Retirement planning: What is your house really worth?

Question:

I’m getting focused on my retirement plan and I know you are nuts about people calculating their net worth as a part of the plan. I’m doing mine now but I’m not sure which value I should use for my house—the value estimated from my property tax assessment or the sale price of a comparable property.

Answer:

Online dating can teach you a very important lesson about calculating your net worth. I’m not kidding. A smart and sassy friend of mine recently threw herself into the online dating pool—which turns out to an appropriate metaphor based on her experience so far. She has shared a number of insights, including this classic: What looks good on paper doesn’t necessarily look so good in real life, even under the muted lighting of her local café.

In online dating, meeting someone who looks good on paper is the booby prize. The same goes for your net worth. What you really want in both areas is something that looks good in real life.

Which brings me back to the value of your house. The simple answer to your question is to put down the lesser of the two values on your net worth statement, though I don’t think it really matters which one you choose. The more important point is to focus on your net worth in real life and not on paper.

In today’s steaming-hot real estate market many homeowners have an inflated sense of personal wealth because of how much their house is now worth on paper. However, this number can be a red herring on your net worth statement, especially when it comes to retirement planning. Here’s why:

After you stop working, you’ll still need income to pay for groceries. A pension might cover some of your expenses, but most of us will need the income from our retirement savings to meet our needs, groceries, hip-hop lessons, a weekly shampoo and set, etc. Aside from renting rooms out or getting a reverse mortgage, the only way to unlock the value of your house and access its income potential is to sell it, move somewhere cheaper and invest the net proceeds. The problem is, most of us won’t be willing to do that. So while “on paper” your house is worth $1.3 M, in “real life” you’ll be relying on your investment portfolio to provide the income for your groceries.

Focus on building your net worth over time, but especially focus on assets that can provide an income for you in the future, like your investment portfolio or rental properties. You don’t want your “on paper” real estate wealth to drive stupid decisions. Just like you don’t want a 10-year-old, photoshopped online dating photo to prompt a marriage proposal.

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.