Understanding “Your Number” is important. Unless you’re developing passive income – and sometimes even if you are – chances are that net worth will probably be the main deciding number used to determine if you can afford to retire or not. General consensus is that you stand a pretty good chance of being able to retire for 30 years if you have a withdrawal rate of 4% of your net worth. If you want to play it safe, lowering it to 3.5% or 3% will give you some wiggle room.
But when people figure out their net worth and how far they are from retiring, they’re often quick to throw their houses in there (along with the mortgage, if applicable). That always bugged me. Why would you include your primary residence in THIS net worth calculation??
The Point of Net Worth
Net worth is a simple calculation; what you own minus what you owe. The resulting number, hopefully positive, is your net worth. I track our net worth monthly. It’s a great indicator of the progress we’re making (or not making) toward retirement.
The key I throw in here is “for retirement“. Yes, it’s important to understand your net worth now, even if you’re not planning on retiring now. Really, though, it’s a useful tool to gauge if you’re ready to retire. The issue I have with throwing a primary residence into your net worth calculation is pretty simple. Unless you’re planning on selling your house, or taking a reverse mortgage or something similar, your home’s value skews your net worth for the sake of retirement. It’s not a real indicator of what you have to retire on!
When we die, I don’t want to leave someone else in charge of paying back my house. I want to retire without a mortgage, and my home will simply be a place that I live. It’s not an income-producing asset, and I’m not going to tap it for money. Relying on borrowing money against the equity we’ve built over the years is basically taking a loan out to retire. Why would I want to retire that way??
Your Retirement Plan
Of course your mileage may vary. Kristin and I are planning on basically living in our home forever. We don’t anticipate moving, but plans obviously change. Still, in our planning right now, that’s the goal.
Your retirement plan might be different. Let’s brainstorm the reasons why you would want to include your primary residence in your net worth calculations:
- You’re planning on selling your home.
Seriously, the only reason to factor in your home’s value when thinking about if you can afford to retire is if you’re planning on selling it.
Yes, there are ways you can tap that equity in retirement. Ever hear of a reverse mortgage? It does exactly that – you essentially get a loan and need to repay that loan upon sale of the house, when you move, or when you die.
If you aren’t planning on selling, then you leave your heirs or other loved ones to take care of a potentially huge bill for you after you die. There are other options like having the lender sell the house for your heirs and such. What a headache and what a way to go. It’s not how I’d want anybody to have to handle my estate.
The Real Net Worth Number you should care about
Liquidable Net Worth is really what you should be focusing on. The value of your investments, supplemented with additional sources of income, are the fundamental indicators that you’re ready to retire. If you can liquidate an asset, and are planning to in order to fund your retirement, then you should have no qualms in using it to figure out your net worth.
Now, I’m not trying to say that you shouldn’t track your net worth using your home at all. But it’s important to understand why we track net worth, and how we’re using the number we arrive at to make decisions in our lives.
If you’re not planning on, or capable of, using your home’s value to fund your retirement, why would you include the equity you have in it in figuring out your net worth?
Do you (or would you) include your primary residence’s value in your net worth calculations? Why or why not?