Dreaming of a Vacation Home In Retirement? Here's a Reality Check
It might be a dream for many retirees, but the financial realities of owning a second home can make it a bad investment.
For people getting ready to retire, buying a vacation home is often at the top of their list of priorities. But it may not be a wise investment.
You may dream of purchasing a second home for a number of reasons: Perhaps you envision it as the centerpiece of family activities—a place where your children and grandchildren can come together for a week or more every year. It's the place where the family can reconnect, enjoy fun activities and spend quality time. Or maybe you like to spend time near the beach or in the mountains or in a part of the country that has long interested you. Or maybe it can be your reward for working hard and accomplishing your goals during your working years.
Unfortunately, your vision of how the vacation home will be used sometimes does not match reality. As a result, it can take a large bite out of your finances.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Here's how that scenario often plays out: You and your spouse take the plunge, and buy a family vacation "compound." But with increasing job responsibilities and the demands of raising your grandkids, your adult children find less time to travel. Let's say you have two or more adult children—all with families. Finding time when everyone can come together at the vacation home becomes harder each year.
On top of that, you might even find you don't have the time to use your dreamy retreat either. As you get older, the physical demands of travel may restrict your ability to get away, and the place gets used less frequently than you had imagined.
Unfortunately, once the purchase is made, the home may have a number of fixed costs that can start to eat into your cash flow and possibly your retirement portfolio. Property taxes, homeowner's insurance, utilities, landscaping and other general upkeep of the property can easily amount to $2,500 a month or more.
The crowning blow is that, over time, the property may not appreciate and could possibly even lose value.
Several years ago, one of my clients purchased a vacation home in the Tennessee mountains. But after his adult child moved north as part of a job promotion, the retirees ended up traveling there to see their grandchildren often and rarely used the vacation home.
In addition, the mountain property didn't appreciate much over time, so the main reasons for buying the home were nullified. The retiree and his spouse sold the home, but the proceeds were barely enough to cover the mortgage, meaning that they had little to reinvest.
In terms of lifestyle and finances, consider this well-worn phrase when making financial decisions in retirement: "Rent the best, and invest the rest."
Rather than buy a vacation home, consider taking vacations in different places every year, perhaps places you've always dreamed of visiting. Because a couple in retirement often looks forward to vacations with their grandchildren, think about how new locations will appeal to everyone, especially as the grandchildren grow older.
For example, when the grandchildren are young, beach vacations may be fun for everyone. But when they become teenagers, the grandkids may want to try other experiences such as cruises, trips to large cities, Major League Baseball games and other, more active vacations. These teenagers may prefer to take trips in which they can get away from the rest of the family and enjoy some personal time—and a secluded mountain house simply doesn't meet those needs.
Most couples have worked a lifetime and invested wisely so that they can enjoy their retirement. Before deciding that owning a second home is the right move for you, consider your objectives carefully and speak to others that have been through this experience.
Lisa Brown is a partner and wealth advisor at Brightworth, an Atlanta wealth management firm with $1.2 billion in assets under management.
Lisa Brown, CFP®, CIMA®, is author of "Girl Talk, Money Talk, The Smart Girl's Guide to Money After College” and “Girl Talk, Money Talk II, Financially Fit and Fabulous in Your 40s and 50s". She is the Practice Area Leader for corporate professionals and executives at wealth management firm CI Brightworth in Atlanta. Advising busy corporate executives on their finances for nearly 20 years has been her passion inside the office. Outside the office she's an avid runner, cyclist and supporter of charitable causes focused on homeless children and their families.
-
Tax Breaks That Get Better With Age
Tax Breaks Depending on your age, several tax credits, deductions, and amounts change — sometimes for the better.
By Kelley R. Taylor Published
-
How Inflation, Deflation and Other 'Flations' Impact Your Stock Portfolio
There are five different types "flations" that not only impact the economy, but also your investment returns. Here's how to adjust your portfolio for each one.
By Kim Clark Published
-
Opportunity Zone Investing Still Hot Despite Looming Sunset
Tax incentives and rise of niche fund strategies make the qualified opportunity zone program an attractive way to grow tax-free wealth.
By Daniel Goodwin Published
-
Seven Costs Landlords Underestimate When Setting Expectations
Many landlords might expect their real estate investment properties to rake in a return on investment of 8% to 10%, but often it’s actually 1% to 2%.
By Brian Evans, CPA, PFS Published
-
Workplace Financial Coaching Has Become Ever More Important
Employees face growing challenges to their financial wellness today, so it’s more critical than ever that employers provide the help they need to navigate them.
By Greg Ward, CFP® Published
-
Six Reasons to Use a Real Estate Agent When You Sell
So many financial factors depend on the outcome when you downsize for retirement that enlisting a professional can be well worth the price.
By Evan T. Beach, CFP®, AWMA® Published
-
Three Reasons Not to Use a Real Estate Agent When You Sell
While this financial adviser doesn’t recommend taking that route, he does see scenarios where it could make sense for you.
By Evan T. Beach, CFP®, AWMA® Published
-
Why Can’t You Ever Use Your Timeshare?
If you find yourself with a timeshare that never seems available to you, that could be because your bookings are competing with non-timeshare-owning customers.
By H. Dennis Beaver, Esq. Published
-
Four Reasons to Tap Opportunity Zones Before They Expire
As a provision in the Tax Cuts and Jobs Act, opportunity zones could sunset at the end of 2026, but there’s still time to maximize major tax benefits.
By Daniel Goodwin Published
-
Why Ground Lease REITs Are Building in Popularity
As more property owners in need of liquidity use ground leases to unlock capital, real estate investors could reap the rewards.
By Jim Small Published