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How should one modify their retirement asset allocation
when they buy a home? How do they interact?

For example, before buying a house, suppose that
somebody has $100,000 invested in the following mix:

$75,000 stock
$15,000 bonds
$10,000 cash

If this person now invests $25,000 in a house, how
should they modify their asset allocation? Should they apply the same percentages (75% stock, 15% bonds, 10% cash) to the remaining $75,000 they have? Or should they consider that real-estate is another diversification away from stocks, which bonds also are, and so should the relative portion invested in bonds decrease?

Thanks,

--Pete Shell pshell@wisdomcorp.com
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Greetings, Pete, and welcome. You asked:

How should one modify their retirement asset allocation
when they buy a home? How do they interact?

For example, before buying a house, suppose that
somebody has $100,000 invested in the following mix:

$75,000 stock
$15,000 bonds
$10,000 cash

If this person now invests $25,000 in a house, how
should they modify their asset allocation? Should they apply the same percentages (75% stock, 15% bonds, 10% cash) to the remaining $75,000 they have? Or should they consider that real-estate is another diversification away from stocks, which bonds also are, and so should the relative portion invested in bonds decrease?


IMHO the purchase of a home has no bearing on your investment allocations. While a large expenditure, it's really not part of your portfolio. Instead, it's more like a personal asset on a par with cars, jewelry, furniture, etc. In short, for investment purposes I believe you should ignore it.

Regards….Pixy
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<<How should one modify their retirement asset allocation
when they buy a home? How do they interact?>>

Not at all. A home is a place to live, not an investment. If it increases in value over the years, well and good; but consider it frosting on the cake.

Regards,
Ray
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Rayvt posted:
<<How should one modify their retirement asset allocation when they buy a home? How do they interact?>>

Not at all. A home is a place to live, not an investment. If it increases in value over the years, well and good; but consider it frosting on the cake.

Regards,
Ray



That's an interesting and perhaps helpful way to look at it, Ray, and overall it's probably not a bad idea to ignore a large chunk of one's net worth when planning for retirement, and rely on other savings to do the trick. The home, then, would be pure gravy, or as you put it, frosting on the cake, when the time for retirement comes. (Why am I getting hungry all of a sudden?)

The question, though, is more complex, and the answer depends on many, many factors, including the age of the home owner, the assets he or she has already accumulated, and the plans that person has for the future. Many people live in large homes during their working life when they have families to raise and a need for more space, then sell those homes and move into more modest digs when it comes time to retire. In that case, the equity in the home can be an important consideration in a retirement plan. Then there are the reverse mortgages which some people use -- it's another way to take advantage of that equity they have built up in their homes.

I'm not going to pretend I have the answers here, and I'll leave the final word to those with larger brains than mine (Pixy? This is your cue to step in...)

Cheeze :-)
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How should one modify their retirement asset allocation
when they buy a home? How do they interact?


I would not include the home as an investment. You need to live someplace.

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TMFCheeze wrote:

Rayvt posted:
<<How should one modify their retirement asset allocation when they buy a home? How do they interact?>>

Not at all. A home is a place to live, not an investment. If it increases in value over the years, well and good; but consider it frosting on the cake.

Regards,
Ray


That's an interesting and perhaps helpful way to look at it, Ray, and overall it's probably not a bad idea to ignore a large chunk of one's net worth when planning for retirement, and rely on other savings to do the trick. The home, then, would be pure gravy, or as you put it, frosting on the cake, when the time for retirement comes. (Why am I getting hungry all of a sudden?)

The question, though, is more complex, and the answer depends on many, many factors, including the age of the home owner, the assets he or she has already accumulated, and the plans that person has for the future. Many people live in large homes during their working life when they have families to raise and a need for more space, then sell those homes and move into more modest digs when it comes time to retire. In that case, the equity in the home can be an important consideration in a retirement plan. Then there are the reverse mortgages which some people use -- it's another way to take advantage of that equity they have built up in their homes.

I'm not going to pretend I have the answers here, and I'll leave the final word to those with larger brains than mine (Pixy? This is your cue to step in...)

To which I reply:

Surprisingly enough, I agree with both of you. I don't think a home should count as part of one's investment portfolio, but it should count as a source of potential cash that can be tapped in any number of circumstances of which retirement is but one. You highlighted quite well some of the instances where it applies. I would nitpick only on the reverse mortgage issue, which I believe appropriate only for retirees of advanced years (i.e., 85+) in need of income. Otherwise, I really don't like them. And while I appreciate the compliment, my brain ain't any larger than years, so I can't claim to have all the answers either. It's a funny thing about CFPs. Give any five the same set of circumstances and you'll end up with at least three different answers, all appropriate and all justified. It's all in the eyes of the beholder, so "rightness" will vary from person to person.

Regards….Pixy
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TMF Pixy wrote:
<<<
I would nitpick only on the reverse mortgage issue, which I believe appropriate only for retirees of advanced years (i.e., 85+) in need of income. Otherwise, I really don't like them.
>>>

I hope my comments didn't sound like a ringing endorsement of reverse mortgages... I'm no expert, of course, but they seem like a last resort kinda thing to me.

I defer to Pixy in all things. ;-)

Cheeze
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TMFCheeze wrote:

Rayvt posted:
<<How should one modify their retirement asset allocation when they buy a home? How do they interact?>>

Not at all. A home is a place to live, not an investment. If it increases in value over the years, well and good; but consider it frosting on the cake.

Regards,
Ray


That's an interesting and perhaps helpful way to look at it, Ray, and overall it's probably not a bad idea to ignore a large chunk of one's net worth when planning for retirement, and rely on other savings to do the trick. The home, then, would be pure gravy, or as you put it, frosting on the cake, when the time for retirement comes. (Why am I getting hungry all of a sudden?)

The question, though, is more complex, and the answer depends on many, many factors, including the age of the home owner, the assets he or she has already accumulated, and the plans that person has for the future. Many people live in large homes during their working life when they have families to raise and a need for more space, then sell those homes and move into more modest digs when it comes time to retire. In that case, the equity in the home can be an important consideration in a retirement plan. Then there are the reverse mortgages which some people use -- it's another way to take advantage of that equity they have built up in their homes.

I'm not going to pretend I have the answers here, and I'll leave the final word to those with larger brains than mine (Pixy? This is your cue to step in...)

To which Pixy replied:

Surprisingly enough, I agree with both of you. I don't think a home should count as part of one's investment portfolio, but it should count as a source of potential cash that can be tapped in any number of circumstances of which retirement is but one. You highlighted quite well some of the instances where it applies. I would nitpick only on the reverse mortgage issue, which I believe appropriate only for retirees of advanced years (i.e., 85+) in need of income. Otherwise, I really don't like them. And while I appreciate the compliment, my brain ain't any larger than years, so I can't claim to have all the answers either. It's a funny thing about CFPs. Give any five the same set of circumstances and you'll end up with at least three different answers, all appropriate and all justified. It's all in the eyes of the beholder, so "rightness" will vary from person to person.

===========================================

My Comment:

I wouldn't let the home equity question affect asset allocation, but it would affect the question of how much retirement income you need and how serious it would be to fall short of the goal. If you plan on retiring with little equity, your income will have to cover rent/mortgage. If on the other hand the home will be paid off or have the equite to purchase a smaller home for cash, then you can retire on a much lower income with the same standard of living. That should be taken into account.

My personal opinion is that you can also afford greater uncertainty in your retirement income if the house is paid off, because that is a large inflexible expense. In that sense, even without considering a paid-off house as an investment, avoiding a fixed and inflexible mortgage/rent expense permits a more stock-oriented asset allocation well into retirement.
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RogerD wrote:

I wouldn't let the home equity question affect asset allocation, but it would affect the question of how much retirement income you need and how serious it would be to fall short of the goal. If you plan on retiring with little equity, your income will have to cover rent/mortgage. If on the other hand the home will be paid off or have the equite to purchase a smaller home for cash, then you can retire on a much lower income with the same standard of living. That should be taken into account.

My personal opinion is that you can also afford greater uncertainty in your retirement income if the house is paid off, because that is a large inflexible expense. In that sense, even without considering a paid-off house as an investment, avoiding a fixed and inflexible mortgage/rent expense permits a more stock-oriented asset allocation well into retirement.


Well said, Sir. I agree with the points you make. But then why wouldn't I if they make sense, which they do?

Regards….Pixy
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