Have you ever really thought about how you’ll spend your money in retirement? All I’ve ever heard was, ‘Just take 4% of your net worth’ or something along those lines.
I recently read this article by Go Curry Cracker about retirement income and whether or not to include a home’s equity. This topic has me deeply thinking about how I calculate my own spending in retirement. I originally thought I would take 4% of our net worth. Easy right? Well, Now I’m not so sure.
When we get ready to start drawing on our portfolio my plan has always been take 4% of our net worth. As of the end of September, our net worth was $1.23M. If I take 4% of that our annual retirement spending would be $49,200. That sounds great and good but the issue with this method is our rental property and our primary residence’s equity.
After reading their article I thought, let me calculate our retirement income using their method. I still used the 4% rule but for our investments only. Then added our yearly net rental income to that. So basically, excluding our primary residence because it is not producing any income and it has a mortgage on it.
To start, taking 4% of our investments as of the end of September would be $26,500. Then add our estimated net rental income of $14,000. Our retirement income would be $40,500. This budget method would produce $8,700 less than the traditional 4% rule. That’s a significant difference.
I’m not going to get bent out of shape over this because I do realize that our primary residence does have value but just doesn’t produce any income at this moment. Down the line when we decide to sell it or rent the house out the two methods will be close to the same. We have assumed net rental income from our primary residence to be $8400.00 per year. That will bring our retirement income to $48,900.00 a year. Very close to the traditional 4% rule method.
This doesn’t change much for us right now as we are not drawing down our portfolio yet. It does give me food for thought, especially now that we are approaching the spending phase of our FIRE journey.
AHA FIRE 
I always thought the 4% rule excluded your house, unless you planned to downsize reasonably soon.
I’d love it not to be the case but I don’t see it working for me to include household equity for financial independence.
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I agree. Equity isn’t worth including unless it will be transferred to an income producing asset.
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Well, one thing to consider is, if you’re making 14K with your rental property, would it be worth selling it, and if so could you make more than 14k by utilizing the proceeds in a different asset? You’ve likely considered this already, but just more food for thought! Happy Holidays!
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Hi Jim, We are definitely considering selling it. The current issue is that rental has like $250K in capital gains. I think we like the idea of selling it and putting it in the market simply for the more passive nature of the stock market. Happy Holidays to you as well.
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