I’m Not Using Our House in “Our Number”, and You Shouldn’t Either.

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 worthΒ 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:

  1. You’re planning on selling your home.

The end.

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?

Question:

Do you (or would you) include your primary residence’s value in your net worth calculations? Why or why not?

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12 Comments

  1. This is exactly what I do too (not include my home). You wouldn’t enter it in an investment growth or retirement planner app, so doesn’t make sense to include there. It’s more useful for the general net worth stat – but that itself is useless from a practical sense and more useful for measurement in comparison.

    1. Yep very true. I like using net worth just to see if I’m trending in the right direction. For most purposes it’s relatively useless since it doesn’t paint the full picture.

  2. We don’t include our home in our net worth right now. That’s mostly due to the fact that we don’t *actually* own our home; the bank still does. It doesn’t make sense to us to count it as an asset until it’s fully ours. So here in about 7 years (hopefully), we’ll count it. It’s important to pay off our mortgage before FIRE so we have our largest regular expense out of the picture. It makes us feel less uneasy about not having regular income.

    1. That’s a great way to think about it Mrs PP!

      I agree that having it paid off before retirement is where we want to be, too. It’d drastically reduce our expenses!

      Right now we’re on a plan to retire and pay off the mortgage in 20 years. It’s a bit longer than I’d like but still plenty early (puts us at 50/51). As our income grows I’d love to see that timeline shrunk down to 15 years tops. πŸ™‚

  3. Great post, and I love your blog btw!

    I do include the mortgage when tracking our net worth up until retirement (maybe I shouldn’t be).

    We are planning on eventually selling the house once we retire and then adding the proceeds to our portfolio.

    I do also track where we’d be if we sold the house at any point in time and added the equity gains to our portfolio.

    The liability of the mortgage itself sure drags down our NW number!

    1. Thanks Ava! I’m glad you like it – I do too πŸ™‚

      I think if you’re planning on selling the house it’s totally reasonable to use it as part of your retirement planning. Of course, your living expenses will change when that happens, but as long as you’ve got that accounted for I think you’d be in good shape!

  4. We keep our house in our net worth valued at purchases price for the following reasons;

    – it serves as a quasi dividend when paid off (we don’t have to pay a housing expense)
    – we could sell the house and redeploy the capital to generate income to cover living expenses
    – we will likely downsize in retirement
    – it is an asset on the family balance sheet
    – just because it is illiquid doesn’t mean it shouldn’t be part of your net worth. Others include private businesses, rental properties and venture capital.

    1. If you’ll downsize I think that’s fine. I don’t count it as a ‘quasi dividend’ mostly because I just figure my expenses will be that much less. It’s the same outcome, but I don’t consider it a liquidable asset for me.

      I think it should be part of your net worth – just as a business or rental property – but I don’t think you should use it in figuring out if you can retire or not, if you’re not planning on selling it. I can sell it in a pinch, but I’m not planning on it, so I’m not going to use its value in my retirement planning.

      Thanks for stopping by and commenting!

    1. No problem! In retirement it’s all about income producing assets πŸ™‚ Sometimes that means through things like dividends or rental income; other times through the sale of those assets.

      It’s important to know what your entire portfolio looks like to know how your individual situation looks like.

      Thanks for stopping by!

  5. We include our house in our Net Worth, but I do not use our Net Worth as our FI number/retirement calculation number. That number is made up of our investments and significant cash (aka- liquid assets) πŸ™‚

    1. Perfect! I think that’s a great way to do it. It’s important to understand its impact on your net worth, particularly if it tends to be a huge percentage of it – as is the case for many people. It may be a good indicator that you should focus more on liquid assets to fund your retirement, etc.

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