If you’re 65 with $3 million saved, then yes, you can buy a vacation home: congratulations! But you should only purchase that second home under certain circumstances — or you may get a double dose of regret when you turn 66.
The good news is that you are ahead of your peers on a broad level. The average net worth of someone your age is about $1,794,600, and the more accurate (i.e., less skewed by wealthy outliers) mean net worth is only $409,900. Remember, that's net worth, which includes all of your assets, not just savings, so you're lucky indeed.
Of course, your decision to buy a vacation home will hinge mainly on the cost of that home and your priorities. But there are a few factors to consider when making your choice.
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Buy a vacation home only if you can handle opportunity cost
A $3 million nest egg at age 65 puts you in a strong position to cover your retirement expenses, provided they’re reasonable. If you apply the famous 4% rule to your nest egg, $3 million gives you the leeway to grant yourself a $120,000 annual salary. And that’s not counting income from Social Security.
Qualifying for a mortgage in retirement can be challenging, since you don't have job-related income. But if you’re buying a vacation home mortgage-free, your $3 million is going to be whittled down. How much? That depends on the cost of your vacation home.
Even if you don’t buy that vacation property outright, or you get it for a steal, there are ongoing expenses you’ll need to contend with. All homes need to be insured and maintained. There are also property taxes and utilities to cover.
You’ll need to add up the total expense of owning that home and figure out what other aspects, if any, of your lifestyle you’ll need to give up. You may find that a vacation home takes the place of international travel, for example. And that may be just fine. But understand what you’re losing as well as what you’re gaining.
And if you dip into your savings to finance the second home, your money will no longer earn investment income as it would likely do in a diversified portfolio. While you may be lucky and get a good return on investment from your vacation home if you need to sell, there's no guarantee you will. In many cases, the appreciation of your vacation home value is offset by the costs of owning and maintaining the property. Moreover, your vacation home investment isn't liquid, so easy cash is out of reach in case of an emergency.
The work involved when you own a vacation home
It’s no secret that owning a vacation home is expensive. But there’s also the time you’ll need to put in to keep it in good shape that you must think about.
If you’re 65 and retired, you may have time on your hands to fix up a vacation property and perform regular maintenance tasks on top of tending to your primary home. If you’re still working, or working part-time, your hours may be more limited, at least initially.
You’ll also need to ask yourself whether it’s work you want to do. If joint achiness or arthritis is starting to creep in, you may not relish the idea of having more bushes to trim, more countertops to scrub, more bathroom tiles to re-grout and more leaky faucets to battle. But if you love DIY projects, fixing up your home might be a great hobby in retirement.
Will you actually use your vacation home?
You may be picturing a vacation home you escape to regularly for peace and quiet or a change of scenery. But before you start making offers, think about how often you’ll actually use that property.
A Pacaso survey found that 59% of existing and expectant second-home owners visit or intend to visit more than four times a year. But that means a good chunk of vacation property owners may not be getting great use out of their second homes.
Location, of course, will be a big part of that. A vacation home that’s two hours away by car is one you might use more often than one requiring a three-hour flight.
But think about whether your expected usage is worth the cost and effort. You may find that it’s less expensive — and less of a hassle — to rent a home in your favorite vacation spot a few times a year rather than own one yourself.
That said, if you only expect to use your vacation home sporadically but like the idea of having it available as an option, you could consider renting it out on a short-term basis during periods when you won’t need it. If the home is generating some rental income, you can offset your ownership costs — perhaps so much so that you can justify the expense of a property manager. Just be aware that renting out your vacation home comes with specific tax rules you should know before making a purchase.
A property manager might give you the best of both worlds — your own private vacation escape without having to do the maintenance yourself. But work closely with a real estate agent who knows the area and make sure rental laws or HOA rules, if applicable, won’t get in the way of those plans.
Even if nothing is barring you from renting out your vacation home on a partial basis, there could be backlash from neighbors to consider. And nothing makes a vacation home less peaceful for the times you do want to use it than scowling neighbors.
Do your research
The U.S. economy and housing market are in a state of flux, to put it mildly. Most Americans say it's a bad time to buy a home, given high mortgage rates and economic uncertainty. So, before you buy, do rigorous research. Consider how tastes are changing, as fewer people want to retire to Florida, for example, compared to the past. Also, investigate the risk of flooding or wildfires near your new home, keeping in mind that these problems are predicted to worsen. You should also check if your dream home is in a zip code where home insurance rates and claims have skyrocketed.
If you do your homework and find a great location that makes sense for your retirement security and happiness, then go for it! Life expectancies may be longer these days, but the adage that "life is short" still seems to apply. Don't be so averse to spending your retirement savings that you miss out on making some sweet memories.
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