have been wondering how net worth and housing costs and real estate fit together for people.
Since we own our current house outright, I just don't count it as part of our net worth. But now we are looking at a mortgage, which would come with a debt, so I would count it in that circumstance, and then subtract the debt.
But what do you all do? Do you apportion a certain percent of your money to be in real estate, and do you include your personal residence in that? I can see a rental property, that makes total sense, but what about your personal residence. I figure you have to live somewhere, and would pay rent without it, but easier to figure without it, unless I have a mortgage.
Do you all have a guideline of no more than x percent of your net worth in your residence, for example?
Or maybe if it's paid off, you just don't consider it?
Am trying to figure out asset allocation on the whole picture, I guess, and not just in the stock/bond portfolio.
Some people take out of their retirement portfolio to purchase with cash. That scares me, as I would lose ability to generate income on that money and to grow it tax deferred.
Paid off and don't consider it. Reason being that it is unlikely to provide any income from principal or income generation in any foreseeable future.
SteveinMN
2-28-20, 11:45am
For us, the real estate just "is". When I bought this house, I spent far less than the lender would give me; I just didn't feel I needed to spend that much money on a house (especially when I didn't know how long I'd have it). My rental property was the same way. And I would not have bought it if I didn't know I'd have a sure rental for at least a few years.
Our financial advisor counts the equity we have in both houses as part of our portfolio, as he counts the guesstimate value of DW's and my pensions. It was nice to hear that number but I'm not sure it means much on a daily basis. From our perspective, the mortgages are just bills to pay until they're gone. We were paying additional against principal for a while but diverted that to investments with a better return.
I'm not looking for additional real estate; DW and I are talking about possibly downsizing in a different city as this one is starting to display a fair amount of stupidity in how they want to spend money. But that would be a wash financially and the equity in the rental could be applied to that to finish it off (or get it close). For whatever reasons, I'm not hung up on paying off the house before retirement. Our income should be enough to cover what's left of the mortgage; we don't have to pay that forever.
iris lilies
2-28-20, 12:02pm
For us, the real estate just "is". When I bought this house, I spent far less than the lender would give me; I just didn't feel I needed to spend that much money on a house (especially when I didn't know how long I'd have it). My rental property was the same way. And I would not have bought it if I didn't know I'd have a sure rental for at least a few years.
Our financial advisor counts the equity we have in both houses as part of our portfolio, as he counts the guesstimate value of DW's and my pensions. It was nice to hear that number but I'm not sure it means much on a daily basis. From our perspective, the mortgages are just bills to pay until they're gone. We were paying additional against principal for a while but diverted that to investments with a better return.
I'm not looking for additional real estate; DW and I are talking about possibly downsizing in a different city as this one is starting to display a fair amount of stupidity in how they want to spend money. But that would be a wash financially and the equity in the rental could be applied to that to finish it off (or get it close). For whatever reasons, I'm not hung up on paying off the house before retirement. Our income should be enough to cover what's left of the mortgage; we don't have to pay that forever.
Is this just an intellectual exercise as to what you determine as your net worth?
True honest accounting of net worth counts the equity you have in your house. It also counts any mortgage debt against it.
I don’t count pension or Social Security income at all because I calculate our assets as this, on the day we die what is our estate worth? Our pension income and Social Security income die with us, there is no cash value upon death for us.Well, If I die today my pension pays out for five more years to DH. But I don’t know what happens to it if he’s dead as well. I don’t count that because it’s not a ton of money.
House paid off and use it for some rental income as well as my residents.
But, I consider my net worth as what I am worth on the day it is all over.
I do question if I should use Insurance payout on death or what it is worth
to me as cash valve? I go back and forth on that one?
iris lilies
2-28-20, 12:18pm
To speak to the heart of your question, I personally do not like to have a whole lot of money tied up in real estate. I’m relieved that we are now owners of only two houses instead of multiple houses.
I don’t like real estate, I have never made money on real estate —ever. So, I don’t like to have a significant portion of our assets in real property. At this moment, and considering the rapid fall of the stock market in the past few days, even now we have a smaller percentage of assets in real estate then we have had since we were 35 years old.
I have a mental number for our residence, and I do not want to live in a place that has a market value of more than $250,000.
I never really thought about net worth in terms of "day I die" although it sounds like some do. I think of it in terms of where I am right now in the world.
I don't count social security and don't understand why the financial advisor counts pension.
I guess I'm like Steve, the real estate is where I live but not generating any income.
I don't understand why people don't count their homes value in their net worth calculations. Net worth by definition is the value of assets minus liabilities and has little to do with income outside of the difference between income and expenses which could go in either asset or liability column.
I wouldn't count future earnings as an asset until those earnings were collected any more than I would count future living expenses as a liability before those costs were incurred, with exceptions for mandated future payouts or clawbacks.
We own 2 homes free and clear. We consider the cabin cash-it's our self-insurance plan rather than purchasing LTC insurance. We want to live somewhere so our primary home is not an asset.
I started my career long-enough-ago that I have a pension for 20y service. It is unlikely the Nuns will go out of business-but I do not count it in my retirement assets.
An asset calculator published in the late 90s in Money mag, I use to this date. Age * 0.1 * Annual Income. We are currently at 311% of our target.
iris lilies
2-28-20, 12:38pm
The thread has caused me to think that I need to go find out about my pension information. If it is true that it pays out cash upon the death of both DH and I, I need to know that because our estate executor will have to go after that money and it needs to be reflected in our asset list.
p.s. I just called our pension board and for the next five years there is a cash value to my pension beyond my life and DH’s life. But that disappears in the year 2025. I suppose I will update our asset list to reflect this since it’s well over $100,000.
Gardner, I don't understand the asset calculator.
Teacher Terry
2-28-20, 1:28pm
We count our house as it’s a significant asset. We could sell it and move to a cheaper part of the country if we wanted to. We couldn’t afford to pay rent here now. I don’t think we are in a bubble like last time since 30 tech companies have moved here and we are growing like crazy. When we both die our pensions are dead too:))
We count our house as it’s a significant asset. We could sell it and move to a cheaper part of the country if we wanted to.
This is how I treat my houses on the island here too. I could sell one and move to most anywhere else in the country, and end up with a fair chunk of money in my pocket, and lower costs overall. I've factored this into my worst-case financial model for my aging years.
Teacher Terry
2-28-20, 1:42pm
Actually if we wanted some of the house money we would probably move to a condo which are much cheaper. After living in 5 states this place is wonderful and why so many people are moving here. I would miss the great weather, tons of activities and my family and friends.
Actually if we wanted some of the house money we would probably move to a condo which are much cheaper. After living in 5 states this place is wonderful and why so many people are moving here. I would miss the great weather, tons of activities and my family and friends.
I think my most likely plan here is to sell the 4500 sq. ft. house on the mountain on the island, that I am living in now, and move into my mother's 1200 sq. ft. place down on the beach, within easy walking distance of our village, once she no longer has need of it. At that point I'll either rent out the big house, or sell it.
Then if I run out of money later on, I can always take out a mortgage or reverse mortgage on one of them.
Gardner, I don't understand the asset calculator.
Age: 50
Income: 100000
50*.1= 5 * 100000 = 500k asset target for this age at this current income.
All fictitious
Teacher Terry
2-28-20, 1:49pm
Downsizing for you is a great option. We downsized 8 years ago.
We count our house as it’s a significant asset. We could sell it and move to a cheaper part of the country if we wanted to. We couldn’t afford to pay rent here now. I don’t think we are in a bubble like last time since 30 tech companies have moved here and we are growing like crazy. When we both die our pensions are dead too:))
We are in our retirement community already. Selling to go into something smaller would actually cost us more $! Real estate is crazy here.
My pension dies with me. Hubbies has a cash value that goes into our Trust for distribution with our other cash assets.
Our real estate and personal property is an insignificant portion of our net worth. We consider it a use asset and not an appreciating asset (regardless of the current market). I dont follow it "value" and pretty much keep it on our asset list at cost.
The house is a asset, so I count it. I am very conservative on what I value it. It could be sold, rented or borrowed against. It is about 15% of my net worth. Depending on where the stock market settles at.
My net worth is my home and its contents, my car, my investments and any cash. I live on my pensions which expire when I do.
Age: 50
Income: 100000
50*.1= 5 * 100000 = 500k asset target for this age at this current income.
All fictitious
So it tells you if you are on target for your age and income? So if you require a 50000 income, and you are 50. then is your target asset 250k?
Then if you still require a 50,000 income, and you are 70, your target is 350k?
Or is it your current income while working?
And if you can only withdraw 4% a year on 250000, that is only 10k? And at 70. in same scenario, it is only 14k?
Or is it all about how much they want you to save by a certain age to be on track?
Tybee - I was going to post a link to a retirement calculator on Vanguard's site that I used yesterday but I'm not able to access it now. I suspect too much traffic on the site is the issue. I'll post it for you when I can.
bae - 4500 sq. ft.... don't you get lost? :D
bae - 4500 sq. ft.... don't you get lost? :D
I do, really. I essentially now just live on the main floor, and use one of the downstairs floor rooms for watching movies. The upstairs floor is now the domain of the cat basically.
So I'm down to 1500 sq ft or so, in reality. Still, so much cleaning and maintenance and expense for the unused space.
rosarugosa
2-28-20, 6:23pm
I count our home as part of our net worth because it is by definition, but I don't really consider it part of our investment portfolio, if that makes any sense.
It all makes sense! For some who think they might sell and downsize and use the money for investment nest egg, including it certainly makes sense. I think ours is so low value that it's simpler to disregard it under the theory that you have to live somewhere. Of course, technically, it is part of one's net worth.
So it tells you if you are on target for your age and income? So if you require a 50000 income, and you are 50. then is your target asset 250k?
Then if you still require a 50,000 income, and you are 70, your target is 350k?
Or is it your current income while working?
And if you can only withdraw 4% a year on 250000, that is only 10k? And at 70. in same scenario, it is only 14k?
Or is it all about how much they want you to save by a certain age to be on track?
The intention then was to give you a target portfolio during employed income years. Because it is based on income and supposed expense levels, it should work to provide the needs after retirement? That was a long time ago and I don't have the details anymore.
Teacher Terry
2-28-20, 9:01pm
If my husband died I would move into a condo that was in a secure building. That’s what I did when I was single. We can age in place with everything low maintenance. I don’t want to go smaller with my messy husband:))
SteveinMN
2-28-20, 11:11pm
Is this just an intellectual exercise as to what you determine as your net worth?
What it comes down to is that I really don't care about my net worth all that much as long as it is positive. So I don't track closely individual components. I don't use the number as a comparator with my peers and I don't use it to estimate how much I should have to finance the rest of my life.
I have a good estimate of what our house would be worth on the market if we put it up for sale tomorrow. It's much more than what we owe on the mortgage. Ditto for the rental property. I have an idea if the equity in the two houses together would clear the cost of a retirement residence. But that's nothing seriously on the burner at this point, and, if/when we get there, we will have paid more on both houses and they will be worth more or less than they are now so the number will be different anyway.
When our current financial advisor computed our net worth, he included the equity we have in both houses and included estimated values for DW's pension and my annuity. The classical definition, I guess. I had never calculated it down to the dollar before; I just knew our income exceeded our expenses handily and I guess I've chosen to concentrate on other numbers or concepts.
I calculate the way Alan does. I would never NOT consider equity in my home as part of my net worth. I could cash out on it pretty easily. When I die, my kids will be able to cash out on it. To get my net worth, I typically add up cash in all my checking and savings accounts plus investments, plus home value, plus vehicle value. I then subtract all debt, including mortgage debt of course, and that's what I consider to be my net worth. As I said, right now 90% of my net worth is in my two houses, but if we sell our NJ house, that equity will go directly into mutual funds.
As I said, right now 90% of my net worth is in my two houses, but if we sell our NJ house, that equity will go directly into mutual funds.
That makes total sense, and puts you in the category of someone who is doing retirement planning, but also someone who owns two houses, one of which is generating income, which makes total sense to me to be counted in the investment column.
I just found this article about this question and he goes into some of the different things we've talked about and different ways of looking at it:
https://loans.usnews.com/should-you-include-your-home-in-your-net-worth
I just found this article about this question
Thanks, Tybee. I had never gone into (even internally) debating the pros and cons of including home equity in our net worth, largely for the reasons the author provided. Ditto, really, for the value of pensions; they're not liquid assets like a CD or stocks. The author made the case far more eloquently than I could.
iris lilies
2-29-20, 6:40pm
It is interesting to see how many of the financial gurus are assigning a value to pensions and Social Security. Makes little sense to me other than, well, I can think of a reason why it benefits THEM.
We have financial advisors, too many of them, because we have multiple brokerage accounts ( and I am not happy with that situation but it is what it is.) And if any of them pulled that with me, I might say “see ya, Kurt and Ed Jones and Crystal, hasta la vista”
I think this may just be a new thing in counseling seniors.
My 457 plan makes stupid computer generated projections about how much more money I need to generate for retirement. It is stupid because I am already retired and the computer program has no clue about my assets, all it know is the smallish % in my 457 account. It MAY be taking into account potential Social Security income, who knows. I wish I could skip over this dunderheaded screen of projections whenever I sign on.
It is interesting to see how many of the financial gurus are assigning a value to pensions and Social Security. Makes little sense to me other than, well, I can think of a reason why it benefits THEM.
We have financial advisors, too many of them, because we have multiple brokerage accounts ( and I am not happy with that situation but it is what it is.) And if any of them pulled that with me, I might say “see ya, Kurt and Ed Jones and Crystal, hasta la vista”
I think this may just be a new thing in counseling seniors.
My 457 plan makes stupid computer generated projections about how much more money I need to generate for retirement. It is stupid because I am already retired and the computer program has no clue about my assets, all it know is the smallish % in my 457 account. It MAY be taking into account potential Social Security income, who knows. I wish I could skip over this dunderheaded screen of projections whenever I sign on.
I thought that was odd, too, about the pension and social security, but Steve says his talks about pensions.
That makes sense if you are trying to figure out how much money someone needs to add to the pension coming in each month, but not for net worth.
iris lilies
2-29-20, 6:48pm
I calculate the way Alan does. I would never NOT consider equity in my home as part of my net worth. I could cash out on it pretty easily. When I die, my kids will be able to cash out on it. To get my net worth, I typically add up cash in all my checking and savings accounts plus investments, plus home value, plus vehicle value. I then subtract all debt, including mortgage debt of course, and that's what I consider to be my net worth. As I said, right now 90% of my net worth is in my two houses, but if we sell our NJ house, that equity will go directly into mutual funds.
The way Alan calculates net worth is correct. Twisting the meaning of it, as I see some doing here, seems odd to me.
A net worth figure is only a tool to aid financial planning. A single statement of net worth probably does not have a lot of meaning without contextual explanations, hence all of the discussion about primary residence as part of net worth.
iris lilies
2-29-20, 6:52pm
I thought that was odd, too, about the pension and social security, but Steve says his talks about pensions.
That makes sense if you are trying to figure out how much money someone needs to add to the pension coming in each month, but not for net worth.
sure, I can see that, but that is a level of calculation I dont need. I also tell my financial guys that if they speak to me in terms of “monthly” I do not like that. They had better annualize everything for me. I have never considered, budgeted, thought about, planned, or looked at financials in monthly terms.
Teacher Terry
2-29-20, 9:29pm
Our pensions only have value because we left 100% to each other. Once we are both dead there’s no value.
So it tells you if you are on target for your age and income? So if you require a 50000 income, and you are 50. then is your target asset 250k?
Then if you still require a 50,000 income, and you are 70, your target is 350k?
Or is it your current income while working?
And if you can only withdraw 4% a year on 250000, that is only 10k? And at 70. in same scenario, it is only 14k?
Or is it all about how much they want you to save by a certain age to be on track?
The problem I have with simple calculators like this is that there's a lot of details that get left out, some of which matter, as you've pointed out.
Personally when I look at my income vs. what I'm saving and what I'm spending, I include my employer match for my 401k and ESOP as income. I also include SS withholding as tax since I won't be paying that once I retire. When I do that I find that 26% of my income goes to taxes, 35% goes towards savings and the remaining 39% goes towards current spending. Of the current spending about 40% goes towards rent. We don't own real estate so the OP's questions is easily answered for me. What does matter to me is that when SO and I retire we will be moving somewhere cheaper. We will buy a home with cash and our rent expense will disappear. So, in order to maintain my current lifestyle, my retirement income need will be approximately 24% of my current (all in including employer savings matches) earnings, plus whatever additional costs homeownership will entail, plus whatever additional health insurance/healthcare costs we will have.
A simple "you need to have saved X by this point in your life" calculation doesn't seem sufficient for me because details matter.
San Onofre Guy
2-29-20, 10:32pm
I am finally getting to be less of a freak about net worth. I am retired with a great pension and a paid off condo. Next year when my wife pulls social security that will pay my health insurance. I’m consulting more than I planned, it is fun but we just sock away the funds. We will be those people who at age 70 1/2 are required to pull money from deferred accounts. Our children will do well when we die as we did when my folks passed and they did when granny passed. It is how you live and earn that determines how you can give. Now at time of Financial Independence the tracking Of net worth isn’t as crazy as it has been but I do love studying finance and the markets, it is how I am wired
I am finally getting to be less of a freak about net worth. I am retired with a great pension and a paid off condo. Next year when my wife pulls social security that will pay my health insurance. I’m consulting more than I planned, it is fun but we just sock away the funds. We will be those people who at age 70 1/2 are required to pull money from deferred accounts. Our children will do well when we die as we did when my folks passed and they did when granny passed. It is how you live and earn that determines how you can give. Now at time of Financial Independence the tracking Of net worth isn’t as crazy as it has been but I do love studying finance and the markets, it is how I am wired
RMDs are fascinating to me. I get the idea, from a tax policy perspective, but it's just one of so many tax policy issues related to old people and to inheritances. And it seems completely separated from most of the rest. Personally I inherited a few thousand in an IRA from my father. He was probably having to take pretty big chunks every year as a distribution since he was 85 when he died. Now that it's mine I have to only take a small amount since I'm only 52, but I still have to take something. So every December I get a deposit in my bank account for an absurdly small amount. This year it was $93.
I have an MBA, although I use the soft leadership skills a lot and the facts/figures leadership skills only a little in my work. My one son has a math degree and the other is an accountant. Husband makes a hobby of following small investments and the markets, and he’s very conservative.
I think there’s plenty of input in my world without any financial advisors involved. We advise ourselves for free. 😄
I don’t worry about net worth. Our only debt is the mortgage and we’ll retire with S.S. and a pension. And some smaller IRAs and 403Bs, etc. I really don’t care what the exact number is.
iris lilies
3-1-20, 2:24pm
Good lord I am so efficient! I pulled out our financial “Legacy” file and found
I had already documented the part about my pension having a cash value until the year 2025.
I used to not think about net worth but then I started to feel like my life was sort of spread out all over, financially speaking, and I couldn't really tell what impact my decisions were having on my finances and my future.
So for the past couple of years I keep track of everything a couple of times a week and do a net worth figure too, so at least I can tell where I am versus where I was a year ago, for example, and see how the pieces fit together--it has helped me feel grounded and in control of things a bit more, because I tend to worry about money.
No matter how you slice it. NET WORTH WILL ALWAYS BE ASSETS Minus LIABILITIES. and at any given time.
No matter how you slice it. NET WORTH WILL ALWAYS BE ASSETS Minus LIABILITIES. and at any given time.
Is there some reason you feel you need to SHOUT using CAPS?
Is there some reason you feel you need to SHOUT using CAPS?
I believe Lon said he's hard of hearing. :)
dado potato
5-6-20, 8:15pm
For the past 10 years I aimed for owned real estate to be 16% of total assets. I think a younger person realistically could say 20-22%.
I use Zillow now to obtain an appraised value for our home, but I am skeptical.
I always paid cash in my dealings for my hearth and home.
iris lilies
5-6-20, 9:29pm
I believe Lon said he's hard of hearing. :)
Haha
Is there some reason you feel you need to SHOUT using CAPS?
Yes----I want to make a point .
I believe Lon said he's hard of hearing. :)
Haha
Lol. If I were to guess, based on our very limited knowledge of him, Lon is the type of guy who, when he walks into the bar, comes over and gives his friends a big friendly smack on the back and followed by a big side bear hug while giving an exuberant hello with lots of friendly chuckles.
Lon, I agree that is the classic way to figure net worth. I have just gotten into the habit of excluding our house, but that does not make sense, either, as without our house, I'd have to pay to rent every month. But then I don't count upcoming money coming in, either, the way some do. It's what I actually have that I can lay my hands on at any given moment in time.
I agree with Lon: Assets minus Liabilities at any given time. I don't find it necessary to make it more complicated than that. Right now, to figure my net worth, I'd add up my cash in all my accounts plus the value of my house(s) and car(s) and then subtract debt against all those things as well as any unsecured debt. That's my net worth.
I calculate my net worth according to GAAP, but I expense cars and appliances at the time I buy them. This gives me a fairly conservative approximation of the value of my estate before any applicable insurance payouts or pension survivor benefits. I’m at the age where that is a planning issue for me.
I fully understand my home is an asset. But I have to/want to live under a roof so I don't count it on my balance sheet. If I give it up, it becomes cash which then has to be doled out monthy for rent which I have absolutely no control over and it has skyrocketed in our area, beyond belief!
We have no debt so we're 100% asset. Like LDAHL, I expense large purchases at the time I write the check rather than amortize over the life of the item.
There was a good piece at humbledollar about connecting the dots of all the various aspects of your financial situation through the balance sheet. Preparing one forces you to review the interaction and net impact of all your various decisions rather than considering each in fragmented isolation.
There was a good piece at humble dollar about connecting the dots of all the various aspects of your financial situation through the balance sheet. Preparing one forces you to review the interaction and net impact of all your various decisions rather than considering each in fragmented isolation.
Yes. I started tracking our D:E ratio back in November 1996. It was awesome to see the D shrink and the E rise and finally achieving 0:100 on 1/25/11.:cool:
iris lilies
5-11-20, 1:27pm
What is d and e?
What is d and e?
Whew. I was curious, too, but didn't want to ask.
What is d and e?I believe she's talking debt to equity ratio, it's the highfalutin version of assets vs liabilities and is usually used to show the ratio of company debt to shareholder value. Like many of us here, hers appears to be 0.
No Smack on the back or Bear Hug, just a friendly Hi How Ya Doing?
dado potato
5-11-20, 4:30pm
I have seen a rule of thumb that a long term objective in a prudent financial plan is that the current market value of your owner-occupied dwelling ought to be (at most) 20% of your total assets.
I don't remember where I saw that. I would be very cautious with defining a goal in that way, because:
Locality makes a great deal of difference... the cost of a decent place to live is way higher in say, Greenwich CT or Santa Clara CA, than in my neck of the woods in the northern highlands of WI.
In a specific locality, there can be huge shifts due to changing environmental or economic conditions... Sleepy Verona WI is the home of Epic Systems, a company that is hiring talent hand-over-fist. But then there's Flint MI, and fabulous Desert Shores CA (with its own yacht club on the Salton Sea). You can be living on a little patch of paradise in coastal North Carolina, only to realize your home is next door to a new "Concentrated Animal Feeding Operation". Even a little thing like a sinkhole on your property can greatly reduce the price a buyer would offer.
With Zillow, every 6 months or so I can see what is their current estimate of the value of my house.
I realize SO and I are a bit out of the mainstream in that we both make good money but still choose to rent. Our D/E ratio is great. We have no debt but quite a bit of equity in non-real estate investments. We could take out an $800k mortgage to buy a place and our monthly cash flow wouldn't change significantly but then our D/E ratio would change significantly. We have made the decision to follow this path because buying a place comparable to what we are currently renting would probably require at least an extra $1000/month hit on our cash flow, and a redirect of other investments into a down payment. Our goal is that by doing this we will have enough additional non-real estate assets 10-ish years from now to be able to buy a place with cash in a substantially cheaper market than SF. Time will tell if our strategy was a good one.
Curiously, my parents also did not purchase a home until they retired. Their circumstances were somewhat different. In their case they lived in a nice rented house for my entire childhood and the landlord let the rent drift further and further under market because my parents did most of the minor repair type work themselves (painting the walls if the landlord paid for the paint, that kind of thing.) After dad retired they spent approximately 20% of their net worth on a condo (cash purchase) and lived happily ever after.
I believe she's talking debt to equity ratio, it's the highfalutin version of assets vs liabilities and is usually used to show the ratio of company debt to shareholder value. Like many of us here, hers appears to be 0.
Never thought of it as highfalutin........it's what I've heard all my life rather than asset/liability.
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