How would you like to have a steady income that rose regularly, was never taxed, and required no work?

This income is available to all of us. We just don't know about it, don't think about it, and seldom incorporate it into our long-term plans.

Economists call it "imputed income"--- the benefits in service (not cash) that we enjoy from our household capital. Household capital is the money we investment in houses, household goods, and cars. Since the 'income' we receive is in services, not cash, it never appears on a form 1099 or W-2.

So it is never taxed.

The single most important source of imputed income is homeownership. Although seldom measured, it can--- as you will soon see--- loom as large in your retirement and financial planning as income from investments, pensions, or Social Security.

How do we get imputed income?

We work to own our homes free and clear by paying off the mortgage. It's that simple.  

We can measure our "imputed income" pretty easily. Suppose your house is worth about $150,000 and you own it free and clear. Suppose it would rent for about $1,500 a month.  Your imputed income is $1,500 a month--- less the cost of taxes, insurance, and maintenance. That would make your imputed income $1,050 a month or $12,600 a year.

This calculation can be done for anything from a Palm Beach mansion to an RV community in Apache Junction, Arizona. As with everything else, some houses and areas will be better than others. Some will be worse.

Do many people have significant imputed income from homeownership?

More than you think. According to government figures, nearly 40 percent of all homes are debt free. The South, at 42.1 percent, has the highest amount of debt free homeownership. The West has the lowest amount, 31 percent.

Bottom line: millions of Americans receive significant imputed income from homeownership.

Now look back to the example. A house that is close to the national median home value could 'produce' $12,600 a year in shelter services. How much would you need in other investments to provide the equivalent income?

Answer: a lot.

To have $12,600 a year in tax-free income from quality municipal bonds you would need to invest $230,800. To have $12,600 in after-tax income from long-term Treasury obligations (assuming a 28 percent tax bracket) you would need to invest $305,000.   These figures are based on recent Bloomberg yields of 5.30 percent for the 30 year Treasury and 5.46 percent for top quality 30-year municipal bonds.

Since neither Treasury or municipal bonds provide any inflation protection and home values tend to rise with inflation, it's clear that imputed income from home ownership beats conventional fixed income investments hands down.

That's why home ownership is the most important investment most of us ever make.

According to the Social Security Administration website the average Social Security retirement check for an individual will be $874 a month in 2002. That's $10,488 for the year.

The average retired couple will receive $1,418 a month in Social Security retirement benefits or $17,016 for the year.

If the income is tax-free, as it will be for many retirees, home ownership will be nearly as important for retirement security as Social Security. If other sources of income are high enough to trigger the taxation of Social Security benefits, the benefits of home ownership could be greater than the after-tax benefits of Social Security.

This is why home ownership should be a core part of financial planning. It's also why arguments about the benefits of carrying a mortgage only have merit when you are young and saving.

The more we own free and clear, the better off we are because free and clear ownership delivers valuable services without the burden of income taxes.