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Retirement Discussions / Retire Early CampFIRE
|Subject: Re: Relationship Of Non-Income Producing Assets||Date: 2/7/2000 3:33 AM|
|Author: jpkiljan||Number: 3250 of 857162|
Tomcat wrote and jpkiljan replied:
". . .
Our current home is nice. Our Equity is about $40k of a value total of $160K. We are thinking about buying another home that
is a lot larger. This would be a house that would be our final home. We plan on retiring in 10 years. This house is $260k and
we would put down 20%. Looking at what it would cost us in future investment earnings is about $220K over the 10 year
period. Looks like our projected investment portfolio would be $750k at the end of the 10 year period.
My question really centers around is it wise to make that plunge now or wait til 10 year point? I think about the higher housing
cost and that bigger point further out in the future."
This is a great question and the answer depends upon so many things that you didn't mention like the size of your family (present and future), kids to put through college, typical housing costs in your market, your ages, and why you'd want to retire and live in one house for 30 more years and what makes you think the market growth for big houses is going to be as good or better than the stock market for the next ten years, etc.
Anyway, my gut feeling is that the best strategy is oft-stated 'buy the least house that meets your needs and that you can afford' and that this will also be the case for you--but only you can decide that. But, don't me dissuade you from thinking about thinking this through.
The reason I replied is that, when I am faced with a decision like this, I always fire up my spreadsheet program and do a 'what-if' scenario for my potential investment decision. They always start out the same way: A column with years (months if you want, but years are close enough) on the left side and a series of columns next to that showing what happens to my assets if I don't make the investment (keeping the old house in your case) and a series of columns to the right showing what happens to my assets if I do make the investment (buying the new house in your case). Typically, you should interpret the year 2007 as meaning the financial condition at the END of the year to do it like the pro's do.
Include every thing that matters! The 7%-8% sales commissions, the increased property taxes, the larger maintenance cost, the estimated growth of the stock and real estate markets, the falling price of large homes expected when the baby boomers all start to retire ten years from now and move to Arizona (maybe you're there now?), additional commute costs, increased redecorating/furnshing costs, the probable cost of purchasing anther retirement home after ten years if you didn't do it now, your risk tolerance and most importantly a plausible scenario of how you'd invest the savings of not upgrading your house right away adn what return those invested monies would bring to you.
If you need another column for some other expense/savings, just add one. Set up expected interest/growth rates (property tax increases, appreciation of stock/bonds/land, etc) as single cells and refer back to them in your annual formula (eg, =B6*$E$2+B7 instead of =B6*.07+B7, where $E$2 contains the rate you are using and the $ signs fix the cell reference so it doesn't move as you add stuff). That way it is easier to do 'what-if's' with rates you are not too sure about instead of re-writing each cell.
At the bottom of the spreadsheet add up all these columns (or combination of columns) for the year 2010 to get a net worth for each scenario. If you do it right, what what you will get is an implied statement such as, "If I go ahead and upgrade now, my net worth will be $50K less than if I waited to 2010." or something similar. Then, you can go ahead and make your decision based on the intangibles (things like better schools, getting away from crazy neighbors, shorter commute, cozy fireplace, etc). There is no right answer--a quieter neighborhood may be worth $50K to you but not $100K. For others, it may have no value at all.
Using these spreadsheet techniques, I have decided whether or not to pay off my house early, whether to invest in tax-exempt securities, how soon I can retire, how much I will have to spend in retirement, how much each additional month of paid employment really pays me, whether to invest in a 401(k), Roth IRA or an after-tax account, and whether to invest in a vacation home.
Take your time and allow 3-4 hours for your first go at one of these. You can't loose by trying. At the very least, you will learn how to think quantitatively using spreadsheets--a fantastic planning resource the computer age has given us.
Don't forget financial planning Rule #1 when you do all of this: Only you are responsible for how your investment plans turn out. Not your broker, not your mutual fund manager, not your relatives, not your accountant, not your knowledgible friends and not even the considerably talented people you see posting messages on this board.
Whatever your final choice, good luck.
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