‘I’m no hedonist’ but I want to build our next home for retirement, my wife says no. We’ve saved $3 million. What should I do?
Dear MarketWatch,
I’m 57 and my wife is 55. We have no children and no debt. We own our house and vehicles outright. My wife is a corporate accountant and earns about $150,000 a year. I recently retired from public service with a pension worth $104,000 a year. Our health benefits currently cost $160 per month and will increase contractually roughly 3.5% every year until Medicare, at which point they become secondary without cost of living adjustments. Our current cash burn is less than my pension and our current savings, primarily 401(k) and 457(b) plans and posttax market accounts is around $3 million. Included in that figure is about $450,000 cash from the sale of a house. Those funds are earmarked for the purchase of a house we are building.
The new house will end up costing about $850,000 and we plan to take a mortgage for the remainder rather than pull investments or sell our current home. The mortgage payment will just about equal the remaining pension income, however our current home would become a rental worth $30,000 a year and would negate that. There is also $40,000 a year in dividend earnings which gets reinvested.
So what’s the problem?
My wife. Her family struggled and she’s no stranger to third-hand clothing and very used cars. She’s definitely kept me in check over the years, and we’ve both worked very hard to get where we are. For years, our original plan was that she would retire along with me and we’d do some traveling, however her employer made her a great offer to keep her on board. We talked about it and she accepted, so she now works from home, putting in 10-hour days during her “retirement”. I have begun a venture which has yet to bear fruit, but I have plenty of downtime and would like to do more with her. We live in Florida and have been to the beach twice in the last 14 months!
Though we discussed the new house extensively and spent plenty of time crunching numbers she maintains that it’s an outrageous extravagance. Our current home is worth about half of what the new one is. Now, I’m no hedonist. I’ve done a great deal of my own home improvement work and do my own brakes. I think we can afford to build the new house, have her retire (or at least step into something part time), live off of our investments, and even do more traveling and living. I’m concerned she fears for no reason, but I also feel some guilt about what I want.
Thoughts?
Dear Reader,
First, it’s great that you were able to amass such a lofty retirement nest egg and that you’ve already begun to enjoy your own retirement years. It sounds like your wife wants to take the slow and steady approach to her retirement, and that also makes complete sense. Sometimes, it doesn’t matter how much money people have saved — there are still reasons why they may be attached to their jobs or income.
As it stands, and as you may already know, you are currently already in good financial shape to both be retired and pursue your goals, said Michael Peterson, a certified financial planner and founder of Faithful Steward Wealth Advisors. Of course, this is based on the figures you provided and some standard assumptions about Social Security benefits in the future. If you’re spending less than your net pension income even after the new mortgage and rental income occurs, you both could be comfortable in retirement, said Julie Hall, a certified financial planner at Vision Capital Partners.
Again, this is based on the figures you provided and some general assumptions — a financial planner can work with you to go over all of the details and determine whether any variables stand in your way of a secure retirement.
I know you asked about what to do regarding homebuilding and discussions with your wife but I first wanted to point out a few other considerations you should make for your retirement.
For example, you may want to look over your current investment strategy and ensure it is aligned with your goals and needs, Peterson said. He suggested refocusing your portfolio to become more income-oriented, as opposed to growth-oriented. Many people do systematic withdrawals, which is when they have scheduled distributions from their retirement assets, but it’s not always the best option for investors. Instead, consider consulting a financial planner who could help you understand all of your investment options and seek the best portfolio construction to generate the income you’ll need to support your goals in retirement.
Along with asset allocation, be aware of your tax planning. You didn’t mention any Roth accounts, but either way, you might want to consider a Roth conversion — where you roll over a portion of your taxable retirement assets into a Roth account and pay the taxes on that distribution now. Whether or not a Roth account is best for you depends on numerous factors, but if you’re in a relatively low tax bracket right now — or anticipate you’ll be in a higher one later in life, it could be a good move. It will also help you diversify your tax liabilities when you’re older.
You mentioned your healthcare expenses and Medicare, but you might also want to look into long-term care options now, Peterson said. “The one thing that could possibly derail their retirement plan would be for one of them to require nursing home care,” he said. “If they need to pay out of pocket for care, the resulting drain on assets may leave the healthy spouse without sufficient assets to maintain their lifestyle.” You’re “prime candidates” to seek long-term care options, and see if an insurance policy is right for you. Here’s more on that.
And of course, have all of your estate documents in order. This includes healthcare proxies and wills. These are never fun conversations to have, but they will make life so much simpler for the surviving spouse during such a stressful and emotional moment.
Also see: Here’s how to help yourself and your family ‘in case you get hit by a bus’
Back to the homebuilding goal.
Perhaps the greatest piece of advice for this situation, and potentially something that will make your wife feel better, is to bulk up the budget for building your home. Buying homes and moving always include surprise expenses, but those bills could be potentially larger when actually building the house. Does that $850,000 include the emergency charges you may have to make if the renovations don’t go according to plan?
Have a 20% contingency fund, said Danielle Harrison, a certified financial planner at Harrison Financial Planning and a former commercial lender who has worked with individuals building custom homes. “When building, it is very easy to think that you’ve accounted for everything, but when you get into the building process you will find that it is very easy to upgrade items because it is cheaper to do so during the building phase than down the line after the home has been built.” For example: wiring for audio systems, more durable paint and flooring, extra tools for the times when you go the do-it-yourself route.
Check out MarketWatch’s column “Retirement Hacks” for actionable pieces of advice for your own retirement savings journey
Because of your age, you may also want to consider ways in which this home can work for you as you get older. So many Americans would prefer to age at home, but their houses are not set up to accommodate that, so consider accommodations such as fewer stairs and wider door frames.
Be extra mindful of the approach you take to pay for the home. Using a mortgage instead of pulling from investments is a good strategy, Peterson said, as it will minimize or eliminate tax consequences. We are also living in times of historically low mortgage rates, Harrison said. She said she often encourages individuals to go with a 30-year mortgage over a 15-year one because the interest rate difference is minimal and it provides the homeowners more flexibility, but just check to see if there would be any prepayment penalties. If not, you could always pay off the loan faster if it would make you or your wife more comfortable.
I know you said you’ve both discussed this new venture at length, but you may need to continue talking it out a bit more, Peterson said. It is not uncommon for couples to disagree on how to spend their money, even if they have ample amounts saved and shared long-term goals, and it’s understandable to be hesitant about extra large purchases.
“For individuals who have amassed a large nest egg, like this couple, it can be very challenging to switch gears and feel comfortable with spending the funds they have worked so hard to save,” Harrison said. She suggests working with a certified financial planner, and if you need assistance, perhaps even a certified financial therapist who could help clients walk through their concerns and deep-rooted feelings toward money.
Money is a personal, and sometimes scary thing, and as you have already noted, everyone has unique experiences with how they were taught to perceive or use it. While this hiccup might seem frustrating right now, it’s great that you have each other — you seem to balance each other out, which will ultimately help neither of you become too worried about running out of money or never spending any of it in retirement.
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