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Can we afford a condo?
Old 04-06-2015, 04:38 PM   #1
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Can we afford a condo?

Our background: both 56, no debt except for a total of $47K HEL/auto @ 1.99%/1.49% (thank you penfed!)

home conservatively valued at $850,000-$900,000, we do not plan on downsizing our primary residence in conjunction with or after this purchase.

kids- 1 year of college remaining (she will be working as a BSN upon graduation)- other 2 out of house,working, all with no debt and small investment portfolios

our assets:

bucket 1 - taxable - $1,488,000 (LTCG approx $600,000)

bucket 2 - profit sharing/ - $1,731,000
trad IRA type

bucket 3 - Roth $824,000

total $4,033,000

interest in son's condo $33,000 + %gain (currently worth 48-50K)

Social Security - I will defer till age 70, spouse will likely collect spousal benefits @ my FRA - total est combined approx $50K+/year ( not sure of % taxed but, could be heavily taxed!)


yearly expenses (not counting health insurance/daughter's college expenses) - $84,000

proposed purchase is a winter condo for $600K-$750K (depending on unit) with yearly expenses of $24,000 - $28,000/year (HOA,RE taxes,utilities)

We understand that it would be cheaper to rent a unit (even for 4 months!) but we would be much more comfortable going to our 'own home'. Also, we understand that there are many cheaper units but this area is the best location for us in terms of friends,neighborhood and familiarity.

Currently our health insurance is paid through my corp. I am committed to working for the next year or so and then would like to quite possibly cut back to very part time - earning 50-100K while still having my corp pay the health insurance until we are eligible for medicare. I am not sure that profit sharing contributions would continue beyond this year if I cut back.

We view our financial situation as having reached a critical mass or financial independence. I see myself as working because I want to instead of as needing to. While purchasing a condo would be very nice, I don't want to give up our financial independence for it! As for calculations, I would like to be conservative and bump up my yearly spending from $84,000 to $100,000 for a bit of a cushion.

I look forward to your thoughts!
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Old 04-06-2015, 07:07 PM   #2
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It's borderline but personally, I would not feel comfortable with your plan. The $28k condo annual expenses are equivalent to $700k principal at 4%, plus the $750k you want to spend on the condo, so that's like subtracting $1.5M from your $4M of investments. That leaves $2.5M at 4% or $100k/year, while you're spending $84k/year ex college and medical (which to my mind, could easily cost >$16k/year).

I would downsize the $900k primary residence and use some of the capital provided by that to get the condo. And I'd look for a condo at $600k not $750k. Or, plan to keep working for a while.
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Old 04-06-2015, 10:39 PM   #3
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To be conservative I have for calculation purposes bumped our yearly needs from 84K to 100K. The 84 K is an actual spend rate from 2014 culled from credit cards/ checking accounts and probably includes some xtra funding of kids (food,some shopping,clothes,etc) that really won't be there in the future.

Since I am full on working this year I need 13 years of lets say $100,000(expenses) + $30,000(condo expenses)=$130,000 x 13 years= $1,690,000, $750,000 spent on condo leaving $1,560,000 once social security comes on board. That would generate $60,000 (@ 4%/yr swr) + ss of lets say $50,000/yr for a total of $110,000/yr from that pt on. this is $20,000 short from my conservative estimate of what we would require. These numbers hold true even if the money is kept in a mattress. To be ultra conservative lets say I take all required funds until social security (13 yrs) and put them in my mattress. also take out the $750,000 for the condo(max spend). This leaves $1,560,000 left after squirreling away 13 yrs of expenses. Lets say the market returns me 4%/yr (way under most averages!). This leaves me at the end of 13 years with $2,597,500 which throws off $103,900/yr at 4% + my $50,000 SS or $20,000 over what I need.

The above numbers don't include any investment gains for the money used in the first 13 years. Nor do they include any salary that I would make in the next 9 years(till medicare kicks in), nor spousal ss benefits. While I want to retain 'financial independence' I have no problem doing very part time work for this time. I actually enjoy the daytime part of it and it will keep me out of my spouse's hair!!

The fly in the ointment here is I worry that I could get derailed by an early 'bad sequence of returns' making the calculations a bit more dicey even with continuing some work.....
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Old 04-07-2015, 12:08 AM   #4
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I went through a similar exercise recently regarding a potential snowbird home. My base planning is in Quicken Lifetime Planner and I use firecalc as a stress test for sequence of returns risk. I simply added a winter home scenario to each and nw have the green light to proceed if we decide we want to.
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Old 04-07-2015, 05:11 AM   #5
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Personally I wouldn't invest that much in a second home. But if you did hit a bad sequence of returns you could always sell it and re-generate at least some of your stash (value not likely to go to $0 in a market where condos are that expensive, I gather).
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Old 04-07-2015, 05:45 AM   #6
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Do not underestimate the cost of nice furniture and other stuff to make the condo a (winter)home.
You'd probably do not want to travel back and forth with a trailer filled with everything from towels to blender.
Go though your home and add up the prices of all the small and not so small things you would expect to be available also in the winterhome.
You could quickly end in the 6 digit range, not only if you have an expensive taste.
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Old 04-07-2015, 06:25 AM   #7
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Does your $50,000 social security include COLA? I don't think one person qualifies for that much in today's dollars, even a high earner, so I think the answer is yes. You might want to think of it in today's dollars because you are thinking of your expenses in current $.

Also, you are aware that a big portion of your funds will be taxed (good job noting the buckets they are in so we can see how they will be taxed!) when they are withdrawn or used. So you could think about how you would pay for the condo to make your estimates more realistic.

You have a pretty sweet set-up right now, I must say!
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Old 04-07-2015, 09:17 AM   #8
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donuts, I interpreted the $50k as being for them as a couple (combined) so it would be COLAed.
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Old 04-07-2015, 09:31 AM   #9
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If I were in your shoes, I'd just decide to defer the condo purchase for a few years. Once you put that much time and money in a vacation home you will feel compelled to spend all of your away time there to justify the expense.

Once you are actually retired you might find you have an interest in road-tripping or extensive travel. You might find you don't mind the cold winters as much when you don't need to commute everyday. Some of your children might relocate to a warmer climate and have grandchildren you want to spend time with. My point is you are still pretty young to decide you want to completely settle down and commit all of your fun money to one option. This is certainly what happened to us in the late 50, early 60 stage we changed some of our ideas and plans. We almost bought a winter homes ourselves and now we have no interest in a second home, we relish our independence to go where and when we want to... or don't want too if that's our choice.
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Old 04-07-2015, 10:06 AM   #10
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I ran some quick "back of the envelope" flat line numbers.

Your taxable account goes from $1,488.000 to 1,338,000 once 25% tax is imposed on those long term gains. Yes, perhaps a bit high but one never knows what the government is going to do.
Your profit sharing account goes from $1,731,000 to 1,298,250 once taxed at ordinary income of 25%.
Your Roth stays the same at $824,000.

Final real net given these hypotheticals(your tax rate could be higher or lower) = $3,460,250.
Less the $750K for the condo = $2,710,250. A 3% SWAT = $81,307 net of tax withdrawal for 30 years. Some large portion of that will make you money since it is invested. Let's assume $2.5M allowing for a year or two or withdrawals. $2.5M at 4% = $100,000 assuming it is invested at 4%.
Conclusion: you ought to be making more money than you are withdrawing each year given a perfect world.
I think you can do it given the little we know. It just depends on how much you want it and only you can decide.

BTW: The Condo is really costing you over $50,000/yr. The $24,000 in carry cost plus the lost income potential on the $750,000 to buy it assuming you do not rent. ($750K at 4% = $30,000). (It's the way my brain thinks!!).

I have not factored in SSN or other potential income sources, market volatility, etc.

Your decision is not carved in stone. You can always sell it, rent it, etc.

I have been down this road a few times the last 3 years but have not purchased a 2nd home, yet. I understand the point of "if I don't do this then I will just be making my kids wealthy" - so "why not do this to increase the quality of our lives, etc.".

Good luck with your decision!
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Old 04-07-2015, 10:10 AM   #11
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Originally Posted by 123donuts View Post
Does your $50,000 social security include COLA? I don't think one person qualifies for that much in today's dollars, even a high earner, so I think the answer is yes. You might want to think of it in today's dollars because you are thinking of your expenses in current $.

Also, you are aware that a big portion of your funds will be taxed (good job noting the buckets they are in so we can see how they will be taxed!) when they are withdrawn or used. So you could think about how you would pay for the condo to make your estimates more realistic.

You have a pretty sweet set-up right now, I must say!
ssa estimates i would get 41,724/yr waiting until 70 and my wife would get 1/2 of mine when I file and suspend @ FRA or 16,404. this would be much larger than she would get on her own so that would continue. I believe there is a cap on family benefits at $54k/yr so my estimate of 50k/yr is conservative. also, my calculations do not include the 16k she would be receiving at 66yr 8 m of age.
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Old 04-07-2015, 10:18 AM   #12
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I wouldn't be crazy about the $24K - $28K yearly expenses and it puts you closer to the point of not being able to comfortably afford your lifestyle indefinitely. However, if the condo is in a good location you can always sell it at any given time.


Bottom line, if you really want the condo then go buy it. Monitor your expenses vs. income/portfolio and anytime you feel like it might get too tight, sell it. if all goes well, keep it.
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Old 04-07-2015, 10:29 AM   #13
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Do not underestimate the cost of nice furniture and other stuff to make the condo a (winter)home.
You'd probably do not want to travel back and forth with a trailer filled with everything from towels to blender.
Go though your home and add up the prices of all the small and not so small things you would expect to be available also in the winterhome.
You could quickly end in the 6 digit range, not only if you have an expensive taste.
yes you are right! we could very easily spend $150-$200K on renovation/furnishings. BUT, we have agreed that the only purchases we would commit to initially would be a king sized bed and a TV + any window coverings necessary to sleep. anything else would come from an excess of funds from either earnings or outsized market gains. we lived 6 1/2 years in our first house with a samsonite card table for the dining room and my in laws old living room furniture. we never furnished cause we then sold and moved to the current home! we haven't lived large or we wouldn't be where we are today!
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Old 04-07-2015, 10:37 AM   #14
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yes you are right! we could very easily spend $150-$200K on renovation/furnishings. BUT, we have agreed that the only purchases we would commit to initially would be a king sized bed and a TV + any window coverings necessary to sleep. anything else would come from an excess of funds from either earnings or outsized market gains. we lived 6 1/2 years in our first house with a samsonite card table for the dining room and my in laws old living room furniture. we never furnished cause we then sold and moved to the current home! we haven't lived large or we wouldn't be where we are today!
I have difficulty understanding why you would want to spend so much on a vacation condo and camp out in it almost empty. I know, location, location, location.

Personally, I would have more modest ambitions for my vacation property. Yes, of course you can sell it if things don't work out, but vacation property is discretionary and is the first to lose value in a downturn.
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Old 04-07-2015, 10:39 AM   #15
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Originally Posted by newenglandpat View Post
ssa estimates i would get 41,724/yr waiting until 70 and my wife would get 1/2 of mine when I file and suspend @ FRA or 32,808. this would be much larger than she would get on her own so that would continue. I believe there is a cap on family benefits at $54k/yr so my estimate of 50k/yr is conservative. also, my calculations do not include the 32k she would be receiving at 66yr 8 m of age.
Something doesn't add up with your numbers. If your SS benefit at 70 is $41K than your FRA benefit must be ~34K. That means your wife's spousal benefit is ~$17K. Also I don't understand your last line. Your $50+K does include her benefit.

At any rate; I think your financial position could support the purchase. I personally would wait to see what life brings.
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Old 04-07-2015, 10:42 AM   #16
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Originally Posted by sheehs1 View Post
I ran some quick "back of the envelope" flat line numbers.

Your taxable account goes from $1,488.000 to 1,338,000 once 25% tax is imposed on those long term gains. Yes, perhaps a bit high but one never knows what the government is going to do.
Your profit sharing account goes from $1,731,000 to 1,298,250 once taxed at ordinary income of 25%.
Your Roth stays the same at $824,000.

Final real net given these hypotheticals(your tax rate could be higher or lower) = $3,460,250.
Less the $750K for the condo = $2,710,250. A 3% SWAT = $81,307 net of tax withdrawal for 30 years. Some large portion of that will make you money since it is invested. Let's assume $2.5M allowing for a year or two or withdrawals. $2.5M at 4% = $100,000 assuming it is invested at 4%.
Conclusion: you ought to be making more money than you are withdrawing each year given a perfect world.
I think you can do it given the little we know. It just depends on how much you want it and only you can decide.

BTW: The Condo is really costing you over $50,000/yr. The $24,000 in carry cost plus the lost income potential on the $750,000 to buy it assuming you do not rent. ($750K at 4% = $30,000). (It's the way my brain thinks!!).

I have not factored in SSN or other potential income sources, market volatility, etc.

Your decision is not carved in stone. You can always sell it, rent it, etc.

I have been down this road a few times the last 3 years but have not purchased a 2nd home, yet. I understand the point of "if I don't do this then I will just be making my kids wealthy" - so "why not do this to increase the quality of our lives, etc.".

Good luck with your decision!
As to how I would pay for this: I can easily get to 350-400K from my taxable bucket (bucket 1) without hardly any capital gains pain between using cash and selling equities. ( I would likely re-buy the equities in bucket 2 to maintain my asset allocation) the remainder I was thinking of doing a PENFED 5/5 ARM (2.75% no points) as a cash out REFI on our current residence as it is basically paid off. I would then plan to pay it off before the rate reset.

I don't think short term rentals (while we are away) are an option nor would we want to. I would anticipate several additional trips to the condo during the other times of the year.

I'm am not sure I can go without dipping into the buckets until medicare but even taking partial draws of say 40-50K/year our portfolio SHOULD continue to grow with normal market conditions. Of course the unknown dreaded sequence of returns could play havoc with our plans!
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Old 04-07-2015, 10:47 AM   #17
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Something doesn't add up with your numbers. If your SS benefit at 70 is $41K than your FRA benefit must be ~34K. That means your wife's spousal benefit is ~$17K. Also I don't understand your last line. Your $50+K does include her benefit.

At any rate; I think your financial position could support the purchase. I personally would wait to see what life brings.
you are correct(thanks!) she will receive my 1/2 @ FRA of $16,404. add that to my $41,724 at age 70 and we will be over the max limit/yr. my other comment is that my calculations don't include her $16,404 between ages 66 and 70.
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Old 04-07-2015, 10:50 AM   #18
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I have difficulty understanding why you would want to spend so much on a vacation condo and camp out in it almost empty. I know, location, location, location.

Personally, I would have more modest ambitions for my vacation property. Yes, of course you can sell it if things don't work out, but vacation property is discretionary and is the first to lose value in a downturn.
only very temporarily!! Our goal would be to trick it out as soon as fiscally possible! if our 20 something kids have to crash on blow up beds for a year or so, oh well! life is tough!
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Old 04-07-2015, 10:51 AM   #19
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As to how I would pay for this: I can easily get to 350-400K from my taxable bucket (bucket 1) without hardly any capital gains pain between using cash and selling equities. ( I would likely re-buy the equities in bucket 2 to maintain my asset allocation) the remainder I was thinking of doing a PENFED 5/5 ARM (2.75% no points) as a cash out REFI on our current residence as it is basically paid off. I would then plan to pay it off before the rate reset.
Yes as it would leave more in your buckets to spin off some income. Was going to suggest something like this rather than using ALL of your own money.
You have plenty of "buffer". Let us know what you do.
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Old 04-07-2015, 10:53 AM   #20
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I wouldn't be crazy about the $24K - $28K yearly expenses and it puts you closer to the point of not being able to comfortably afford your lifestyle indefinitely. However, if the condo is in a good location you can always sell it at any given time.


Bottom line, if you really want the condo then go buy it. Monitor your expenses vs. income/portfolio and anytime you feel like it might get too tight, sell it. if all goes well, keep it.
yes, this where the rubber meets the road! On one hand why would anyone pay this much? On the other hand it is a lifestyle,security,upkeep,service and of course VIEWS! While I think we can swing this should we?? The question isn't the cost of the unit but rather the yearly carry cost. I can look at it as an annuity that throws off $28,000/year or a $700,000 nut if I do it myself with a 4% withdrawl and keep control of the money. It may pay to get a 2-person annuity using myself & my spouse when interest rates normalize to cover this and free up a chunk of the $700K. The cost is currently $600,000 for a 1 yr waiting pd to get 28K/yr and I give up the nut! Not worth it at this pt but might be in the future.
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