The Vacation Home Squeeze: How a Second Home Impacts Your Retirement Plan
One of the benefits of accumulating wealth is having the financial freedom to enjoy it. For many people, that includes purchasing a vacation home, or perhaps owning several homes in different locations.
But personal-use real estate presents a particular challenge when it comes to retirement planning. Not only does it reduce the amount of money available in an investment portfolio to support retirement spending, but it also adds expenses that the portfolio needs to support.
In other words, a vacation home can affect your retirement finances in two ways: it reduces the investments available to support retirement spending while increasing the expenses those investments need to cover.
How Does Buying a Vacation Home Affect Your Retirement Plan
Consider a hypothetical household with a $10 million net worth, including a $2.5 million primary residence and $7.5 million in investments. Now suppose the household purchases a $2.5 million vacation home using money from its investment portfolio. There is no mortgage, and net worth hasn't changed. But the financial picture looks quite different.
The table below compares the household's position before and after the purchase. We'll assume a 4% annual portfolio withdrawal rate and property carrying costs (taxes, insurance, maintenance, and other expenses) equal to 3% of property value. These assumptions are purely illustrative. Actual expenses can vary considerably depending on the property and its location.
| Before Purchase | After Purchase | |
|---|---|---|
| Total net worth | $10,000,000 | $10,000,000 |
| Personal real estate | $2,500,000 | $5,000,000 |
| Investable assets | $7,500,000 | $5,000,000 |
| Illustrative annual portfolio withdrawal at 4% | $300,000 | $200,000 |
| Annual property expenses at 3% | ($75,000) | ($150,000) |
| Illustrative amount remaining for other spending from portfolio withdrawals | $225,000 | $50,000 |
Hypothetical illustration for educational purposes only. The figures do not represent any particular client's financial circumstances or actual properties. The 4% withdrawal rate is a planning assumption, not a guaranteed or universally sustainable rate. The comparison excludes taxes, transaction costs, property appreciation, and other sources of income.
Although net worth hasn't changed, the portfolio's annual withdrawal rate has fallen by $100,000, while property expenses have increased by $75,000. That's $175,000 less each year for everything else.
How Much Personal Real Estate Is Reasonable?
There is no single answer, since much depends on spending needs, other sources of income, and what you want your wealth to accomplish.
As a rough starting point, I like to see a minimum of $2.50 invested for every dollar of personal real estate. This isn't a universal rule, but a way to begin evaluating whether too much wealth is tied up in properties that don't generate income.
In our example, the ratio falls from 3-to-1 before the purchase to 1-to-1 afterward. Even at 2-to-1, property expenses would consume more than a third of the portfolio's assumed spending capacity.
Here in Jupiter and throughout Palm Beach County, owning multiple homes is not uncommon. Whether it's a seasonal residence in South Florida or a vacation property elsewhere, the financial considerations are similar. Property taxes, insurance, maintenance, and other carrying costs can add up, placing additional demands on the investment portfolio intended to support retirement spending.
None of this is meant to discourage anyone from buying a vacation home. Owning a place where family and friends can gather and create lasting memories is a meaningful goal. But it's important to understand the financial trade-offs.
The question isn't simply whether you have enough net worth to afford the property. It's whether you have enough invested to sustain the ongoing costs without compromising the other financial goals that matter to you.
Core Wealth Management is a fee-only wealth management firm located in Jupiter, FL. Our CFP® professionals provide investment management, financial planning and advisory services, while always strictly abiding by the highest fiduciary standards. For more information, contact us today at 561-491-0231.
Todd Schanel, CFP®, CPA, CFA is the Principal and Director of Investment Advisory Services at Core Wealth Management.
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