Vacation home considered part of your retirement assets?

[qwerty3656]

So we're recently retired and have a comfortable nest egg. Recently, we've had some discussion about whether we should get a seasonal home (say, for example, a small home in Florida).

Just to use simple numbers let's say we have a $1 million in IRA and are comfortable with that number as a retirement nest egg. If we take say $250k and pay cash for a home in Florida would you still consider that we have a $1 million nest egg? You can ignore taxes (most of our money is in Roth).

Edit: I guess one consideration is would our monthly expenses increase if we had a 2nd home.

 

[street]

If you feel comfortable with spending 25% of your nest egg on real estate I would do it. I personally would feel comfortable with buying real estate knowing I could resell it and be hopefully back to the 1M or better than what you started with.

So, yes. IMO

 

[MarieIG]

It is part of your net worth, although not part of your portfolio of investible assets.

It could be liquidated in the future, i.e. to pay for long term care - but the value of the home at time of liquidation would be uncertain (as would be the value of certain equities).

Of course, the carrying/ maintenance costs should be a consideration in your decision making process.

 

[38Chevy454]

It is part of your net worth, although not part of your portfolio of investible assets.

It could be liquidated in the future, i.e. to pay for long term care - but the value of the home at time of liquidation would be uncertain (as would be the value of certain equities).

Of course, the carrying/ maintenance costs should be a consideration in your decision making process.

What Marie said, the second home is part of your net worth, along with your primary house and savings. But that $250K is now out of savings and is not generating income (dividends and gains). The real estate may go up in value, which increases your net worth, but it is not income generating; at least until the future date you sell the second home and hopefully for increase over your purchase price.

I have a small snowbird place and it does have some ongoing costs for me. Prop taxes and HOA fees are the two main larger expenses, and electric being smaller.

 

[Car-Guy]

Yes, it's an asset, can be sold (at fair market value) and should be counted.

 

[cyber888]

If you have a "good eye" for real estate - meaning a great intuition for properties that appreciate fast. Then, you can use it for the meantime as a 2nd home, but if you get tired of it, you can always dispose of it and gain $ from the real estate investment..

If it is a beachfront condo, you should expect to pay a huge monthly HOA fee. So that could be a drain on your finances. Now, if you rent it out a couple of days a month, that could offset the HOA and maintenance fees.

 

[OldShooter]

It is part of your net worth, although not part of your portfolio of investible assets.

It could be liquidated in the future, i.e. to pay for long term care - but the value of the home at time of liquidation would be uncertain (as would be the value of certain equities).

Of course, the carrying/ maintenance costs should be a consideration in your decision making process.

This.

The thing about most individually held real estate, including a vacation home, is that it is relatively illiquid compared to a typical investment portfolio and transaction costs are high.

We just built a very nice second home but I don't really consider it to be an investment though it is part of our net worth.

 

[Aerides]

Networth - yes

Portfolio to determine your SWR - No

 

[qwerty3656]

Networth - yes

Portfolio to determine your SWR - No

Well. I guess that's what I'm asking. In my example, I would like to be able to withdraw $40k a year (with the understanding that if things go the wrong way, I would have to sell the vacation home).

 

[Aerides]

Well. I guess that's what I'm asking. In my example, I would like to be able to withdraw $40k a year (with the understanding that if things go the wrong way, I would have to sell the vacation home).

So the thing to remember is, real estate goes up, down, and sideways, and doesn't always sell fast.

Buy in 2020, sell in 2023? woo-hoo. You just made a tidy profit and will sell super fast to a cash buyer.

Buy in 2007, sell in 2010... Yeah good luck with that. In many markets houses dropped in half, and then took months and months to sell.

I don't think we're anywhere close to another 2008 situation in real estate, but I also don't think the next 3 years can repeat the last 3.

 

[Koolau]

If you were to make the vacation home a "money maker" then I'd agree it's net worth for purposes of your 4% withdrawal. Lot of issues with making money with a distant property. We did it years ago and counted the property for NW purposes (and though we weren't retired) we counted the property as if we could draw from it (because we could easily sell the property.) YMMV

 

[OldShooter]

Well. I guess that's what I'm asking. In my example, I would like to be able to withdraw $40k a year (with the understanding that if things go the wrong way, I would have to sell the vacation home).

SGOTI can't give you an approval on that. The question is part of a much bigger personal picture which only you know about.

That said, you can masticate this idea and consult SGOTI to whatever degree you like, but none of that will yield any better prediction of the future than you have right now. Which is: None of us have a clue, so we have created various defensive positions for ourselves. Would I lock up 25% of our liquid assets anticipating a hypothetical 40% market drop lasting 3 years. Nope. SORR too high.

Good luck to you.

 

[PaunchyPirate]

I don’t count my primary house as part of my retirement portfolio. Nor did I count 2 other homes (non-rentals) that I previously owned as part of my retirement portfolio. I considered it as part of my current net worth, but not my portfolio. When I sold the 2 other homes, most of the proceeds went into my investment accounts and thus became part of my retirement portfolio. That’s just the way I viewed it. I never trusted the longevity of the value of the homes until they were sold.

 

[audreyh1]

In our case we withdraw a % of our portfolio (invested assets) for annual income covering living expenses etc. If 1/4 disappeared into a house, our annnu income would drop 25%. For someone with substantial pension and social security this may not be a big deal especially if SS and pension cover annual living expenses.

So in your example you go from withdrawing $40K a year to $30K a year.

Plus you have to look at how a 2nd home would increase your annual living expenses.

 

[brett]

Apart from affordability, the percentage of your resources that it represents, the thing to consider is the 'indivisibility' of real estate. All or nothing so to speak.

We traveled in Costa Rica for eight weeks a number of years ago. The NA economy was not doing well at that time The prices of vacation homes/condos tanked. These appeared to be the first assets that many were willing to sell.

Not certain how it is in other parts of the world. At the time we were only considering Costa Rica and Mexico. Decided against both in preference to going to somewhere different each winter. At some point we could buy and do five months in Mexico.

We do not regret our decision.

 

[Luvtoride]

Qwerty, I understand your question from a financial/portfolio perspective but I think a larger part of the decision should be your expected enjoyment/ usage.

Why do you want to exchange part of your retirement portfolio for a vacation home? How much and when will you use it? Will family visit/ use it? Do you intend to use it as a rental property for some of the time?

As noted by Brett, there are other travel options that might work and be manageable (and more flexible) financially. It depends on what your expectations are for the vacation home.

I am retiring in 3 weeks. We bought a vacation home at the beach which is an hour away from our primary home, 6 years ago. We and our family use it extensively and love spending time here. My wife and I will spend more time here when I retire.

Yes, the equity (it’s value has risen almost 50% since we bought it) is part of our Net Worth, but we still enjoy it a heck of a lot more than seeing the assets we used to purchase it in our investment portfolio.

Good luck.

 

[LateToFIRE]

This is a topic near and dear, as a significant portion of our NW (~1/3) is held in real estate, both our primary home, vacation home, and rental property. I'm nearing retirement over the next year or so at which point will probably simplify to only the home we will retire to plus maybe a condo in a warmer climate (as perhaps you are considering).

For retirement planning purposes, I run two WD rates, one including r.e. and one excluding r.e. I sleep best at night when the % WD rate excluding r.e. is still adequate.

The way I see it, the r.e. is the safety valve. Yes, it is illiquid, so if you need to sell in the future, timing will be a very critical factor. And yes, also there are expenses associated with a vacation home, though if you're looking at something like a condo, those expenses are relatively predictable. But, it is an asset, and if chosen carefully, I would consider it an investment, just of a different sort. Personally, I've done extremely well in this asset class. As I plan out retirement, I've built in sale of r.e. at various points in time to bulk up the investment portfolio - ultimately figuring we will downsize later in retirement to a condo or assisted living arrangement in our 80's - by that time with conservative appreciation and mortgage amortization assumptions will unlock a very substantial dollar value of equity - enough to carry us through to the end in the event we've somehow exhausted all else - again, I run my numbers with and without the r.e. transactions just to be sure I'm not overly reliant on something that is very illiquid.

 

[Gumby]

You could run FIREcalc with the value of the second home excluded from the current portfolio, but then designate it as a portfolio addition at some point in the future (I would use its current value). See how that affects the outcome.

 

[street]

Some great advice giving for the OP. I also agree it should be only used be in your NW numbers. The vacation home still is there to sell if needed and is an asset so in my thinking, you still have that dollar amount you started with if sold and hopefully for more.

 

[Dawg52]

I'm on the fence on this one so I calculate my assets with and without my vacation condo. Normally w/o. It doesn't drastically change the percentages in my case.

 

[LateToFIRE]

You could run FIREcalc with the value of the second home excluded from the current portfolio, but then designate it as a portfolio addition at some point in the future (I would use its current value). See how that affects the outcome.

That's an excellent suggestion and pretty much how I do it. I use FIREcalc to sanity check my plan and do almost exactly that - I will run two scenarios, with and without the sale of real estate in the plan.

However, I do growth the r.e. by 1.5% annually, which is conservative relative to historic norms in my region and I do account for mortgage amortization, as keeping my very cheap mortgage rate.

 

[LateToFIRE]

This is a topic near and dear, as a significant portion of our NW (~1/3) is held in real estate, both our primary home, vacation home, and rental property. I'm nearing retirement over the next year or so at which point will probably simplify to only the home we will retire to plus maybe a condo in a warmer climate (as perhaps you are considering).

For retirement planning purposes, I run two WD rates, one including r.e. and one excluding r.e. I sleep best at night when the % WD rate excluding r.e. is still adequate.

The way I see it, the r.e. is the safety valve. Yes, it is illiquid, so if you need to sell in the future, timing will be a very critical factor. And yes, also there are expenses associated with a vacation home, though if you're looking at something like a condo, those expenses are relatively predictable. But, it is an asset, and if chosen carefully, I would consider it an investment, just of a different sort. Personally, I've done extremely well in this asset class. As I plan out retirement, I've built in sale of r.e. at various points in time to bulk up the investment portfolio - ultimately figuring we will downsize later in retirement to a condo or assisted living arrangement in our 80's - by that time with conservative appreciation and mortgage amortization assumptions will unlock a very substantial dollar value of equity - enough to carry us through to the end in the event we've somehow exhausted all else - again, I run my numbers with and without the r.e. transactions just to be sure I'm not overly reliant on something that is very illiquid.

I should have added, for perspective, that once retired, and having liquidated non-essential r.e., that the value of our home will be less than 20% of our total assets.

 

[dknighd]

I would consider the purchase of a vacation home as a life style choice.
But I would also consider it part of my assets. I'm retired, so by default it would be part of my retirement assets.
I occasionally think about buying a vacation home. But for now have to decided to rent as needed.
My Dad made a lot of money by buying and selling a vacation home. But I consider that lucky.

 

[MarieIG]

I should have added, for perspective, that once retired, and having liquidated non-essential r.e., that the value of our home will be less than 20% of our total assets.

IIRC - there was a poll on that at one point. (Probably Midpack initiated - as may polls are. )

 

[Koolau]

I've mentioned elsewhere my "crazy" RE vs NW play. When I lived in a tri-level on the mainland (about $150K value) I did not count it in my NW. At the same time, I had a town house in the Islands which was rented out. (about $300K value at the time.) I counted the town house as part of my NW (invested.)

When I moved to the Islands, "suddenly" my invested NW went down because the Town House was my now my home and my previous house was an asset (that I was about to sell.) It gets complicated and it's also a bit philosophical so YMMV.