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How does real estate factor into retirement planning

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  • How does real estate factor into retirement planning

    This may seem like a basic question but I'm curious about the math. I'm familiar with the 4% or 3% rule for retirement. If you purchase real estate how do you factor it into an overall financial plan? Do you subtract the rental income from your annual retirement need (treating it like a pension or annuity)? Do you use the value of the property as part of your net worth where you can sell it if you need money to live? Both?

  • #2
    As an extension to that question...What about the value of one's business, fine art, coin collections or that 1995 McLaren F1 collecting dust in the garage? If you own it, can get it valued, and may need it in retirement to live rather than passing it on why not include?

    If you include those assets in your 3 or 4% calculation, keep in mind the actual value of those assets is only what someone is willing to pay for them when you sell, not what you think it's worth so you may want to go with more conservative valuations versus what an asset is appraised for. Also there are costs associated with selling an asset, ie. realtor fees, auction fees, etc. Once the asset is sold, obviously you have more clarity regarding your retirement finances.

    Not sure if you can factor in both the rental income and value of the property though because once you sell, the rental income is going to be subtracted out of your monthly income. Until you sell, the value of the real estate is also a moving target so there are some challenges in retirement planning there the longer your time horizon. One can better guestimate the value of an asset in 2 years than 20 years.

    For estate planning purposes everything must be included including residence, but that's another purpose than you mentioned.

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    • #3
      Several questions within your question.

      For retirement income purposes:  cashflow.  we treat it like a pension in that sense.

      For Net Worth purposes:  Asset (true valuation) - Liability

      --If you need to sell the property in order to live during retirement -- one would suggest that the planning didn't go right in the first place because you'll get the valuation out, but the cashflow is lost.   It's like cashing out your pension to live or drawing 8% instead of 3% to live.

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      • #4
        Do you subtract the rental income from your annual retirement need (treating it like a pension or annuity)?

        yup.
        Do you use the value of the property as part of your net worth where you can sell it if you need money to live?

        yup.
        I’m familiar with the 4% or 3% rule for retirement.

        there is only the 4% rule.

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        • #5
          Look at real estate like any investment. Take stocks - the value of the investment should grow (same as RE) and the income paid on the investment (dividends) is included in the overall ROI. If there are no dividends, you should be compensated with higher growth rate. Kind of similar with RE and rent.

          If you are evaluating in that manner, you need to consider that you are investing in an illiquid, highly concentrated asset that typically requires more of your personal time than a well-balanced equity portfolio. Therefore, you should expect a higher long-term ROI to compensate for the added risk - whether for retirement or for goals prior to that time.
          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6
            Don't get discouraged on RE either --it represents 50% of our immediate portfolio and we never step into the properties (completely managed by trusted 3rd party).   Our entire retirement portfolio is roughly 1/3 pension 1/3 direct residential RE and 1/3 equities  which we are trying to maintain that balance to withstand and minimize any particular volatility.

             

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            • #7



              Do you subtract the rental income from your annual retirement need (treating it like a pension or annuity)?

              yup.
              Do you use the value of the property as part of your net worth where you can sell it if you need money to live?

              yup.
              I’m familiar with the 4% or 3% rule for retirement.

              there is only the 4% rule.
              Click to expand...


              Thanks for all the responses. I said 3 or 4% because I realize for the FIRE folks they use 3%.

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              • #8
                “...Thanks for all the responses. I said 3 or 4% because I realize for the FIRE folks they use 3%.”

                 

                I actually think this is fine. The 4% thumb rule derives from an age 65 starting point, so starting younger than that should logically drive a lower safe withdrawal rate.

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