How a House Raises the Number You Need to Retire
His house is paid off and worth about US$500,000, and it does not appear on the sheet anywhere.
Picture a man named Roy, 63, who plans to retire abroad. He has a spreadsheet with one line for rent, one for food and one for travel. His house is paid off and worth about US$500,000, and it does not appear on the sheet anywhere. "The house is done," he told his friend Chuck. "It costs me nothing now."
Chuck is a retired accountant. He asked Roy to write down what the house costs each year when nobody lives in it. Roy had the figures from the last three years: tax, insurance, upkeep, and the utilities he leaves on.
Then Chuck showed him one idea. If a person plans to spend about 4% of savings each year, then every yearly cost needs savings of that yearly cost divided by 0.04. Dividing by 0.04 is the same as multiplying by 25.
| Yearly cost | US$ per year | Savings needed (yearly cost times 25) |
|---|---|---|
| Rent and utilities abroad, one-bedroom (US$900 and US$150 a month, an illustration) | 12,600 | 315,000 |
| House: tax, insurance, upkeep | 12,500 | 312,500 |
| House: utilities and security check | 2,400 | 60,000 |
| House total | 14,900 | 372,500 |
| Rent abroad plus the empty house | 27,500 | 687,500 |
Roy added the last line himself. 315,000 plus 372,500 is 687,500.
"Almost four hundred thousand dollars just for the house," Roy said.
"Savings you would need in order to pay its bills," Chuck said. "The 4% is an illustration, and markets vary."
Roy looked at his sheet. The number he had been building toward covered rent and food and travel. It did not cover a house that took US$14,900 a year.
Then Chuck asked him to compare like with like. Roy would live abroad in a one-bedroom whatever he did with the house, so the US$12,600 belongs in every case. The question was what each choice does to the rest.
| Choice for the house | What it does each year | Savings it adds to the number |
|---|---|---|
| Leave it empty | Costs US$14,900 | +US$372,500 |
| Rent it out through a manager | Brings in US$33,000, less US$13,800 of costs, leaves +US$19,200 | A surplus of US$19,200 a year, which covers his rent abroad and leaves US$6,600 |
| Sell it | US$470,000 after selling costs, at 4% brings in US$18,800 | A surplus of US$18,800 a year, which covers his rent abroad and leaves US$6,200 |
A tenant pays the utilities and the routine upkeep, so a rented house costs Roy less than an empty one. The US$13,800 is an assumption of tax, insurance and big repairs plus a 10% manager.
Roy wrote a new line at the top of the sheet. The empty house added US$372,500 to his number. A rented or a sold house took the rent abroad off it. He began a second page, headed What I want the house to do.
You could…
- Add your own yearly house cost to your plan, and divide by 0.04.
- Add the cost of the place you would live in, in every version, so the versions compare.
- Ask a planner or accountant to check how the 4% idea fits your own savings.
If you added your house to your retirement number, how much would it change? Send us your number by writing in. A reader whose retirement sheet leaves out the house could see what it changes.
Figures are estimates for planning, based on public data, before income tax.
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