House Rich Cash Poor Retirement?

[Mountain skier]

I request your insights and opinions on a retirement scenario. My conservative nature is challenged by this scenario. We are considering a major change: going from a house that is worth $350K to $1M...thus our liquidity would go from $1.35M down to $700K.

Age: 60, both DH and DW. We are both retired
Yearly living expenses: $60k (actually $40k- allow $20k for vacations, etc)
DW pension $35k/yr non-cola 100% joint survivor (if she passes before me I still receive same yearly amount)
SS...wife at 62 $15k, at 64 $17K..considering taking at age 64; husband at 67 $25,600

If we bought expensive house we would greatly reduce travel and use the $ to pay the much higher property taxes, insurance, etc. Thus our $40k expenses probably jump into the $50k-$55k range.

Our AA: 27/73 (cash, not bonds)

Is this a feasible idea? I realize my financial comfort level would drop quite a bit. What do you folks think about this?

Thanks

 

[Dtail]

I put your numbers into Firecalc and it produced a 100% success rate and a maximum yearly spending of 75k.
If this house is your special retirement haven, it sounds like you are in good shape.

 

[Surewhitey]

Will the maintenance, insurance, etc. be substantially more too? I wouldn't be comfortable personally...

 

[Aerides]

If you're both on board with the reduced travel, and the home has the amenities and location you both absolutely love, then it can work. Of course, a bigger house (assuming it's bigger and not just a location upgrade) would mean more upkeep/maintenance budget.

But do be very sure on the house prices right now - those $1m listings are probably getting bids more like 1.1. Of course your $350k house might sell for $400. Just be careful on the timing as you don't want to be selling your home then finding the $1m is now $1.2, etc.

 

[Bamaman]

The question is how cheap are you buying the house? Current market value? Or, is it a buy too good to pass up? Could you turn that house any day and get back your initial investment?

I ask these things because you may be the most middle class person in your neighborhood. And money doesn't grow on trees when you're no longer working.

My sister had a condo in Aspen for 15 years, and she sold it in 2007 at the top of the market. With the proceeds, she bought a house in the NC mountains that's now worth $1.5 million plus a LearJet 45 to fly back and forth in.

 

[Jerry1]

Not for me. I like having just the opposite - cash plenty, house minimal. In the end, financially, you can probably make anything work, including what you’ve outlined. Therefore, do some soul searching and make sure that’s how you want to live your life.

Personally, I like knowing that if I over spend, things will be fine. I would not want to put myself in a situation where I know going in that the budget is tight. I’ve outlined this in other posts. My necessity budget is around half of my working budget. If things go south, that difference represents cushion. I didn’t do the math, but I think your cushion is too low. Of course it’s an individual decision so think this through.

What are you going to get out of the more expensive house. I have a friend that bought way more house than me, but it comes with a lifestyle that suits him well. It’s in a Del Web community and that comes at a premium. Houses in California come with a completely different weather scape than most other states. That also comes an ability to experience a different lifestyle. If all you’re getting is more space, I caution you that it will fade quickly.

 

[Mountain skier]

Not for me. I like having just the opposite - cash plenty, house minimal. In the end, financially, you can probably make anything work, including what you’ve outlined. Therefore, do some soul searching and make sure that’s how you want to live your life.

Personally, I like knowing that if I over spend, things will be fine. I would not want to put myself in a situation where I know going in that the budget is tight. I’ve outlined this in other posts. My necessity budget is around half of my working budget. If things go south, that difference represents cushion. I didn’t do the math, but I think your cushion is too low. Of course it’s an individual decision so think this through.

What are you going to get out of the more expensive house. I have a friend that bought way more house than me, but it comes with a lifestyle that suits him well. It’s in a Del Web community and that comes at a premium. Houses in California come with a completely different weather scape than most other states. That also comes an ability to experience a different lifestyle. If all you’re getting is more space, I caution you that it will fade quickly.

The location we are thinking is near the Pacific Ocean and yes house prices are quite high. It is not the size of house but location and lifestyle it offers that we are interested in.

But I agree with you in that I have always preferred to have most of our net worth in liquidity not housing...so this would be the direct opposite....which is a bit concerning and why I am seeking counsel.

It appears we can financially do this but a concern is if the real estate market has a big correction...suddenly our primary part of our net worth would drop potentially a lot. The liquidity part of our net worth would be lower with this purchase and if there is a big real estate correction one can see the danger in this scenario.

 

[Ramen]

Not for me. I like having just the opposite - cash plenty, house minimal. In the end, financially, you can probably make anything work, including what you’ve outlined. Therefore, do some soul searching and make sure that’s how you want to live your life.

Agree.

OP, I think you're answering your own question. Pensions and SS are birds in the bush, not in the hand. You're thinking about sinking more than half of your net worth into a house, an about face from your original plan to travel a lot. Sounds impulsive and limiting to me. On the other hand, if the housing market stays hot for a while longer, you could flip the house if it didn't work out.

How about going on a nice long trip right now and clearing your head for a couple of weeks? Then see how you feel when you return.

 

[Sunset]

OP - What about other costs, like State taxes will this be a +/- effect.

Have you considered for the lifestyle, to just vacation there for a few months per yr. Sort of like snowbirding, but to the West.

 

[RetireeRobert]

Agree.

OP, I think you're answering your own question. Pensions and SS are birds in the bush, not in the hand. You're thinking about sinking more than half of your net worth into a house, an about face from your original plan to travel a lot. Sounds impulsive and limiting to me. On the other hand, if the housing market stays hot for a while longer, you could flip the house if it didn't work out.

How about going on a nice long trip right now and clearing your head for a couple of weeks? Then see how you feel when you return.

+1 Some good advice, that ^

 

[ncbill]

The location we are thinking is near the Pacific Ocean and yes house prices are quite high. It is not the size of house but location and lifestyle it offers that we are interested in.

But I agree with you in that I have always preferred to have most of our net worth in liquidity not housing...so this would be the direct opposite....which is a bit concerning and why I am seeking counsel.

It appears we can financially do this but a concern is if the real estate market has a big correction...suddenly our primary part of our net worth would drop potentially a lot. The liquidity part of our net worth would be lower with this purchase and if there is a big real estate correction one can see the danger in this scenario.

How well will it work as you age?

Can it be set up for one level living?

Close enough to doctors, hospital, etc.?

Don't remember if it was on this forum but I read about a couple who purchased their dream home in the mountains but found a decade or so later they could no longer walk their property.

 

[Sniggle]

DW and I are heading down that same path. We will be building, but by the time the property is set we will be into it for $1 million, or maybe a little more if the damn lumber prices do not revert to the mean.

If you are good with the lifestyle of the home and surrounding area, and the numbers work with some wiggle room, go for it.

When I was trying to get my head around spending a chunk of our retirement savings on a new home, I finally found comfort in the simple premise that I have saved for 35 years so I could do something like that if I so decide. I do not believe there is a wrong answer on how to spend your retirement savings, as long as you can continue to fund your basic living expenses ( basic can mean restaurants 3 times a week or whatever).

 

[pjigar]

Like lot of people mentioned, think about ongoing expenses. There are a lot extra costs of large home ownership so don't under estimate them. Namely:
1. Visible costs: maintenance, utility, insurance and taxes
2. Invisible: cleaning, keeping up with Joneses, higher price tag for repairs, "upgrades", etc.

I have seen this personally first hand. Our monthly house related "visible" expense went up about 90% even when our house price was only 65% more than the old house. I am not even counting invisible expenses. We finally moved to a smaller house in preparation of FIRE (down to the same hose related expenses we had 20 years ago and even smaller house than 20 years ago). My personal lesson is that bigger houses are over rated. But to each of their own. By the way, bigger houses are VERY good for the economy.

Particularly you don't have any control over taxes and insurance. I just don't like the idea that I have to pay "rent" to the government for living in my own house. I am OK with the income tax but funding government using property tax is just wrong to old and/or poor people. A topic for a different debate. Back to the topic: Also the "visible" house related costs are always inflating more than the core inflation so be mindful about that.

Another angle to look at: Lenders prefer 30-40% maximum debt service ratio (for a reason). If you apply similar ratio to the networth then you should also come up with maximum price of an "affordable house". Food for thought.

Do you want to leave inheritance? If no then bigger house is just that: large inheritance to "someone". That someone may be heir(s), charity or simply a reverse mortgage holder.

All in all, personally I would NEVER do it. But I wanted to give you some objective arguments listed above.

 

[Exchme]

I recommend OP run those retirement ages through opensocialsecurity.com, they seem a little random.

Also, OP needs to make sure he understands the property tax, the existing owner might have been protected by Prop 13, your tax will be reset to today's value. If for instance you have to pay 2% of $1M in taxes, not sure your finances look so good. Also, the cost of living can be high there as everyone has to charge more because of high land cost.

I don't understand holding so much cash, do you really know more about the future than every one else in the world that participates in the bond market?

If the inflation you must think is coming actually arrives, the cash and pension will get hurt, stocks might weather that better.

 

[pb4uski]

I put your numbers into Firecalc and it produced a 100% success rate and a maximum yearly spending of 75k.
If this house is your special retirement haven, it sounds like you are in good shape.

+1 It sounds like financially you would be fine. You might give yourself more flexibility by fundingme of the purchase with a mortgage after the purchase... IOW, purchase for cash and then consider a mortgage to replinish cash.

That said, I'm not sure I would do it. At first blush $1m sounds like a lot of property to take care of.

 

[Mountain skier]

The area we are considering: housing is quite expensive...$1M for 1500 sq ft homes built in 1970's-1990's...problem could be in having to upgrade or fix existing issues. The houses aren't necessarily large but older.

But the issue becomes do we go for lifestyle...does one "go for it"?...being house rich cash poor to live in an area for lifestyle.....it is a dilemma.

 

[RunningBum]

It doesn't sound like you'll be *that* cash poor. It probably amounts to trading some vacations to live a better lifestyle the rest of the time. Decide what is more important to you.

 

[finnski1]

It doesn't sound like you'll be *that* cash poor. It probably amounts to trading some vacations to live a better lifestyle the rest of the time. Decide what is more important to you.

^ +1

 

[tb001]

Previous posters have brought up good points about property taxes etc. I don’t know where you live now, but you may also want to factor in increased COL in your new area. Also look into how your habits may change. E.g. If it’s in a more urban walkable area are you going to be eating out more often? Also don’t underestimate ‘switching’ costs of a new home.

If you’re confident in your new expenses/numbers, and firecalc still works, then why not. We made a similar choice and love where we live. The biggest unplanned hit to the budget has been work we’ve had done to upgrade/settle in to our forever house. We still have a long list of projects we’d like to do, but will wait to see if the market cooperates.

The biggest issue, imo, is whether the change in day to day lifestyle is worth the trade off in other areas. For us, it was a no brainer, but others may have different priorities.

 

[OldShooter]

... It probably amounts to trading some vacations to live a better lifestyle the rest of the time. ...

A slight rephrase might be:

"It probably amounts to trading some highly controllable and discretionary expenses for predictably increasing and uncontrollable expenses."

Coastline? California? From an investment point of view, California is a Sell or even a short. Not only is the population declining, the departing folks are more likely to be the ones who can afford $1M houses, and the immigrants are mostly folks who cannot. So a significant demographic risk. Other risks include fires and earthquakes where, even if your area is untouched, the damage has to be paid for. "Federal money" is wild card of course, but you can bet that people in the midwest and in most red states are getting tired of bailing out people who have chosen geographically risky locations. More and more of the California disaster costs will be paid for by California taxes.

Other coastline locations need to be looked with investors' eyes, IMO. IMO Florida's hurricane costs will more and more be borne by Florida taxpayers, for example.

 

[SALTedOut]

Our AA: 27/73 (cash, not bonds)

Thanks

Just to make sure I understand, you are 73% cash? Any concern your remaining portfolio will not be able to keep up with the cost of living?

 

[pb4uski]

The area we are considering: housing is quite expensive...$1M for 1500 sq ft homes built in 1970's-1990's...problem could be in having to upgrade or fix existing issues. The houses aren't necessarily large but older.

But the issue becomes do we go for lifestyle...does one "go for it"?...being house rich cash poor to live in an area for lifestyle.....it is a dilemma.

With a mortgage you can have the best of both worlds... take the $350k value of your current home as a down payment and get a $650k mortgage. At 3%/30 years that would be $2,750/month but your home equity would be the same $350k as it is today. The $2,750 (plus increased property taxes and other costs) is the cost of the lifestyle choice.

As long as your portolio return exceeds your mortgage rate then you are good.

 

[Mountain skier]

With a mortgage you can have the best of both worlds... take the $350k value of your current home as a down payment and get a $650k mortgage. At 3%/30 years that would be $2,750/month but your home equity would be the same $350k as it is today. The $2,750 (plus increased property taxes and other costs) is the cost of the lifestyle choice.

As long as your portolio return exceeds your mortgage rate then you are good.

Interesting idea...thanks pb4uski

 

[OldShooter]

With a mortgage you can have the best of both worlds... take the $350k value of your current home as a down payment and get a $650k mortgage. At 3%/30 years that would be $2,750/month but your home equity would be the same $350k as it is today. The $2,750 (plus increased property taxes and other costs) is the cost of the lifestyle choice.

As long as your portolio return exceeds your mortgage rate then you are good.

Not necessarily criticizing, but this is essentially the same as buying on margin, right? Arbitrage the certain loan rate vs the hoped-for investment gains.

 

[Sunset]

With a mortgage you can have the best of both worlds... take the $350k value of your current home as a down payment and get a $650k mortgage. At 3%/30 years that would be $2,750/month but your home equity would be the same $350k as it is today. The $2,750 (plus increased property taxes and other costs) is the cost of the lifestyle choice.

As long as your portolio return exceeds your mortgage rate then you are good.

I think this is a good idea/bet , one I'm personally tempted with should we move.

I think the market over the next 30 yrs will return on avg more than 3%, plus now that inflation appears to be over it's decline, the inflation will drive indexed things like SS to increase possibly even higher than 3% in some years.

OP would have mortgage interest costs of $19,500 add in the high property tax and they probably will be itemizing their deductions for the next decade.