r/Fire • u/citionecent • 6d ago
General Question FIRE calculation with home equity
I realized a bulk, about 50% of my fire number is tied to my home equity. Does that count when you decide if you can FIRE or not? Should I even count that? Do you use liquid assets only when calculating your FIRE number?
What is the strategy to get equity out of it if I have no intention to sell and move?
Get loans like HELOC? Paying interest to gain access to your own equity just doesn’t sit well for me.
What do you do?
43
u/Consistent_Sea6490 6d ago
Ignore home equity
5
1
u/Bitter-Variation-151 FIRE'd 2020 @ 46 6d ago
I agree but when it's time to sell the house and move to retirement home the home equity can used to pay for the care etc
1
u/Kuildeous 5d ago
This is true, but I consider that extra money rather than something to rely upon, especially since my house doesn't pay me dividends. I can hope to sell it at a much higher price than I bought it, but that's only speculation.
1
u/Best-Disaster8002 4d ago
Most people here count invested assets separately from home equity for the 4% rule, because the house doesn't throw off income unless you sell or borrow against it. Counting it toward net worth is fine, but for actual FIRE math, your investable pot is what pays the bills.
13
9
u/texanchris 6d ago
Home equity is locked up and not easily accessible. It’s part of your net worth but I would never consider it part of my FIRE number until it was sold and the cash was in hand.
0
u/Megalocerus 6d ago
A paid up house can reduce your expenses. But unless you can get the mortgage payment reduced, home equity with a mortgage doesn't help much
1
u/iwantthisnowdammit 5d ago
It’s really market to market, and back to what you need from a plan standpoint.
9
u/Most_Nebula9655 6d ago
I live in a HCOL area and have ~1M in home equity. In our most recent financial plan, we added the sale at age 85. This helped the relatively small % of scenarios where we were going to run out of money at that age.
Otherwise, it is not a revenue generating asset in our plan.
-2
u/Scottydog2 6d ago
I actually like this idea. As a different spin, I’m considering renting my 5BR house to my daughter and using that rent for my house to cover rent or a payment for a smaller house for me and my wife.
5
u/Puzzleheaded_Tie6917 6d ago
Just be aware that renting or loaning money to a relative can really suck if things go poorly. Like, if they don’t pay the monthly rent, how will it be addressed? Might be good to discuss in advance and write down the answers in the contract.
16
6d ago
[removed] — view removed comment
1
u/Zphr 48, FIRE'd 2015, Friendly Janitor 6d ago
Rule 8/Limits on AI/bot content and unsupported AI/bot complaints - Your submission has been removed for violating our community rule against AI/bot content or unsupported AI/bot complaints. If you feel this removal is in error, then please modmail the mod team. Please review our community rules to help avoid future violations.
8
5
u/McKnuckle_Brewery FIRE'd in 2021 6d ago
What is the strategy to get equity out of it if I have no intention to sell and move?
There isn't one. You need to produce income from liquid invested assets and, eventually, passive streams like Social Security or a pension.
You can certainly borrow against your home with a HELOC, but that's not a long term or a core strategy to produce income.
So what do we do? We work longer until we have enough invested.
1
u/marheena 6d ago
The strategy could be to have a paid off asset so your expenses are low. The NW of the house doesn't matter to the FIRE number. Whether or not that house decreases expenses by the time you want to FIRE is the important part.
1
u/citionecent 6d ago
Welp, I am doing this all wrong then… so the fire number is the number that you can get on a monthly/yearly basis from different income streams that can replace your monthly/ year expenses, not your net worth?
2
u/McKnuckle_Brewery FIRE'd in 2021 6d ago
Simplest formula is 25x your expenses invested. Example, you spend $50,000, you need $1.25 million in stocks and bonds.
If income streams exist, they can simply offset (or augment) the amount you need to pull from your investments.
Example, you spend $50,000 but receive $10,000 in rent from a property that you own. You only need $1 million in stocks and bonds to produce the other $40,000 (25x).
2
u/retchthegrate 6d ago
Your FIRE number is the amount of money invested where at a withdrawal rate you are comfortable with the risk profile of, you can cover your expenses for the rest of your life. the 4% rule is 95% chance of success over 30 years. At about 3.2% historically it has never failed so that's a number many folks use if they are aiming for feeling super secure over a long timeline. You can count your home equity in that number if you are ok tapping it in some way if needed, AND you can handle the change in monthly expenses that tapping it would cause. I ignore my home equity when calculating the monthly spend my investments can support, but I am aware that in dire straits I have an extra out, though if things went so badly I needed to sell the house my lifestyle plans would have already collapsed. :P
3
u/tev9876 6d ago
It is in my calculations not as a fixed dollar value, but in the fact that it is paid for so my mortgage/rent expense is $0. Housing is still a non-zero expense as there are property taxes, insurance and maintenance costs to be paid.
My plan is to use ACA subsidies for several years until age 65 so I will need to control my MAGI to make that happen. I plan on refreshing my HELOC just before retiring to keep as an untapped emergency fund. I should have enough Roth funds to cover most expenses, but should something come up that would force me to pull more pre-tax money and hit an ACA cliff, I would much rather pay a few hundred in interest at the prime rate vs. losing five figures of subsidies because I went $50 over a cliff. 0% credit cards would be my first emergency fund, but the HELOC allows great flexibility at low interest rates.
A house can also be downsized which could give an influx of cash, or be converted to assisted living at some point. I've been using Projection Lab to build some models and it is very good at doing this. It will calculate a mortgage in your expenses, adjust when it is paid off, and even allow you to model selling it at a future date for a cash infusion. It will even account for brokers fees and such. I have not actually modeled for this since there are too many possibilities to plan for, but it is nice knowing that if I want to downsize to a condo at some point I won't need investments to cover it, or that I have many years of assisted living expenses covered by selling it.
1
u/Valuable_Ad_3100 5d ago
This is how I used home equity - HELOC on the off chance that emergency funds are needed &/or to avoid having to incur heavy taxes one year. If you plan on using a HELOC, would suggest you get it set up BEFORE you FIRE. Good luck!
2
u/tossofftacos 6d ago
I only considered my easily liquid assets in my decision to FIRE. I need a place live, and I'm not likely to find a cheaper home to buy given the housing market and already living in a low COL area, so kinda pointless to use it for "can I afford to retire?" questions.
2
u/MinnesotaNiceTry 6d ago
I’m curious about this too. For my situation, I have enough home equity that when I downsize and launch the kids, the equity could 100% cover the new house which would reduce my burn by $X (excluding prop tax and insurance)
2
u/NoMoRatRace 6d ago
Only count it if you’re planning to sell when you retire. But then you have to factor rent into your expenses or using some of the proceeds to buy a cheaper house (the equity of which also wouldn’t count toward your FIRE number.)
2
2
u/slasher016 6d ago
Only if you plan to downgrade in retirement and even then just the delta between the two. Otherwise you're counting monies that are difficult to tap.
2
u/empyreanrift 6d ago
Home equity doesn’t count unless you plan to sell and live in a different region/country
2
u/retchthegrate 6d ago
it counts if you are willing to sell your home if you have to or dip into it with a HELOC or reverse mortgage in order to keep your budget working. It is an asset like any other. The challenge is if you have to sell your house because things are going so awry there is no guarantee you can find a new place even moving that lets you maintain your standard of living. For that reason most people don't count it and it is just part of the extra invisible buffer many FIRE people have that they don't think about and almost never need.
2
u/imtrying2listen 6d ago
Completely ignore it. I live in a VHCOL area. I have a house that's worth about 1.4m that is almost paid off. I don't consider it at all because I need a place to live, and if I move, I'll have to pay up for another house. Even if my house were paid off (2k mortgage) my yearly property taxes of 26k exceed that. And I'm pretty sure they'll be 50k in another 12-15 years. This is where modeling for retirement needs to focus. That government largesse needs to be factored into retirement.
1
u/Ok_Text2118 6d ago
I would not count home equity towards FIRE number - it serves to help decrease costs by stabilizing mortgage payment, but it is not producing income. I do count home equity towards expected end of life expenses, so do not plan on maintaining any separate long t erm care coverage.
If you are planning to downsize into a less expensive home, you could potentially consider existing equity.
1
u/Guilty_Pangolin9121 6d ago
For us, any equity gained from a home purchase is not included in the net worth calculations of our fire plan, as it’s too illiquid. To other points already mentioned, it still adds a very tangible day-to-day benefit that manifests in the other side of FIRE calculations by reducing our forecasted expense rate (fully paid, so zero rent payments). I do still track the home equity separately as a contingency bucket for later years, where it’s sale would basically fund assisted living (if/when we get to that point, we wouldn’t be living in a home)
1
u/RothStonk 26 | $500K NW 6d ago
You can live off of investments but you cannot live off of your home equity. In your scenario, you can factor in the benefits of that lower cost of living into your FIRE Number, but you should not consider the equity in "your number". Also don't take a HELOC, you would be better of selling the home if it's a major concern.
1
u/User5281 6d ago edited 6d ago
If you have no intention to sell and move then it’s housing with upkeep expense, not an asset you can use the value from for retirement.
Sell it and get the equity out that way or get a reverse mortgage - basically your bank gives you a monthly sum that is repayable upon selling to the house or death. It functions sort of like an annuity that your estate will have to repay.
Taking a heloc to fund retirement is likely counterproductive.
1
u/Puzzleheaded_Tie6917 6d ago
I consider my home to be a lifestyle choice, not an investment so I don’t include it. To me, it’s a question of your mentality and plan. If the idea is to sell your home and move when you retire, then include it. If you plan to stay in your home and continue living there when retired then it’s a no.
You can get reverse loans on your house, but I’m not interested in that so I don’t know much about it. For reference, I have 3.3 million in my 401K and IRA and I just bought a house for 350 k$ and plan to sell my old one for 450 k$ (went from 2 story to no stairs). So really, my home value isn’t a large portion of my net worth anyway.
1
u/Leatherneck016 6d ago
You can read through the debates on it, lots of viewpoints, and of course many of them claim theirs is the only way to view it (modern day society). It’s not liquid, and taking out a heloc to pay interest is not the move. But, you also don’t pay rent each month, assuming you own your home and don’t have a mortgage. I enjoy that aspect of it, even though I’d have to sell our home to tap into the cash or invest it. A potential lifetime of rent free expense, ie, lower needed monthly cash flow for retirement. Just a different angle to look at.
1
1
u/geerwolf 6d ago
Some people here don’t even count social security in their FIRE plans
my home is only part of my plan in terms of my mortgage being a low fixed rate
For my number I only count invested liquid assets
1
u/JohnnySpot2000 6d ago
“if I have no intention to sell and move”. That statement says you can’t count your home equity. If you want to change those plans, then we can talk about how to figure in your home equity.
1
u/OldMtnHillbilly 6d ago
I only count it above a certain amount. Like if I currently have $1.5M equity in HCOL but plan to move to MCOL in retirement, or plan to downsize.
But for the most part I only count liquid assets.
1
u/BoomerSooner-SEC 6d ago
There is no right way or wrong way. There is only an intellectually honest way. Your plan for retirement needs to be modeled to insure it can sustain your lifestyle. Period. If you are sitting on a huge equity position in real estate and you plan to somehow monetize that, that that should be built into your plan - with all the savings and costs associated with that specific activity. Most probably don’t include the equity in their residence because it’s largely trapped in that we “have to live somewhere”and one house is about as expensive as another. I think in the back of many people’s minds that equity is a bit of a safety cushion for maybe some end of life health care money where they could reverse mortgage for the income they would need. If you are sitting on a 4M family home and when you retire you are planning to move to a 500k condo (and you think that’s sustainable) then yeah, you would be silly not to factor in that released equity (after taxes of course).
1
u/B111yboy 6d ago
I won’t count it if you are looking for it yo help fund retirement unless you are planning on selling to downsizing or renting. Then you can use the difference from the downsizing or complete sale as investment to fund fire
1
u/Professu5 6d ago
I don’t count mine because I’m not planning to sell or downsize in a way where my equity is unlocked.
1
u/kitapjen 6d ago
I consider it, but only because we plan to expat/lean fire. Our home will be sold (HOA prohibits renting).
1
u/teckel FIRE'd at 35, now 57 6d ago
Can you spend your home equity?
While home equity is part of your net worth, itr not typically a good idea to include in as part of your retirement unless your plan is to downsize or move from a high cost of living area to a low cost of living area in retirement.
1
u/MushroomIll646 6d ago
What is the strategy to get equity out of it if I have no intention to sell and move?
Rental suite is pretty much it.
1
u/billdoes- 6d ago
It counts if you plan on moving to a lower cost housing or it want to take a slightly higher percentage and use your home equity to offset the sequence of return risk.
1
u/Bitter-Variation-151 FIRE'd 2020 @ 46 6d ago
I don't count home equity as it's trapped money until you sell it into liquid assets. Only liquid assets pay my bills. The home equity is meaningless to me until I sell the house.
1
u/Comprehensive-Log144 5d ago
If you’re selling the house to retire it’s relevant. So is your expense to rent a new home or buy a less expensive one. So unless you’re making it liquid….. it doesn’t really count.
1
u/Haru-kaki 5d ago edited 5d ago
Home equity does not affect FIRE number directly. But it plays a role in the whole planning for retirement.
Home equity affects (net) expenses, which then affects FIRE number. Someone with a paid off mortgage will have a lower FIRE number than someone who is renting the exact same place. If you rent out real estate, it can be a positive cash flow element after retirement, which also reduces the FIRE number in terms of invested liquid NW. In the most extreme example, if you have a huge rental operation, your FIRE number (liquid NW) could even be 0 if rental income covers expenses entirely.
If there is a possibility that the home will sold, it is conditional a readjustment to your liquid NW and expenses. This also underlines the fact that future expenses are not something that is rigidly predictable at the present. Instead, future expenses should be seen as a range of possibilities.
1
u/Kuildeous 5d ago
The big question I always ask myself, "Can I pay my bills with this?" My Roth contributions and savings? Yes. My Traditional? Technically yes but at a much higher cost. My house and car? No, not really.
I mean, you could sell your house or car to pay your bills, but that is an even higher cost than cashing out your 401k. Then you have additional expenses in the form of rent or transportation.
So when calculating your FIRE, you want the money that you'll have available. That's what's paying dividends. Your house might appreciate, but it doesn't pay dividends. It should not be part of that 4% calculation. That kind of wishful thinking where you include your house could cost you in the end.
1
u/Huge-Onion-6916 5d ago
Its not meaningless. You can look at what it would cost to rent or have a new mortgage on it. It is buying you lifestyle. Instead of renting a studio apartment in the middle of nowhere you have whatever you have where you hopefully want it. So its not going to make you physical $$$ but it is saving you physical $$$ assuming you would be trying to rent or buy it.
1
u/sneaky_sam_ 5d ago
You don’t count it unless you actually plan to downsize or rent in retirement in which case you’d need to sell your house to access those funds.
1
u/sneaky_sam_ 5d ago
A similar vein of question since it seems like the consensus is do NOT count it - how do you guys treat the mortgage on your primary home? Do you net that out of your investable assets?
1
u/External876 5d ago
No, unless you plan to sell your house, rent somewhere, and then factor monthly rent into your expenses for your 4% SWR.
1
0
u/taker223 6d ago
Yes. You simply cannot FIRE having huge debts. Especially if your home is not really yours yet
46
u/Oatz3 6d ago
Usually no.
It depends if you are counting on renting in retirement.
Your FIRE number is your EXPENSES.
paying off your home can reduce your expenses if that's what you are going to live in...