“Is home equity included in net worth when calculating a retirement budget?”

“Is having a mortgage in retirement risky?”

“Was it a good idea for you (Go Curry Cracker) to get a mortgage?”

These questions (and others of a similar genre) are amongst the more popular we have received over the years. (Even more so now that we bought a house.)

Today I want to review mortgages, home equity, and related questions as they pertain to retirement budgeting and spending.

Let’s go.

Mortgages, Home Equity, and Retirement Spending

Is home equity part of net worth?

When I googled, “How to calculate net worth”, one of the first results was very succinct:

Net worth is assets minus liabilities.

And it is. Simple.

Hence, home equity (home value minus mortgage) is part of net worth.

Which is great for accounting purposes. But… does it work for retirement budgeting?

Retirement budgeting

The 4% Rule is often used (or at least discussed) when planning a retirement budget.

Summarized: plan to spend 4% of your starting portfolio value each year, adjusted for inflation.
(For more details: What is Your Retirement Number – The 4% Rule.)

Following this guideline your retirement money should last at least 30 years, even in the worst cases in the historical record (which is why it is the 4% rule and not the 5% rule.)

It is in these troubled times that the trouble of including home equity in net worth becomes clear.

What if you based your retirement budget on total net worth (including home equity) and you happened to retire in 1966 (the worst retirement ever.) Maybe at retirement your stock/bond portfolio was worth $750k and your paid off home was worth $250k (75% / 25%.) Come 1980 or so… and your net worth has dropped to ~$250k.

Where is this $250k? In the house. ALL OF IT. All stocks and bonds have been sold and spent.

Now what? Sell it and downsize? Get a reverse mortgage? Rent out a room or two?

Retirement portfolio decline (chart from cFIREsim)

Any of these could be a reasonable option in this situation. Maybe you have a preference.

I certainly do – that preference is to not be in this situation in the first place by not including home equity in net worth for purposes of calculating a retirement budget.

Said another way – exclude home equity from the portfolio.

But my home has real value! Certainly I don’t just assume it has zero value in retirement?

Right you are. That value is in the form of imputed rent.

You spend less (due to no rent or mortgage.) And you spend that lesser sum from a smaller portfolio (that doesn’t include home equity.)

In the preceding example, this would entail spending $30k/year rather than $40k (4% of a $750k portfolio.) Now at the 1980 point you still have $437k remaining ($250k in the house.) There are still 6 years’ worth of spending in the investment portfolio (out of the original 25.)

Things are less robust if you have a mortgage because of the cash flow necessary to make the monthly payment.

But… YOU have a mortgage!

I do. I even invested it.

There was some interesting discussion about how we think of the mortgage on our recent budget post (Our California Dreamin’ Budget). The following is intended to be clarifying remarks.

Market value of house – mortgage value = home equity, which is not included in our net worth for budgeting purposes. I plan to spend less than 4% of the remainder.

I chose to have a mortgage because it seemed a reasonable hedge – we got to borrow at 2.75% and let relatively high inflation eat that in the early years. I fully expect dividends from investing the mortgage to easily make our mortgage payment in short order. The rest is profit.

In the short term this has cash flow implications. I need to generate the cash to make the monthly payments. This isn’t a large problem as I sized the mortgage such that the payments were comfortably within our ability to pay even though I could have borrowed substantially more (and should have in hindsight.)

A portion of those payments is a real expense. Interest paid is gone forever. The remainder of each payment is principal and I can choose to spend that again in the future (either via home sale or borrowing.) For this reason, the principal amount is NOT part of our budget – it is just a slight shift of asset allocation from stocks/bonds to real estate each month.

Should every retiree have a mortgage?

No. Debt can be a great tool (Sweet, Sweet, Debt), and mortgage debt is one of the best kinds of debt, but that doesn’t mean it is automatically a benefit.

Circumstances matter. Interest rates have more than doubled in the year since we got a mortgage, resulting in a 40% larger monthly payment if we were to refinance at today’s rates. With such high interest rates (5.5% – 6%) the delta to long-term stock market returns (10%-ish) isn’t as interesting.

We are spending less than our portfolio can bear and with plenty of cash flow. Were we close to max budget (4%) or if we had to sell stock regularly to make mortgage payments, I would be less willing to shoulder the additional “risk” of the mortgage. There are plenty of articles out there highlighting the sequence of return risk of carrying a mortgage… imagine having to sell stock that is down 50% to make a mortgage payment, effectively doubling your housing costs.

Is a mortgage risky then?

Debt is leverage, which multiplies returns and losses. Magnifying losses (especially without income) is a bad thing, obviously.

But if you have the cash flow and can ride any short term loss out, having a mortgage is no more risky than early retirement itself. Less risky, even.

Quoting reader brooklynguy:

SWR analysis assumes withdrawal amount rises with inflation. Mortgage loan expense remains fixed (unadjusted for inflation) for the life of the loan. Run the numbers in cfiresim (setting the withdrawal amount as fixed, non-inflation-adjusted) and you will see that a leveraged-investing-via mortgage strategy with a 3% interest rate loan has a better success rate (has been quite “safer”) than the 4% rule.

… to which my reply was, “I should have borrowed more.”


It is never a good idea to include home equity in net worth for the purposes of calculating a retirement budget. In bad times this could force a home sale or borrowing, both of which are best done by choice rather than necessity. Instead, keep the home equity separate and enjoy the imputed rent of a paid for (or somewhat paid for) house.

Mortgages can be a positive or negative factor in retirement, all depending on the circumstances. Likewise with the choice to invest mortgage proceeds. Since we were able to get a 30-year mortgage at 2.75% fixed, inflation was 9%+, we had plenty of cash flow, and were spending less than our portfolio would bear, a mortgage was a great choice (probably.)

Mortgages can increase sequence of return risk due to regular portfolio withdrawals to make mortgage payments. However, at low mortgage rates a mortgage is actually less risky than early retirement itself.

Because of the nuance and dependencies, there is no one-size-fits-all conclusion for mortgages in retirement.