Jun

24

Net Worth - Useful Concept?

Posted by cameron

June 24, 2007 |

I have read many, many times about how much money we need to retire, and more often than not people refer to net worth. I don’t like this way of thinking very much for the following two reasons:

  1. I will always need a roof over my head. Within limits, my home equity is the value that provides freedom to live how and where I want. I may downsize but that does not mean decrease equity. One day we may need the equity in our house for a different kind of home, assisted living. In my way of thinking a reverse mortgage destroys this possibility. It’s probably the main reason I keep home equity isolated from everything else. The loss of this equity removes basic freedoms in the future. I keep this separate from all else.
  2. The other equity for most middle class people resides in pre-tax savings such as IRAs and 401Ks. This part of net worth is behind the tax firewall so to speak. It makes absolutely no sense to take huge amounts of money out only to be taxed at a high rate. The whole reason for saving was to avoid high taxes and take the money out at the lowest rate. The withdrawal strategy is about minimizing taxes. That means withdrawing savings through the tax wall slowly. The point is that it has an entirely different purpose and strategy from the house you live in. It’s different and separate.

For me it is easier to compartmentalize and deal with each strategy as a separate entity in which case the term “net worth” doesn’t have any useful meaning. Money can be moved from one place to the other to “balance” so to speak but do it at your own risk. Remember those taxes and remember the long-term ramifications of home equity.


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