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Home Equity and Retirement Ratios

April 10th, 2008 at 05:51 am

In a previous blog, I linked to an article about some quick on the back of a napkin ratio that you could quickly see if you are on target or not. These ratio are just meant as a quick sanity check,

Well, one of the ratios is savings to income. The debate then rages as to whether to include or exclude your house. The only way you could realize that equity in the house is to downsize or move to a less expensive area of the country. Neither one of these are in my near future.

The only way then to tap the equity is through a loan on the equity, which really isnít taking the equity out but securitizing the load with the equity in the house. Therefore, I donít include my home equity in the calculation.

However, if you plan on moving in the next few years and will be getting cash between the sale of the old and purchase of the new, I would include that in savings. Also, if you have investment properties, I would include that in savings.

For debt, I do include the mortgage. First, it is a debt. Second you have to live somewhere.

In my net worth calculations, I do include home equity but not cars.

I look at these as quick numbers to get a sense of where I am. If your income jumped recently, then the ratio are very different then they were last year. Maybe, you removed a huge debt and your income is far less now then you needed in previous years.

The idea is to be honest with yourself to see if you are on track. Where are you? Where are you going? And to a less extent, where did you come from?

Right now, I am in the forest and concentrating on my debt to income ratio. You may be further along on the journey concentrating on the savings numbers. Or you might be doing both.

7 Responses to “Home Equity and Retirement Ratios”

  1. monkeymama Says:

    Why not cars?

    Just curious. I certainly count my cars. When we buy a car our cash doesn't go into a black hole. Likewise, if I lost my job, my car would be 3 months' living expenses. I'd sell it in a second. Depreciating them gradually is a much more real representation. But I am an accountant, what can I say. We depreciate assets. Wink
    I love ratios so I have to check out that post now.

  2. monkeymama Says:

    P.S. Oh yeah - on the house - I certainly include it. Again, it's an asset that could be sold. A VERY large asset. Anyway, we put so much cash into our house it doesn't show any of our big picture to not show our house. Then we just look broke. Though we have 30% equity in a sea of 0% equity.

    That being said, for a while I included the value of the home but it was very volatile. I switched to purchase price. Then I finally settled on assessed value. (It's only a few thousand more than purchase price). It rises VERY slowly/gradually and seems the best representation. Assessed value will never be more than house is worth. It will rise much slower than housing prices, but if they fall much further our assessed value will be lowered. So I have decided that is the fairest measure, while ignoring all the volatile at the upper end. (Assessed is $316k, house was worth $650k for a time, maybe $350k today. I can't keep track! Those undulations on the high end don't really matter. They show little of our true net worth).

    So yeah, it took me a while to get here. But this is fair as it ignores a lot of noise at top, but will certainly take into account if we go upside down or anything like that. Which should reflect negatively on our net worth if it comes to that.

  3. monkeymama Says:

    Nevermind - I read that wrong. No on the savings ratio. Equity doesn't count. (I was talking about net worth. I think I got confused when I started with the cars).

    Anyway, I think it is less important where you are, and more important where you are going. So sounds like you are going the right way. !!

  4. merch Says:

    I look at the ratios as more of a long term number and I look at cars as short term maybe intermediate.

    As for the house, each person has just has to be honest if they look at it as an invest. The period of life that I am in, I don't see selling the house or if I did buying something smaller. So at this point, there is no reason to include it in savings.

    But again, it just depends if you look at it as an investment.

  5. terri77 Says:

    I don't consider my home at all in calculating my retirement savings. I only consider my retirement plans and pensions. All money exclusively set aside for retirement. Home and cars I calculate only in net worth.

    I think the ratio idea is interesting to look at for overall savings.

  6. Caoineag Says:

    I can't imagine having equity in my savings category, to difficult to access and we don't plan on down sizing. On the other hand, I am not sure I see the mortgage as debt (for this ratio) if I am not including the house in savings. An expense yes but my future mortgage will only be as large as my current rent so what is the difference? As you said, we all have to live somewhere and the mortgage eventually ends while rent just goes up and up.

    Course to be fair, my ratios even with the mortgage would be good (we are going cheap). I just don't see the point of including it in this exercise.

  7. scfr Says:

    I include my house* (when I have one) and cars in my net worth statent, but include neither with my retirement savings.

    *I use a conservative estimate of sales price and deduct 8% for agent commissions, taxes, etc.



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