Sanity check about retirement and house

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Topic Author
t24b350
Posts: 125
Joined: Mon Mar 15, 2021 10:43 am

Sanity check about retirement and house

Post by t24b350 »

Right now 54. Maybe able to keep a job for another 5 years or so.
In a VHCOL area. Home equity takes up 2/3 of networth. Debt free.
Just want to do a sanity check here that I should NOT do anything to home equity, say cash out and invest.
lazynovice
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Joined: Mon Apr 16, 2012 10:48 pm
Location: Denver area. Former Texan.

Re: Sanity check about retirement and house

Post by lazynovice »

Not enough info, but unless you are going to relocate, you need a place to live in that area for five years. Are you willing to rent and what does that cost you? That’s the question, I think.
Harmanic
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Joined: Mon Apr 04, 2022 10:19 am

Re: Sanity check about retirement and house

Post by Harmanic »

If you cash out, you will have to pay rent, so the net amount available to invest might not be any higher. On the other hand, now might be a good time to cash out of higher home equity, assuming that real estate price increases slow down or reverse.

I would decide this way. Are you happy in your current house? If yes, stay, if not, sell. Investment returns should not be a deciding factor. I have seen too many people get burned that way, either through selling or HELOC.
The question isn't at what age I want to retire, it's at what income. | - George Foreman
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Sanity check about retirement and house

Post by KlangFool »

t24b350 wrote: Sun May 22, 2022 12:34 pm Right now 54. Maybe able to keep a job for another 5 years or so.
In a VHCOL area. Home equity takes up 2/3 of networth. Debt free.
Just want to do a sanity check here that I should NOT do anything to home equity, say cash out and invest.

t24b350,

1) Unless 1/3 of your net worth is 25 times or more of your annual expense, cash out and invest is the logical answer. How does it makes any sense to tie up 2/3 of your net worth in a house? Why put 2/3 of your eggs in one basket?

2) Especially if you are in a non-recourse loan state like California, you should cash out and take a interest-only mortgage.

3) Please do not tell us that your asset allocation is 100% stock too.

4) Are you that lucky? Aka, you would not be unemployed in the coming recession?

KlangFool
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KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Sanity check about retirement and house

Post by KlangFool »

Harmanic wrote: Sun May 22, 2022 12:41 pm
If you cash out, you will have to pay rent,
Harmanic,

OP can cash out by taking a mortgage. Then, there will be no rent. But, there will be mortgage payment.

But, selling the house and renting might be a good idea too.

KlangFool
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Topic Author
t24b350
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Joined: Mon Mar 15, 2021 10:43 am

Re: Sanity check about retirement and house

Post by t24b350 »

lazynovice wrote: Sun May 22, 2022 12:40 pm Not enough info, but unless you are going to relocate, you need a place to live in that area for five years. Are you willing to rent and what does that cost you? That’s the question, I think.
Definitely not rent. Maybe take out a mortgage.
Topic Author
t24b350
Posts: 125
Joined: Mon Mar 15, 2021 10:43 am

Re: Sanity check about retirement and house

Post by t24b350 »

KlangFool wrote: Sun May 22, 2022 12:52 pm
t24b350 wrote: Sun May 22, 2022 12:34 pm Right now 54. Maybe able to keep a job for another 5 years or so.
In a VHCOL area. Home equity takes up 2/3 of networth. Debt free.
Just want to do a sanity check here that I should NOT do anything to home equity, say cash out and invest.

t24b350,

1) Unless 1/3 of your net worth is 25 times or more of your annual expense, cash out and invest is the logical answer. How does it makes any sense to tie up 2/3 of your net worth in a house? Why put 2/3 of your eggs in one basket?

2) Especially if you are in a non-recourse loan state like California, you should cash out and take a interest-only mortgage.

3) Please do not tell us that your asset allocation is 100% stock too.

4) Are you that lucky? Aka, you would not be unemployed in the coming recession?

KlangFool
12x of current expense. Of course expense should be lower after retirement.
it is not intentional to tie up so much in house but due to 57% appreciation in last 3 yrs.
asset allocation is about 50/50
yea, I said maybe I could keep a job but no guarantee.
lazynovice
Posts: 3370
Joined: Mon Apr 16, 2012 10:48 pm
Location: Denver area. Former Texan.

Re: Sanity check about retirement and house

Post by lazynovice »

t24b350 wrote: Sun May 22, 2022 2:11 pm
KlangFool wrote: Sun May 22, 2022 12:52 pm
t24b350 wrote: Sun May 22, 2022 12:34 pm Right now 54. Maybe able to keep a job for another 5 years or so.
In a VHCOL area. Home equity takes up 2/3 of networth. Debt free.
Just want to do a sanity check here that I should NOT do anything to home equity, say cash out and invest.

t24b350,

1) Unless 1/3 of your net worth is 25 times or more of your annual expense, cash out and invest is the logical answer. How does it makes any sense to tie up 2/3 of your net worth in a house? Why put 2/3 of your eggs in one basket?

2) Especially if you are in a non-recourse loan state like California, you should cash out and take a interest-only mortgage.

3) Please do not tell us that your asset allocation is 100% stock too.

4) Are you that lucky? Aka, you would not be unemployed in the coming recession?

KlangFool
12x of current expense. Of course expense should be lower after retirement.
it is not intentional to tie up so much in house but due to 57% appreciation in last 3 yrs.
asset allocation is about 50/50
yea, I said maybe I could keep a job but no guarantee.
So play out both scenarios. You take out a mortgage, the value of the house plummets, investments plummet, you lose your job versus no mortgage, house value plummets, investments plummet, you lose your job. Which one is better in your mind?
KlangFool
Posts: 31526
Joined: Sat Oct 11, 2008 12:35 pm

Re: Sanity check about retirement and house

Post by KlangFool »

t24b350 wrote: Sun May 22, 2022 2:11 pm
KlangFool wrote: Sun May 22, 2022 12:52 pm
t24b350 wrote: Sun May 22, 2022 12:34 pm Right now 54. Maybe able to keep a job for another 5 years or so.
In a VHCOL area. Home equity takes up 2/3 of networth. Debt free.
Just want to do a sanity check here that I should NOT do anything to home equity, say cash out and invest.

t24b350,

1) Unless 1/3 of your net worth is 25 times or more of your annual expense, cash out and invest is the logical answer. How does it makes any sense to tie up 2/3 of your net worth in a house? Why put 2/3 of your eggs in one basket?

2) Especially if you are in a non-recourse loan state like California, you should cash out and take a interest-only mortgage.

3) Please do not tell us that your asset allocation is 100% stock too.

4) Are you that lucky? Aka, you would not be unemployed in the coming recession?

KlangFool
12x of current expense. Of course expense should be lower after retirement.
it is not intentional to tie up so much in house but due to 57% appreciation in last 3 yrs.
asset allocation is about 50/50
yea, I said maybe I could keep a job but no guarantee.
t24b350,

"12x of current expense"

1) Then, you have too much eggs in your house basket.

"Of course expense should be lower after retirement."

2) I disagreed. Why should this be true? It is not logical at all.

"it is not intentional to tie up so much in house but due to 57% appreciation in last 3 yrs."

3) It is intentional because you paid off the mortgage before you are financially independent. Or else, you would not be facing this situation.

"yea, I said maybe I could keep a job but no guarantee."

4) Why is it safe to keep that much of your net worth in a house? Sell the house and rent if you are that close to retirement. Or, take a non-recourse mortgage if you can.

5) Could you retire in 5 years if the house's price drop 50% and stays down for 10 years?

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Sanity check about retirement and house

Post by KlangFool »

lazynovice wrote: Sun May 22, 2022 2:14 pm
t24b350 wrote: Sun May 22, 2022 2:11 pm
KlangFool wrote: Sun May 22, 2022 12:52 pm
t24b350 wrote: Sun May 22, 2022 12:34 pm Right now 54. Maybe able to keep a job for another 5 years or so.
In a VHCOL area. Home equity takes up 2/3 of networth. Debt free.
Just want to do a sanity check here that I should NOT do anything to home equity, say cash out and invest.

t24b350,

1) Unless 1/3 of your net worth is 25 times or more of your annual expense, cash out and invest is the logical answer. How does it makes any sense to tie up 2/3 of your net worth in a house? Why put 2/3 of your eggs in one basket?

2) Especially if you are in a non-recourse loan state like California, you should cash out and take a interest-only mortgage.

3) Please do not tell us that your asset allocation is 100% stock too.

4) Are you that lucky? Aka, you would not be unemployed in the coming recession?

KlangFool
12x of current expense. Of course expense should be lower after retirement.
it is not intentional to tie up so much in house but due to 57% appreciation in last 3 yrs.
asset allocation is about 50/50
yea, I said maybe I could keep a job but no guarantee.
So play out both scenarios. You take out a mortgage, the value of the house plummets, investments plummet, you lose your job versus no mortgage, house value plummets, investments plummet, you lose your job. Which one is better in your mind?
lazynovice,

Assuming both house and stock market drops 50% and stays down. And, the mortgage is a non-recourse loan and OP cannot sell the house.

50/50 -> lost 25%

A) Keeping the house. OP has 75% of 12 times expense = 9 times expense to survive and wait for the recovery.

B) Take out the mortgage and invest 21.6 time expense. Total portfolio = 33.6 expense before drop. After the drop, OP has 25.2 times expense. OP can walk away from the house and retired elsewhere.

(B) is much better than (A).

KlangFool
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59Gibson
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Re: Sanity check about retirement and house

Post by 59Gibson »

Way too much for my comfort. You're reliant on both the RE mkt and stock mkt to retire. At your age, just too risky.
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Sanity check about retirement and house

Post by KlangFool »

OP,

In my opinion, you should sell your house and rent. It is too risky to tie up 2/3 of your net worth in a house 5 years from retirement. Especially when you could be forced to retire early.

My employer just laid off some people and announced a hiring freeze.

KlangFool
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Californiastate
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Joined: Thu Feb 04, 2021 10:52 am

Re: Sanity check about retirement and house

Post by Californiastate »

OP
Stay where you're at and don't take out a mortgage. You're not JP Morgan and you're not going to arbitrage your way into a windfall. Keep it simple. You've done well by paying off your HCOL home before your retired.
delamer
Posts: 17458
Joined: Tue Feb 08, 2011 5:13 pm

Re: Sanity check about retirement and house

Post by delamer »

Truthfully?

It sounds like you undersaved and got lucky with the recent jump in house prices.

I’d serously consider an interest-free cashout refi for maybe half the value, if you can qualify.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Topic Author
t24b350
Posts: 125
Joined: Mon Mar 15, 2021 10:43 am

Re: Sanity check about retirement and house

Post by t24b350 »

lazynovice wrote: Sun May 22, 2022 2:14 pm
t24b350 wrote: Sun May 22, 2022 2:11 pm
KlangFool wrote: Sun May 22, 2022 12:52 pm
t24b350 wrote: Sun May 22, 2022 12:34 pm Right now 54. Maybe able to keep a job for another 5 years or so.
In a VHCOL area. Home equity takes up 2/3 of networth. Debt free.
Just want to do a sanity check here that I should NOT do anything to home equity, say cash out and invest.

t24b350,

1) Unless 1/3 of your net worth is 25 times or more of your annual expense, cash out and invest is the logical answer. How does it makes any sense to tie up 2/3 of your net worth in a house? Why put 2/3 of your eggs in one basket?

2) Especially if you are in a non-recourse loan state like California, you should cash out and take a interest-only mortgage.

3) Please do not tell us that your asset allocation is 100% stock too.

4) Are you that lucky? Aka, you would not be unemployed in the coming recession?

KlangFool
12x of current expense. Of course expense should be lower after retirement.
it is not intentional to tie up so much in house but due to 57% appreciation in last 3 yrs.
asset allocation is about 50/50
yea, I said maybe I could keep a job but no guarantee.
So play out both scenarios. You take out a mortgage, the value of the house plummets, investments plummet, you lose your job versus no mortgage, house value plummets, investments plummet, you lose your job. Which one is better in your mind?
the later.
Topic Author
t24b350
Posts: 125
Joined: Mon Mar 15, 2021 10:43 am

Re: Sanity check about retirement and house

Post by t24b350 »

KlangFool wrote: Sun May 22, 2022 2:19 pm
t24b350 wrote: Sun May 22, 2022 2:11 pm
KlangFool wrote: Sun May 22, 2022 12:52 pm
t24b350 wrote: Sun May 22, 2022 12:34 pm Right now 54. Maybe able to keep a job for another 5 years or so.
In a VHCOL area. Home equity takes up 2/3 of networth. Debt free.
Just want to do a sanity check here that I should NOT do anything to home equity, say cash out and invest.

t24b350,

1) Unless 1/3 of your net worth is 25 times or more of your annual expense, cash out and invest is the logical answer. How does it makes any sense to tie up 2/3 of your net worth in a house? Why put 2/3 of your eggs in one basket?

2) Especially if you are in a non-recourse loan state like California, you should cash out and take a interest-only mortgage.

3) Please do not tell us that your asset allocation is 100% stock too.

4) Are you that lucky? Aka, you would not be unemployed in the coming recession?

KlangFool
12x of current expense. Of course expense should be lower after retirement.
it is not intentional to tie up so much in house but due to 57% appreciation in last 3 yrs.
asset allocation is about 50/50
yea, I said maybe I could keep a job but no guarantee.
t24b350,

"12x of current expense"

1) Then, you have too much eggs in your house basket.

"Of course expense should be lower after retirement."

2) I disagreed. Why should this be true? It is not logical at all.

"it is not intentional to tie up so much in house but due to 57% appreciation in last 3 yrs."

3) It is intentional because you paid off the mortgage before you are financially independent. Or else, you would not be facing this situation.

"yea, I said maybe I could keep a job but no guarantee."

4) Why is it safe to keep that much of your net worth in a house? Sell the house and rent if you are that close to retirement. Or, take a non-recourse mortgage if you can.

5) Could you retire in 5 years if the house's price drop 50% and stays down for 10 years?

KlangFool
First of all, thank you so much, KlangFool, to take time to review my situation and give advice.
My house is barely above average in the area, which means I have to bid with cash. After buying the house, I am too lazy to take out a mortgage and invest.
If my portfolio were down 25% and house down 50% (which is not heard of in my area before but it could happen in the future), I would have 23x, assuming I could sell the house and rent. It may not be enough for retirement.
The only hope is that between now and laid off, I can save the remaining 2x.
Last edited by t24b350 on Sun May 22, 2022 3:48 pm, edited 1 time in total.
Topic Author
t24b350
Posts: 125
Joined: Mon Mar 15, 2021 10:43 am

Re: Sanity check about retirement and house

Post by t24b350 »

KlangFool wrote: Sun May 22, 2022 2:24 pm
lazynovice wrote: Sun May 22, 2022 2:14 pm
t24b350 wrote: Sun May 22, 2022 2:11 pm
KlangFool wrote: Sun May 22, 2022 12:52 pm
t24b350 wrote: Sun May 22, 2022 12:34 pm Right now 54. Maybe able to keep a job for another 5 years or so.
In a VHCOL area. Home equity takes up 2/3 of networth. Debt free.
Just want to do a sanity check here that I should NOT do anything to home equity, say cash out and invest.

t24b350,

1) Unless 1/3 of your net worth is 25 times or more of your annual expense, cash out and invest is the logical answer. How does it makes any sense to tie up 2/3 of your net worth in a house? Why put 2/3 of your eggs in one basket?

2) Especially if you are in a non-recourse loan state like California, you should cash out and take a interest-only mortgage.

3) Please do not tell us that your asset allocation is 100% stock too.

4) Are you that lucky? Aka, you would not be unemployed in the coming recession?

KlangFool
12x of current expense. Of course expense should be lower after retirement.
it is not intentional to tie up so much in house but due to 57% appreciation in last 3 yrs.
asset allocation is about 50/50
yea, I said maybe I could keep a job but no guarantee.
So play out both scenarios. You take out a mortgage, the value of the house plummets, investments plummet, you lose your job versus no mortgage, house value plummets, investments plummet, you lose your job. Which one is better in your mind?
lazynovice,

Assuming both house and stock market drops 50% and stays down. And, the mortgage is a non-recourse loan and OP cannot sell the house.

50/50 -> lost 25%

A) Keeping the house. OP has 75% of 12 times expense = 9 times expense to survive and wait for the recovery.

B) Take out the mortgage and invest 21.6 time expense. Total portfolio = 33.6 expense before drop. After the drop, OP has 25.2 times expense. OP can walk away from the house and retired elsewhere.

(B) is much better than (A).

KlangFool
Hmm, interesting comparison. I am in a non-recourse loan state.
Topic Author
t24b350
Posts: 125
Joined: Mon Mar 15, 2021 10:43 am

Re: Sanity check about retirement and house

Post by t24b350 »

KlangFool wrote: Sun May 22, 2022 2:47 pm OP,

In my opinion, you should sell your house and rent. It is too risky to tie up 2/3 of your net worth in a house 5 years from retirement. Especially when you could be forced to retire early.

My employer just laid off some people and announced a hiring freeze.

KlangFool
Thanks, KlangFool. I can see the storm coming. The stock of the company I am working for is down 30%+ YTD.
Topic Author
t24b350
Posts: 125
Joined: Mon Mar 15, 2021 10:43 am

Re: Sanity check about retirement and house

Post by t24b350 »

Californiastate wrote: Sun May 22, 2022 3:04 pm OP
Stay where you're at and don't take out a mortgage. You're not JP Morgan and you're not going to arbitrage your way into a windfall. Keep it simple. You've done well by paying off your HCOL home before your retired.
Thank you for offering a different view. Yes, I am also not sure if I can invest properly. Plus, houses in my area typically hold up well during recession, like 10-20% down only. Of course history cannot tell us about the future.
User avatar
Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: Sanity check about retirement and house

Post by Watty »

t24b350 wrote: Sun May 22, 2022 12:34 pm Right now 54. Maybe able to keep a job for another 5 years or so.
In a VHCOL area. Home equity takes up 2/3 of networth. Debt free.
Just want to do a sanity check here that I should NOT do anything to home equity, say cash out and invest.
There are lots and lots of details that we do not know but it is possible that you could sell your house and move to a much lower cost of living area and retire now so I would take a hard look at that. You may decide not to do that but it would be good to run the numbers to see if that is an option for you now.

Even though mortgage interest rates are still relatively low investing and earning a higher return is a lot harder than it sounds because you have a sequence of returns risk. Here is a very simplistic example of that which I posted before. You might want to play with your actual numbers looking at it this way.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://investor.vanguard.com/investing ... allocation

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
Even when interest rates
Jack FFR1846
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Re: Sanity check about retirement and house

Post by Jack FFR1846 »

This all depends on your situation. I'll make up 2 examples to give you what I think are "no, don't sell the house" and "yes, sell the house".

1) Your kids are still at home. Their friends are well established and they're on teams or in clubs or just go to each others houses to study, play, watch tv, whatever. If someone has a pool, they know where it is and go there on hot days. You have a spouse and both of you have friends nearby you do things with. Maybe you play golf with friends or take in a track day with your Miata and always run with the same club on the track. If you sold, you would have to buy nearby to stay with the same friends and schools and everything and the less expensive houses are total dumps.

2) Your kids are about to graduate college. They'll be working in Boston or Chicago or Austin or New York. Absolutely not where you are. Selling your house, moving and buying a new, smaller, much less expensive but nice low cost of living area house will put you at 33 times what your retirement spending will be. Your new home has weather you like, activities available you like, maybe a racetrack you can bring your Miata to and gold course where you can whack balls into ponds. In this case, if you like them, you could potentially save even more money and rent or buy a condo.
Bogle: Smart Beta is stupid
Topic Author
t24b350
Posts: 125
Joined: Mon Mar 15, 2021 10:43 am

Re: Sanity check about retirement and house

Post by t24b350 »

Watty wrote: Sun May 22, 2022 3:52 pm
t24b350 wrote: Sun May 22, 2022 12:34 pm Right now 54. Maybe able to keep a job for another 5 years or so.
In a VHCOL area. Home equity takes up 2/3 of networth. Debt free.
Just want to do a sanity check here that I should NOT do anything to home equity, say cash out and invest.
There are lots and lots of details that we do not know but it is possible that you could sell your house and move to a much lower cost of living area and retire now so I would take a hard look at that. You may decide not to do that but it would be good to run the numbers to see if that is an option for you now.

Even though mortgage interest rates are still relatively low investing and earning a higher return is a lot harder than it sounds because you have a sequence of returns risk. Here is a very simplistic example of that which I posted before. You might want to play with your actual numbers looking at it this way.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://investor.vanguard.com/investing ... allocation

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
Even when interest rates
Thanks for the advice. I still want to keep my job until being laid off as the pay is handsome. So sell the house and retire now does not seem an option.
BernardShakey
Posts: 1147
Joined: Tue Jun 25, 2019 10:52 pm

Re: Sanity check about retirement and house

Post by BernardShakey »

KlangFool wrote: Sun May 22, 2022 2:24 pm
lazynovice wrote: Sun May 22, 2022 2:14 pm
t24b350 wrote: Sun May 22, 2022 2:11 pm
KlangFool wrote: Sun May 22, 2022 12:52 pm
t24b350 wrote: Sun May 22, 2022 12:34 pm Right now 54. Maybe able to keep a job for another 5 years or so.
In a VHCOL area. Home equity takes up 2/3 of networth. Debt free.
Just want to do a sanity check here that I should NOT do anything to home equity, say cash out and invest.

t24b350,

1) Unless 1/3 of your net worth is 25 times or more of your annual expense, cash out and invest is the logical answer. How does it makes any sense to tie up 2/3 of your net worth in a house? Why put 2/3 of your eggs in one basket?

2) Especially if you are in a non-recourse loan state like California, you should cash out and take a interest-only mortgage.

3) Please do not tell us that your asset allocation is 100% stock too.

4) Are you that lucky? Aka, you would not be unemployed in the coming recession?

KlangFool
12x of current expense. Of course expense should be lower after retirement.
it is not intentional to tie up so much in house but due to 57% appreciation in last 3 yrs.
asset allocation is about 50/50
yea, I said maybe I could keep a job but no guarantee.
So play out both scenarios. You take out a mortgage, the value of the house plummets, investments plummet, you lose your job versus no mortgage, house value plummets, investments plummet, you lose your job. Which one is better in your mind?
lazynovice,

Assuming both house and stock market drops 50% and stays down. And, the mortgage is a non-recourse loan and OP cannot sell the house.

50/50 -> lost 25%

A) Keeping the house. OP has 75% of 12 times expense = 9 times expense to survive and wait for the recovery.

B) Take out the mortgage and invest 21.6 time expense. Total portfolio = 33.6 expense before drop. After the drop, OP has 25.2 times expense. OP can walk away from the house and retired elsewhere.

(B) is much better than (A).

KlangFool
Maybe OP doesn't want to retire somewhere else. This advice reflects that of someone in a panic. OP is not in a panic nor should he/she be.
An important key to investing is having a well-calibrated sense of your future regret.
Topic Author
t24b350
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Re: Sanity check about retirement and house

Post by t24b350 »

Jack FFR1846 wrote: Sun May 22, 2022 3:58 pm This all depends on your situation. I'll make up 2 examples to give you what I think are "no, don't sell the house" and "yes, sell the house".

1) Your kids are still at home. Their friends are well established and they're on teams or in clubs or just go to each others houses to study, play, watch tv, whatever. If someone has a pool, they know where it is and go there on hot days. You have a spouse and both of you have friends nearby you do things with. Maybe you play golf with friends or take in a track day with your Miata and always run with the same club on the track. If you sold, you would have to buy nearby to stay with the same friends and schools and everything and the less expensive houses are total dumps.

2) Your kids are about to graduate college. They'll be working in Boston or Chicago or Austin or New York. Absolutely not where you are. Selling your house, moving and buying a new, smaller, much less expensive but nice low cost of living area house will put you at 33 times what your retirement spending will be. Your new home has weather you like, activities available you like, maybe a racetrack you can bring your Miata to and gold course where you can whack balls into ponds. In this case, if you like them, you could potentially save even more money and rent or buy a condo.
Thanks for the sample situations. My kid is still one year from college so cannot sell now. The only option is to get a mortgage and invest.
Topic Author
t24b350
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Re: Sanity check about retirement and house

Post by t24b350 »

BernardShakey wrote: Sun May 22, 2022 4:05 pm
KlangFool wrote: Sun May 22, 2022 2:24 pm
lazynovice wrote: Sun May 22, 2022 2:14 pm
t24b350 wrote: Sun May 22, 2022 2:11 pm
KlangFool wrote: Sun May 22, 2022 12:52 pm

t24b350,

1) Unless 1/3 of your net worth is 25 times or more of your annual expense, cash out and invest is the logical answer. How does it makes any sense to tie up 2/3 of your net worth in a house? Why put 2/3 of your eggs in one basket?

2) Especially if you are in a non-recourse loan state like California, you should cash out and take a interest-only mortgage.

3) Please do not tell us that your asset allocation is 100% stock too.

4) Are you that lucky? Aka, you would not be unemployed in the coming recession?

KlangFool
12x of current expense. Of course expense should be lower after retirement.
it is not intentional to tie up so much in house but due to 57% appreciation in last 3 yrs.
asset allocation is about 50/50
yea, I said maybe I could keep a job but no guarantee.
So play out both scenarios. You take out a mortgage, the value of the house plummets, investments plummet, you lose your job versus no mortgage, house value plummets, investments plummet, you lose your job. Which one is better in your mind?
lazynovice,

Assuming both house and stock market drops 50% and stays down. And, the mortgage is a non-recourse loan and OP cannot sell the house.

50/50 -> lost 25%

A) Keeping the house. OP has 75% of 12 times expense = 9 times expense to survive and wait for the recovery.

B) Take out the mortgage and invest 21.6 time expense. Total portfolio = 33.6 expense before drop. After the drop, OP has 25.2 times expense. OP can walk away from the house and retired elsewhere.

(B) is much better than (A).

KlangFool
Maybe OP doesn't want to retire somewhere else. This advice reflects that of someone in a panic. OP is not in a panic nor should he/she be.
I do want/have to retire somewhere else. I stay in my area just for the sake of job opportunities.
BernardShakey
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Re: Sanity check about retirement and house

Post by BernardShakey »

OP - I'd just stay where you are for now unless you have a desire to relocate to a LCOL region. Keep paying the mortgage, ramp up your retirement savings as much as you can (until it hurts), and keep working. If laid off, find another position and continue saving and paying down the mortgage.

If later on you are out of work or are forced into retirement, then consider selling and moving to lower COL area --- this might be a necessity but you shouldn't feel like you need to do it now. You could buy a property for half the price and invest the remainder. But do you need to do this now ? No.

With more information you might get alternative / better advice (are kids in the picture, college expenses, want to leave money to heirs, desire to relocate, portfolio composition, etc.)
An important key to investing is having a well-calibrated sense of your future regret.
Topic Author
t24b350
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Re: Sanity check about retirement and house

Post by t24b350 »

BernardShakey wrote: Sun May 22, 2022 4:15 pm OP - I'd just stay where you are for now unless you have a desire to relocate to a LCOL region. Keep paying the mortgage, ramp up your retirement savings as much as you can (until it hurts), and keep working. If laid off, find another position and continue saving and paying down the mortgage.

If later on you are out of work or are forced into retirement, then consider selling and moving to lower COL area --- this might be a necessity but you shouldn't feel like you need to do it now. You could buy a property for half the price and invest the remainder. But do you need to do this now ? No.

With more information you might get alternative / better advice (are kids in the picture, college expenses, want to leave money to heirs, desire to relocate, portfolio composition, etc.)
Thanks for the advice. I have the college expenses counted already when I said I have 12x for retirement. Portfolio is 50/50, mostly Vanguard index funds (VTI/VXUS/BND/VIPSX/VCADX) and BlackRock lifepath in 401K (LIBKX).
BernardShakey
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Re: Sanity check about retirement and house

Post by BernardShakey »

t24b350 wrote: Sun May 22, 2022 4:19 pm
BernardShakey wrote: Sun May 22, 2022 4:15 pm OP - I'd just stay where you are for now unless you have a desire to relocate to a LCOL region. Keep paying the mortgage, ramp up your retirement savings as much as you can (until it hurts), and keep working. If laid off, find another position and continue saving and paying down the mortgage.

If later on you are out of work or are forced into retirement, then consider selling and moving to lower COL area --- this might be a necessity but you shouldn't feel like you need to do it now. You could buy a property for half the price and invest the remainder. But do you need to do this now ? No.

With more information you might get alternative / better advice (are kids in the picture, college expenses, want to leave money to heirs, desire to relocate, portfolio composition, etc.)
Thanks for the advice. I have the college expenses counted already when I said I have 12x for retirement. Portfolio is 50/50.
Sorry, missed some of the details and recent update regarding your interest in relocating. Relocating and banking half the sale price is definitely appealing. It seems though that you feel you cannot do that right now. So, plug ahead for now and do it later when you are ready. Yeah, we don't know where markets (stock and RE) will be when you want to relocate but that's life.
An important key to investing is having a well-calibrated sense of your future regret.
KlangFool
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Re: Sanity check about retirement and house

Post by KlangFool »

Folks,

If someone has 67% of his net worth in a stock and his ability to retire in 5 years is dependent on the price of the stock, we would advice the person to sell the stock as soon as possible. In OP's case, 67% of his net worth is tied to the house and his ability to retire is tied to the price of the house, why won't we advise him to sell the house now? Why should this be considered as safe?

KlangFool
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Re: Sanity check about retirement and house

Post by KlangFool »

t24b350 wrote: Sun May 22, 2022 3:37 pm
If my portfolio were down 25% and house down 50% (which is not heard of in my area before but it could happen in the future), I would have 23x, assuming I could sell the house and rent. It may not be enough for retirement.
The only hope is that between now and laid off, I can save the remaining 2x.
t24b350,

You have two choices:

A) Hope to be lucky that nothing goes wrong until you retire.

B) Sell the house or take a non-recourse mortgage so that even if it goes wrong, you would be fine.

The choice is yours. Are you that lucky? Which one makes the most sense?

KlangFool
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t24b350
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Re: Sanity check about retirement and house

Post by t24b350 »

KlangFool wrote: Sun May 22, 2022 4:48 pm
t24b350 wrote: Sun May 22, 2022 3:37 pm
If my portfolio were down 25% and house down 50% (which is not heard of in my area before but it could happen in the future), I would have 23x, assuming I could sell the house and rent. It may not be enough for retirement.
The only hope is that between now and laid off, I can save the remaining 2x.
t24b350,

You have two choices:

A) Hope to be lucky that nothing goes wrong until you retire.

B) Sell the house or take a non-recourse mortgage so that even if it goes wrong, you would be fine.

The choice is yours. Are you that lucky? Which one makes the most sense?

KlangFool
Thanks again, KlangFool.
It seems to me that taking a non-recourse mortgage makes sense only if the percent of the mortgage is higher than the potential drop. To protect the house drop say 50%, the mortgage has to be over 50%. Given the current valuation of the house, 50% mortgage will be over 1 million. Such a big mortgage, even if interest only, can have 3-4K monthly payment, or 40K+ per year. I am not sure if it is worthwhile for the protection provided. Do I miss anything?
KlangFool
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Re: Sanity check about retirement and house

Post by KlangFool »

t24b350 wrote: Sun May 22, 2022 7:36 pm
KlangFool wrote: Sun May 22, 2022 4:48 pm
t24b350 wrote: Sun May 22, 2022 3:37 pm
If my portfolio were down 25% and house down 50% (which is not heard of in my area before but it could happen in the future), I would have 23x, assuming I could sell the house and rent. It may not be enough for retirement.
The only hope is that between now and laid off, I can save the remaining 2x.
t24b350,

You have two choices:

A) Hope to be lucky that nothing goes wrong until you retire.

B) Sell the house or take a non-recourse mortgage so that even if it goes wrong, you would be fine.

The choice is yours. Are you that lucky? Which one makes the most sense?

KlangFool
Thanks again, KlangFool.
It seems to me that taking a non-recourse mortgage makes sense only if the percent of the mortgage is higher than the potential drop. To protect the house drop say 50%, the mortgage has to be over 50%. Given the current valuation of the house, 50% mortgage will be over 1 million. Such a big mortgage, even if interest only, can have 3-4K monthly payment, or 40K+ per year. I am not sure if it is worthwhile for the protection provided. Do I miss anything?
t24b350,

"Given the current valuation of the house, 50% mortgage will be over 1 million. Such a big mortgage, even if interest only, can have 3-4K monthly payment, or 40K+ per year."

Do you mean that you cannot earn at least 40K per year (4%) by investing that 1 million into your 50/50 portfolio? If yes, what is the actual cost to you? Let's assume only 2% interest/dividend/distribution per year, that is 20K per year. Then, your actual cash flow is 40K - 20K = 20K per year.

To be useful, you should take close to 100% Interest-only mortgage. Your goal is to walk away from the house if you have to. 50% = 1 million is a lousy number. You cannot walk away without taking a loss of 1 million.

KlangFool
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t24b350
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Re: Sanity check about retirement and house

Post by t24b350 »

KlangFool wrote: Sun May 22, 2022 7:45 pm
t24b350 wrote: Sun May 22, 2022 7:36 pm
KlangFool wrote: Sun May 22, 2022 4:48 pm
t24b350 wrote: Sun May 22, 2022 3:37 pm
If my portfolio were down 25% and house down 50% (which is not heard of in my area before but it could happen in the future), I would have 23x, assuming I could sell the house and rent. It may not be enough for retirement.
The only hope is that between now and laid off, I can save the remaining 2x.
t24b350,

You have two choices:

A) Hope to be lucky that nothing goes wrong until you retire.

B) Sell the house or take a non-recourse mortgage so that even if it goes wrong, you would be fine.

The choice is yours. Are you that lucky? Which one makes the most sense?

KlangFool
Thanks again, KlangFool.
It seems to me that taking a non-recourse mortgage makes sense only if the percent of the mortgage is higher than the potential drop. To protect the house drop say 50%, the mortgage has to be over 50%. Given the current valuation of the house, 50% mortgage will be over 1 million. Such a big mortgage, even if interest only, can have 3-4K monthly payment, or 40K+ per year. I am not sure if it is worthwhile for the protection provided. Do I miss anything?
t24b350,

"Given the current valuation of the house, 50% mortgage will be over 1 million. Such a big mortgage, even if interest only, can have 3-4K monthly payment, or 40K+ per year."

Do you mean that you cannot earn at least 40K per year (4%) by investing that 1 million into your 50/50 portfolio? If yes, what is the actual cost to you? Let's assume only 2% interest/dividend/distribution per year, that is 20K per year. Then, your actual cash flow is 40K - 20K = 20K per year.

KlangFool
But in my example, if I took 50% mortgage and home price dropped 50%, I would not gain anything with 20K cash flow.
If I took 90% mortgage (even not sure it can be approved), I would need to pay over 90K per year. That is big enough to lose sleep as I saw in another thread someone at my age loses sleep for a 1.3M mortgage.
KlangFool
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Re: Sanity check about retirement and house

Post by KlangFool »

t24b350 wrote: Sun May 22, 2022 7:54 pm
But in my example, if I took 50% mortgage and home price dropped 50%, I would not gain anything with 20K cash flow.
If I took 90% mortgage (not sure even can be approved), I would need to pay 80K per year. That is big enough to lose sleep as I saw in another thread someone at my age loses sleep for a 1.3M mortgage.
t24b350,

"If I took 90% mortgage (not sure even can be approved), I would need to pay 80K per year. That is big enough to lose sleep as I saw in another thread someone at my age loses sleep for a 1.3M mortgage."

And, if the house drops 50%, your house is only worth 1 million. The mortgage is 1.8 million. You stop paying the 80K mortgage and the bank can take your house. The bank lose 800K instead of you losing 800K.

You still have enough money to retire elsewhere and start a new life.

KlangFool
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t24b350
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Re: Sanity check about retirement and house

Post by t24b350 »

KlangFool wrote: Sun May 22, 2022 8:02 pm
t24b350 wrote: Sun May 22, 2022 7:54 pm
But in my example, if I took 50% mortgage and home price dropped 50%, I would not gain anything with 20K cash flow.
If I took 90% mortgage (not sure even can be approved), I would need to pay 80K per year. That is big enough to lose sleep as I saw in another thread someone at my age loses sleep for a 1.3M mortgage.
t24b350,

"If I took 90% mortgage (not sure even can be approved), I would need to pay 80K per year. That is big enough to lose sleep as I saw in another thread someone at my age loses sleep for a 1.3M mortgage."

And, if the house drops 50%, your house is only worth 1 million. The mortgage is 1.8 million. You stop paying the 80K mortgage and the bank can take your house. The bank lose 800K instead of you losing 800K.

You still have enough money to retire elsewhere and start a new life.

KlangFool
Thanks for the explanation and it makes sense. Only that I find having a 2m+ debt is hard to swallow, even if I can get it.
KlangFool
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Re: Sanity check about retirement and house

Post by KlangFool »

t24b350 wrote: Sun May 22, 2022 8:21 pm
KlangFool wrote: Sun May 22, 2022 8:02 pm
t24b350 wrote: Sun May 22, 2022 7:54 pm
But in my example, if I took 50% mortgage and home price dropped 50%, I would not gain anything with 20K cash flow.
If I took 90% mortgage (not sure even can be approved), I would need to pay 80K per year. That is big enough to lose sleep as I saw in another thread someone at my age loses sleep for a 1.3M mortgage.
t24b350,

"If I took 90% mortgage (not sure even can be approved), I would need to pay 80K per year. That is big enough to lose sleep as I saw in another thread someone at my age loses sleep for a 1.3M mortgage."

And, if the house drops 50%, your house is only worth 1 million. The mortgage is 1.8 million. You stop paying the 80K mortgage and the bank can take your house. The bank lose 800K instead of you losing 800K.

You still have enough money to retire elsewhere and start a new life.

KlangFool
Thanks for the explanation and it makes sense. Only that I find having a 2m+ debt is hard to swallow, even if I can get it.
t24b350,

Versus a 2M house (67% of your net worth) that could destroy your retirement? Could you "Sleep Well At Night" (SWAN) with that? Why is that any better?

KlangFool
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Kookaburra
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Re: Sanity check about retirement and house

Post by Kookaburra »

KlangFool wrote: Sun May 22, 2022 4:43 pm Folks,

If someone has 67% of his net worth in a stock and his ability to retire in 5 years is dependent on the price of the stock, we would advice the person to sell the stock as soon as possible. In OP's case, 67% of his net worth is tied to the house and his ability to retire is tied to the price of the house, why won't we advise him to sell the house now? Why should this be considered as safe?

KlangFool
False comparison. An individual stock is much more likely to drop 50% than a residence in a city of comparably priced homes.
makingmistakes
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Re: Sanity check about retirement and house

Post by makingmistakes »

t24b350 wrote: Sun May 22, 2022 8:21 pm
KlangFool wrote: Sun May 22, 2022 8:02 pm
t24b350 wrote: Sun May 22, 2022 7:54 pm
But in my example, if I took 50% mortgage and home price dropped 50%, I would not gain anything with 20K cash flow.
If I took 90% mortgage (not sure even can be approved), I would need to pay 80K per year. That is big enough to lose sleep as I saw in another thread someone at my age loses sleep for a 1.3M mortgage.
t24b350,

"If I took 90% mortgage (not sure even can be approved), I would need to pay 80K per year. That is big enough to lose sleep as I saw in another thread someone at my age loses sleep for a 1.3M mortgage."

And, if the house drops 50%, your house is only worth 1 million. The mortgage is 1.8 million. You stop paying the 80K mortgage and the bank can take your house. The bank lose 800K instead of you losing 800K.

You still have enough money to retire elsewhere and start a new life.

KlangFool
Thanks for the explanation and it makes sense. Only that I find having a 2m+ debt is hard to swallow, even if I can get it.
No way would I ever cash in my house for a mortgage and invest it. Chances of that money dropping 50% a lot more likely than your house value dropping 50%.

I’d live life and downsize when you’re ready to retire.
Circe
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Re: Sanity check about retirement and house

Post by Circe »

Taxes!

You can exclude the profit of $250k if single or $500k mfj on a primary residence. Federal capital gains taxes will be due on the rest unless you purchase another house. You will have to consider state taxes separately. Also, this is current law; it has changed and can change in the future.
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Re: Sanity check about retirement and house

Post by KlangFool »

makingmistakes wrote: Mon May 23, 2022 5:09 am
No way would I ever cash in my house for a mortgage and invest it. Chances of that money dropping 50% a lot more likely than your house value dropping 50%.

I’d live life and downsize when you’re ready to retire.
makingmistakes,

A) 1 million 50/50 portfolio and 2 million house.

B) 3 million 50/50 portfolio, 2 million house, and 2 million non-recourse mortgage.

(A) or (B) is safer?

"No way would I ever cash in my house for a mortgage and invest it."

1) Do you have a paid off house that represent 67% of your net worth?

2) If you cannot sell your house at a good price, you cannot retire?

3) You would be retiring in 5 years or earlier.

Are you in the same situations as OP?

KlangFool
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Re: Sanity check about retirement and house

Post by KlangFool »

Kookaburra wrote: Sun May 22, 2022 10:42 pm
KlangFool wrote: Sun May 22, 2022 4:43 pm Folks,

If someone has 67% of his net worth in a stock and his ability to retire in 5 years is dependent on the price of the stock, we would advice the person to sell the stock as soon as possible. In OP's case, 67% of his net worth is tied to the house and his ability to retire is tied to the price of the house, why won't we advise him to sell the house now? Why should this be considered as safe?

KlangFool
False comparison. An individual stock is much more likely to drop 50% than a residence in a city of comparably priced homes.
How about instead of hoping to be lucky, diversify by selling the single stock or house instead?

Counting on being lucky is not a good strategy.

From OP,

"it is not intentional to tie up so much in house but due to 57% appreciation in last 3 yrs."

KlangFool
Last edited by KlangFool on Mon May 23, 2022 7:36 am, edited 2 times in total.
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Re: Sanity check about retirement and house

Post by KlangFool »

Folks,

From OP,

"it is not intentional to tie up so much in house but due to 57% appreciation in last 3 yrs."

If the house's price can jump up 57% in the last 3 years, it can drop 57% in the next 3 years too.

KlangFool
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Re: Sanity check about retirement and house

Post by Oddball »

KlangFool wrote: Mon May 23, 2022 7:35 am Folks,

From OP,

"it is not intentional to tie up so much in house but due to 57% appreciation in last 3 yrs."

If the house's price can jump up 57% in the last 3 years, it can drop 57% in the next 3 years too.

KlangFool
His house went up in value 57% in 3 years and now his NW is 2/3 house 1/3 investment, so now he has get a mortgage because the price of his house went up? That does not make any sense to me.

So if his house value had stayed the same but his portfolio tanked and he ended in with the same NW ratio of 2/3 house 1/3 investment, he should take out a mortgage then too?
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HMSVictory
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Re: Sanity check about retirement and house

Post by HMSVictory »

Well if the house is $20M and your portfolio is $10M I think you will be ok....... :D

200k house with 100k investments - maybe not so much? :oops:
Stay the course!
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Re: Sanity check about retirement and house

Post by KlangFool »

Oddball wrote: Mon May 23, 2022 10:00 am
KlangFool wrote: Mon May 23, 2022 7:35 am Folks,

From OP,

"it is not intentional to tie up so much in house but due to 57% appreciation in last 3 yrs."

If the house's price can jump up 57% in the last 3 years, it can drop 57% in the next 3 years too.

KlangFool
His house went up in value 57% in 3 years and now his NW is 2/3 house 1/3 investment, so now he has get a mortgage because the price of his house went up? That does not make any sense to me.

So if his house value had stayed the same but his portfolio tanked and he ended in with the same NW ratio of 2/3 house 1/3 investment, he should take out a mortgage then too?
Oddball,

Take a look at the numbers and tell us.

It still comes back to the same answer. OP is "House Poor". He should either take a non-recourse mortgage on the house or sell the house. It too dangerous to tie up 2/3 of your net worth to a house when you are 5 years or less from retirement. Especially when you need to sell the house in order to fund retirement.

If you disagree, show us your calculation as to why this is not true.

KlangFool
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t24b350
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Re: Sanity check about retirement and house

Post by t24b350 »

The actual numbers: NW 4.2m, expense 100k, income 400k
Kookaburra
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Re: Sanity check about retirement and house

Post by Kookaburra »

KlangFool wrote: Mon May 23, 2022 7:35 am Folks,

From OP,

"it is not intentional to tie up so much in house but due to 57% appreciation in last 3 yrs."

If the house's price can jump up 57% in the last 3 years, it can drop 57% in the next 3 years too.

KlangFool
A 57% increase and a 57% drop are not equal. I’m not saying a 57% drop cannot happen, but realistically, I don’t think betting it won’t and being right is “luck”
KlangFool
Posts: 31526
Joined: Sat Oct 11, 2008 12:35 pm

Re: Sanity check about retirement and house

Post by KlangFool »

t24b350 wrote: Mon May 23, 2022 10:49 am The actual numbers: NW 4.2m, expense 100k, income 400k
What is your annual savings/investment?

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Topic Author
t24b350
Posts: 125
Joined: Mon Mar 15, 2021 10:43 am

Re: Sanity check about retirement and house

Post by t24b350 »

KlangFool wrote: Mon May 23, 2022 11:29 am
t24b350 wrote: Mon May 23, 2022 10:49 am The actual numbers: NW 4.2m, expense 100k, income 400k
What is your annual savings/investment?

KlangFool
Around 150 to 180k. Still driving a 2013 Corolla.
KlangFool
Posts: 31526
Joined: Sat Oct 11, 2008 12:35 pm

Re: Sanity check about retirement and house

Post by KlangFool »

t24b350 wrote: Mon May 23, 2022 11:38 am
KlangFool wrote: Mon May 23, 2022 11:29 am
t24b350 wrote: Mon May 23, 2022 10:49 am The actual numbers: NW 4.2m, expense 100k, income 400k
What is your annual savings/investment?

KlangFool
Around 150 to 180k. Still driving a 2013 Corolla.
Thanks. Good luck!

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
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