Retirement planning: What is your house really worth?

When calculating your net worth, what do you write down as your property’s value—the number from your property tax assessment or the price of a similar property?

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Question:

I’m getting focused on my retirement plan and I know you are nuts about people calculating their net worth as a part of the plan. I’m doing mine now but I’m not sure which value I should use for my house—the value estimated from my property tax assessment or the sale price of a comparable property.

Answer:

Online dating can teach you a very important lesson about calculating your net worth. I’m not kidding. A smart and sassy friend of mine recently threw herself into the online dating pool—which turns out to an appropriate metaphor based on her experience so far. She has shared a number of insights, including this classic: What looks good on paper doesn’t necessarily look so good in real life, even under the muted lighting of her local café.

In online dating, meeting someone who looks good on paper is the booby prize. The same goes for your net worth. What you really want in both areas is something that looks good in real life.

Which brings me back to the value of your house. The simple answer to your question is to put down the lesser of the two values on your net worth statement, though I don’t think it really matters which one you choose. The more important point is to focus on your net worth in real life and not on paper.

In today’s steaming-hot real estate market many homeowners have an inflated sense of personal wealth because of how much their house is now worth on paper. However, this number can be a red herring on your net worth statement, especially when it comes to retirement planning. Here’s why:

After you stop working, you’ll still need income to pay for groceries. A pension might cover some of your expenses, but most of us will need the income from our retirement savings to meet our needs, groceries, hip-hop lessons, a weekly shampoo and set, etc. Aside from renting rooms out or getting a reverse mortgage, the only way to unlock the value of your house and access its income potential is to sell it, move somewhere cheaper and invest the net proceeds. The problem is, most of us won’t be willing to do that. So while “on paper” your house is worth $1.3 M, in “real life” you’ll be relying on your investment portfolio to provide the income for your groceries.

Focus on building your net worth over time, but especially focus on assets that can provide an income for you in the future, like your investment portfolio or rental properties. You don’t want your “on paper” real estate wealth to drive stupid decisions. Just like you don’t want a 10-year-old, photoshopped online dating photo to prompt a marriage proposal.

5 comments on “Retirement planning: What is your house really worth?

  1. Man, that's a great point. Taking an income from a house is near impossible while living in it. Technically it's an asset, but it's not very liquid.

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  2. Yes a you can live in a house and release the equity through a secured line of credit. These are easy to get and flexible and affordable. Our line of credit only requires interest only payments. Currently we used a protion to purchase a high yield investment making the interest deductible. Our main reason we took out the line of credit was to provide us with an additional safety net. Use in emergencies only.

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  3. As a business owner this is the mantra I go by: anything you sell is worth exactly as much as someone is willing to pay for it when you sell it. The article makes an excellent point. Do NOT put all your eggs in one basket, always have extra cash on hand in savings for emergencies to avoid creating more interest adding debt and educate yourself…i.e. dont just listen to the so-called arm chair experts in your life who may not be in as good financial shape as they seem (or think).

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  4. History is a great teacher.People forget there is such thing called Bust in Real Estate and at that time it take forever to sell your home.Equity in the house can be false sense of money you thing you have or otherwise depending upon the cycle.Is it boom or bust.Be prepared for both and have steady monthly income coming in
    my two cents!

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  5. Your home's market value is an important factor in a long list of financial decisions, including selling the home, refinancing your mortgage, borrowing against your equity, estimating your annual property tax bill, buying homeowner's insurance, calculating the expected return on remodeling costs, managing your other investments, estate planning and so on. The trick is figuring out how much your home is worth — and remembering that how much you paid for it months or years ago isn't relevant to its current market value. It's not a bad idea to gather information from several sources and compare the findings, rather than relying on just one approach to home valuation.
    Alex from PaydayLoansAt

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