Our Net Worth | Real Estate and Mortgage | Retirement

Should You Include Your Home Value As Retirement Capital? : October Net Worth Update (+1.32%)

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Including Home Value in Your Net Worth May Not Be A Smart Idea

Your home is likely your most valuable asset however whether you should include it in your net worth depends on a few key factors.

A home value takes up a massive chunk of your net worth picture and fools us into having more cash in hand.

Some of you may consider your home as a positive unrealized value subject to market risk.

This means until you sell it there’s money in it but you don’t know where you’ll end up with your net worth calculation.

Your home is not liquid cash it’s an asset that is called a hard asset as in hard to get anything from it unless you downsize.

What that means is unless you sell your home you all you have is a home with money tied up into it.

Unpopular Scenarios Relying On Your Home For Retirement Capital

If you plan to sell your home to feed your retirement you may face a bumpy road ahead.

  • The market is flooded
  • Home values drop
  • First-time buyers can’t afford to buy
  • Home selling less than you imagined
  • Your home sits on the market 
  • Supply exceeds demand

Importance Of Net Worth Calculations

Determining your retirement needs with and without your home listed as an asset has both benefits and risks.

For simplicity, net worth is your assets minus your liabilities which seems pretty straightforward because it is.

I’ve been posting our net worth update on Canadian Budget Binder since 2012 and included our home in our net worth statement.

Recently our retirement vision has changed to living a simple life and enjoying what we accomplished.

Both Mrs. CBB and I have talked about whether that was a smart move and we decided to stick with it which I’ll explain below.

However, having money tied in a house that you plan on living in after you retire only blurs the lines of wealth for people.

Is Your Home Value A Financial Asset?

Dear Mr.CBB

I notice when you do your net worth update post that you include your home value as part of your net worth.

I’ve heard conflicting information about whether to count your home in a net worth statement.

What are your thoughts about this topic?

We currently own my home with a mortgage that will be paid off by the time my wife and I are 65 years old.

At this point, we are not sure whether we plan to stay in our home or downsize to something smaller and cheaper.

We’ve also considered our health as my wife works part-time but she is not sure how long that will last.

I work full-time in a career that offers me a great pension and we both have investments in our RRSP and TFSA.

If we choose not to sell our home then why bother including our home value on our net worth statement?

Thanks for sharing your opinion.

Chris and Judy

Counting Your Home Value As Retirement Capital

Hi Chris and Judy,

That’s a wonderful question and one I’ve been meaning to talk about on the blog for a long time.

Sometimes it’s the readers who send me their finance questions that remind me of the importance of certain topics.

Although I’m not a financial advisor we do work with one and there are reasons why we do include our house in our net worth.

There are pros and cons to including your home as capital in a retirement planning situation which I will discuss below.

I hope our insight will inspire you to perhaps talk to a professional you trust about your specific situation based on your net worth and retirement.

Recognizing retirement capital depends on whether you want to keep your glasses on, off, or hanging off your nose.

Calculating Net Worth

If you’ve never calculated your net worth now might be a great time to do so if retirement planning is part of your financial plan.

Even if it’s not because you think you’re too young to be thinking so far into the future trust me it will be worth it in the end.

Your net worth is calculated by your assets-liabilities= net worth.

This is your assets which are anything that holds value minus what you owe in debt.

Examples of Assets include your home, rental home, cottage, jewellery, investments, or vehicles.

Liabilities on the other hand is any debt that you owe.

You can read more about the debt to income ratio and how to calculate your net worth on CBB to learn more about them both.

How many of you have parents or relatives that are seniors and still living in their first home or a home for a very long time?

Lots of people we know have parents in this situation however with today’s economy and low mortgage rates things are different.

We see homeowners buying and selling far more frequently and wanting bigger homes taking on a larger mortgage.

Purpose Of Calculating Home Value In Your Net Worth

Yes, your home most likely will give you a return but like anything else, there’s risk involved based on the current real estate market.

Something Mrs. CBB and I talked about was the purpose of calculating our home value in our net worth statement.

At the time we began tracking our net worth our mortgage was not paid in full, however it is now.

We needed to understand what the purpose was of including a home value in a net worth statement.

That’s the question you must ask yourself.

If you plan on retiring soon and want to know your overall net worth go ahead and calculate these two possible scenarios.

Which Strategy Works For Your Retirement Plans?

One situation would be retiring without adding your home value to your net worth allowing you to see a true picture of your financial health.

The other scenario would be to calculate your current net worth without your house for a realistic approach.

You can technically do this any time as you’ll learn what we do that you don’t see on CBB>

Downsizing To Free Up Retirement Cash

On the other hand, if you have years in your pocket before you retire you can add it but consider whether you will sell it or not.

Selling your house to downsize or move to a smaller city where houses are cheaper will allow you to cash in on the equity.

Not everyone who retires will do this which means their home may be paid off but that’s about it.

Anyone who has equity in a home can apply for a home equity line of credit but why would you want to do that after you retire?

You’ll likely get very attractive rates which is why it can be lucrative however risky if you struggle to pay it back.

I’m sure lots of people tap into it their home equity in retirement for various reasons, however, consider the risks.

Perhaps you want to invest in real estate or another big adventure putting you back into debt once again.

Debt-Free Retirement Living

Ideally, having little to no debt and a mortgage-free home in retirement is the safe spot for seniors.

Why? because it’s easier and stress-free living not having to worry about paying off massive amounts of debts when you’re older.

Anything can happen which means your house is just a house unless you free up the cash by selling it without increasing debt.

For example, let’s say that when you retire you’ve created a retirement plan you want to net $50,000 a year.

If your home is worth 1 million dollars, paid in full and it’s your only asset you will need to sell it.

However, if you have investments or pensions coming you should factor in how much you will be using each year.

If you’re not able to sustain $50,000 a year from your other assets besides your residential home then you’d still need to sell down.

Re-evaluate Retirement Finances

The other option would be to re-evaluate your retirement planning needs so you can stay in your home until the end.

This will allow you to use any income coming in including investments, government funds, and savings for your retirement.

Not everyone wants to sell their home when they retire because it has become their kingdom of memories.

So, ask yourself what is your purpose of including the home value in your net worth?

If it’s just to see how much you are worth IF you sold your house that’s an important number to know.

On the other hand, if you want to see what your net worth is without your home then don’t include it.

You can just do both but be mindful of the consequences of which one you choose to live by.

Two Situations We Consider When Summarizing Our Net Worth

Consider planning your future living costs ahead of the special day with a retirement checklist.

Below are two situations Mrs. CBB and I could face in the future which we’ve considered.

First off I want to mention that it’s imperative that if you are married or common-law that you are on the same page.

You don’t want to find out at the last-minute that your spouse has no intentions of downsizing or selling assets for cash.

  1. If we plan to stay in our home we will not include the home as part of our retirement plan. Even though the mortgage is paid in full we have ongoing bills to pay.
  2. In the future, if we plan to sell our home and downsize freeing up cash that would be part of our Future Investment (FI) plan.

When we calculate our net worth we look at the following categories;

  • Liquid Cash on hand
  • Investments including pensions, business income
  • House value and profit if we sold plus any costs involved (our home is paid in full but if yours is not then consider what you owe vs. any profits made if you sold it)
  • Current vehicle value

Calculating Net Worth With and Without House Value Included

You don’t see the numbers we calculate as we lump them all together apart from our house and vehicle worth if we sold it today.

You’ll also notice that we haven’t increased the value of our home in our net worth statement for many years.

We bought our house for $265,000 and comparable homes on our street are now selling in the $700k range.

Our home value increased once to $345,000 but decided to leave it at that because we don’t know if we plan to stay or go.

Behind the scenes, we document our net worth with and without our home so we aren’t blinded by rose coloured glasses.

Anything can happen in the future so staying realistic with our retirement planning is the smarter route for us.

Working With Our Home Value And Net Worth Calculations

As of the date, I pulled our finance numbers or net worth including the $345,000 house value is $1,214,183.86

We know our vehicle is an asset that will only drop in value over time so we consider this.

Let’s have a look at what our net worth is without the house included.

Net Worth with house $1,214,183.86$345,000 House valued in our net worth = $869,183.86

That’s the number we truly look at because we can’t predict our housing situation for the future.

We also can’t predict how the investment markets will do so overall net worth is just a snapshot of potential wealth or debt.

If I was to calculate our net worth using the market value of our home today that would increase it to $1,569,183.

Looks good on paper but that’s about it, for now.

Risk Factors Of Including House Value As Part Of Net Worth

  • Not Cash In Hand unless you sell or getting a home equity line of credit if needed
  • A false sense of financial security unless the owner downsizes and sells other assets for cash

Benefits Of Including House Value As Part Of Net Worth

Future Unpredictable Situations To Consider Before and During Retirement

If you plan to rent in retirement and your house is paid off it will be cash in hand however keep in mind future rental inflation.

There’s also a possibility that one of you passes away, becomes very ill, and needs care or is put into long-term care or retirement living.

Selling your house may or may not net you the cash you expected and need or want in that situation.

Lots to consider, that’s for certain. Luckily for my mother-in-law, we sold her house for far more than my inlaws ever imagined.

Fortunately, the house sold in an area that gained multiple potential buyers wanting to purchase it.

This won’t happen to everyone.

The house was their retirement savings along with a works pension from my father-in-law.

Thankfully, it will be more than enough money including her government pensions to give her everything she needs until the end.

A friend of ours put an offer in on a house that needed lots of work and listed for $600,000.

There ended up being 13 offers on the table including hers and it sold for $750,000.

The problem with relying on these types of bidding wars is that they are not realistic for every house sale but certainly a nice financial perk.

Final Thoughts – To Include or Not Include Your Home Value For Net Worth

I think for us calculating the three different scenarios is the best way to see a realistic net worth and a potential net worth.

At the end of the day, you’ll need to calculate your retirement needs without your house value.

That’s the closest you’ll get to make sure you’re going to be financially stable during the golden years.

3 types of net worth calculations you can evaluate

  • Without the house included so we know what we may have if we stay in our house.
  • Adding a slight increase in the value of our home just in case the market crashes and we need to move.
  • Including the current market value of the house if we were to sell

Overall, we’re happy with the way we see both the retirement net worth figures and understand that there will be risks.

Discussion: Do you include your home in your net worth update? Why or Why not? Leave me your comments below.

Net Worth Losses and Gains

net worth retirement planning

What happened to our money in October?

Anytime we see a net worth increase it’s a good month but at the end of the day, it’s the overall performance at year-end.

I can’t believe we will be finishing up 2020 shortly and to be honest, I’m ready for it to be done.

We spent a bit more on our monthly budget than we had anticipated too however we do save monthly for many expenses.

Next month, for example, I bought a new laptop which was something I did NOT plan for in 2020.

That will hit our net worth but it was a business need so I’ll be able to claim it on the business taxes.

How was your month?

Share your comments below.

Net Worth 101

What Does Individual Net Worth Mean?

Net Worth is a snapshot of your financial health sort of like a picture or debt to net assets.

In simple terms, it’s a total of the value of your assets minus your liabilities.

We credit the growth of our net worth due to patience, perseverance, using a monthly budget, and not giving up.

Your numbers may go up and down but don’t let the numbers scare you rather understand why and move on.

If you would like to use our budget I offer a FREE downloadable budget which I created and that you can use.

I don’t charge for it because I want you to save money not spend more!

There are tonnes of other free resources at Canadian Budget Binder to help you build your net worth.

Calculate Your Net Worth

Net Worth Over Time

 

Do you know how to calculate your own Net Worth?

We like to calculate our net worth every month so we know if we are still on track.

Some people calculate it yearly or quarterly but it’s up to you and how informed you want to stay.

Net Worth is only an estimate and not everyone uses the same type of figures to tally it up.

Some of you may not include vehicles like we do or leave out assets inside the home as we have.

You might be that person that believes that your house should be excluded.

It depends on what you want to calculate or what you can sell today and make money for tomorrow.

Figuring out net worth is fairly easy as long as you know your monthly financial numbers.

Net Worth is adding up all your assets (what you own) then taking away your liabilities (what you owe) which will give you a net worth number.

Understanding your net worth will help you determine if you are on track to meet or beat your personal financial goals.

It doesn’t get any easier than that.

Determining Your Net Worth

How to Determine Net Worth?

Net Worth = Assets – Liabilities

Why not go ahead and calculate your own using our Free Money saving Tool Net worth Calculator (Canadian Budget Binder 2012)

Financial Numbers

When budgeting anything is possible, we are proof of that although we still have a long way to go in our journey.

These are our numbers and our goals, not a means of comparison towards your own goals to others’ target goals.

We don’t care how much money others earn or if they have a high net worth or if it is lower than ours as it’s not a competition.

I hope our experiences will help guide you along your financial path working towards debt freedom.

Not everyone has the same path in life.

Some of you may have had to start over like I did or go to school a second time and now have OSAP loans to pay back.

Others may have divorced, lost money in the stock market or other investments, suffered job loss, fell ill or injured on the job and so on but you can’t let that stop you from achieving your financial goals.

You may have been given trust funds, paid-for homes, educations, or other perks that give you a financial kick-start and that’s OK too.

Earn It, Save It, Invest It, Build It

Remember what I said, “It’s not about how much money you make, it’s how you save it”.

The reason people accumulate wealth is that they know how to save or invest even if inherited or a lottery win.

The smallest improvements should mean big strides in working towards reaching your goals.

Sometimes we have to fail to learn and we’ve all been there.

Money can be evil for some people especially those who have a negative attitude towards their financial situation.

Be optimistic and little by little with determination you too should see improvements if you want that to happen.

Canadian Budget Binder Net Worth Updates 2020

Click the links below to read our net worth updates for the year 2020.

That’s all for this month’s net worth update but please check in the middle of December 2020 to see how we made out in November 2020 with our financial portfolio.

Woohoo, the year is almost over thankfully.

~Mr.CBB

Note: This page may contain affiliate links where this blog earns a little income if you choose to use a product or service.

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