Buying a second house.

[Santamonica]

I'm retired, 69. Wife 65, still works. My federal govt pension and social security total about 90k, her income from psycho therapy practice totals about 60k. We have liquid assets of about 3 million and our house in an overpriced neighborhood is worth almost 1 million. We have about 50k house debt.

We settle on a beautiful second home about 2 hours away in Delaware in 90 days. Price 420k. We plan to finance about half and pay cash for the rest. We may move there permanently in three to four years.

Here are some dumb questions for you smart people. Was it reckless to buy a second home? Should we pay points to lock in rates on a 15 year loan? Or wait until closer to settlement? Should we take cash from long-held mutual funds subject to a big capital gain or from a money market account? Maybe some from both so we keep the right retirement balance between stocks, bonds, etc.

Are there better questions I should be asking?

[TexasHusker]

I'm retired, 69. Wife 65, still works. My federal govt pension and social security total about 90k, her income from psycho therapy practice totals about 60k. We have liquid assets of about 3 million and our house in an overpriced neighborhood is worth almost 1 million. We have about 50k house debt.

We settle on a beautiful second home about 2 hours away in Delaware in 90 days. Price 420k. We plan to finance about half and pay cash for the rest. We may move there permanently in three to four years.

Here are some dumb questions for you smart people. Was it reckless to buy a second home? Should we pay points to lock in rates on a 15 year loan? Or wait until closer to settlement? Should we take cash from long-held mutual funds subject to a big capital gain or from a money market account? Maybe some from both so we keep the right retirement balance between stocks, bonds, etc.

Are there better questions I should be asking?

Sounds wonderful ! Tell us more about your second home!

[disneysteve]

What are your monthly expenses now and what will they be once you own two homes?

You need to be sure that your income now and in the future is sufficient to cover all of your expenses. As long as that's true, there's certainly nothing at all wrong with owning a second home. Plus if you move to the new house permanently and sell your current home, that boosts up your nest egg and allows you to generate more income.

[Santamonica]

More about the second home. It was built in 1870. Victorian. Yellow. Used to be a BnB. Three bedrooms. Front porch. Side porch. Porch swing. Geothermal heating/cooling, whatever that is. Granite countertops. It's a very pretty house.

[Santamonica]

About monthly income and expenses, it's a little complicated because now that we're retired were supposed to be spending down some of the accumulated savings. If we converted the savings to an annuity then we could see if income exceeded expense, but I think annuities are a bad idea. Maybe we should pretend 3% of savings is income and compare that, plus wage, SS, and pension income, to expenses. It's good to have a way to ask dumb questions anonymously.

[disneysteve]

About monthly income and expenses, it's a little complicated because now that we're retired were supposed to be spending down some of the accumulated savings. If we converted the savings to an annuity then we could see if income exceeded expense

Sorry but I'm not following you here. Only one of you is retired and has a $90,000/year income. The other of you is still working and earns $60,000. So your combined income is $150,000.

How much are your monthly expenses? That's a pretty straightforward question. Add up everything you spend each month including mortgage (PITI), health care, food, utilities, auto expenses, entertainment, travel, clothing, memberships, etc. And what expenses will be added to the list once you own the new house? You'll have another mortgage, taxes, insurance, maintenance, etc.

You need to make sure that your expenses don't exceed your income.

[kork13]

Even more so now that you're retired, it's very important to know what your expenses are, if for no other reason than to know how much "income" you need to generate/pull from your savings. Having a fair idea of that will also serve as a good guide for making choices about this second home.

With that said, your assets & pension/SS provide you with alot of flexibility. Your assets alone can likely provide ~$120k/yr, in addition to the $90k/yr provided by your pension/SS.

First of all... It sounds like you are, but just to confirm, you are already under contract for this gorgeous-sounding home in Delaware? So even if we tell you "IT'S A TERRIBLE IDEA RUN AWAY!!!", you're still most likely going to buy it? (not saying it is, merely identifying a starting point) .... So it seems to me that the better question for you to ask is this: "How should we pay for this second home?"

So my answer to that question presumes you don't need an income in excess of $200k/yr. If I were in your shoes, I would buy the 2nd home outright, in cash. It'd take your liquid assets down to roughly $2.5M, which should still be able to generate around $100k/yr. That would keep you from having a mortgage hanging over your head in retirement, and the home itself could serve as an inflation hedge for you (most homes, over time & if well maintained, appreciate roughly in line with or just above inflation). When you both decide to settle down further & live only in one house, you can sell the other & recover your equity, having lost nothing to mortgage interest.

[disneysteve]

I agree with kork. I don't really see the advantage of taking out a mortgage here. Why not just pay cash if you have the money?

[Santamonica]

Thanks for comments. I thought maybe it would be good not to tie up so much money in the house. The loan allows us to retain more money in stocks/bonds. Does that make sense?

[Goldy]

One argument for taking out a loan is that your investments will beat the interest rate of the 30yr rate. I believe the lowest stock market return over a 30 year period was 8% with averages around 9. Assuming you can get a low rate of 4% (3% after tax deduction if you can take it) I'd be willing to bet that your money beats the mortgage in the market.

at your income with the pension and the 4% rule I don't see taking a loan out or paying it in cash as a make or break decision. You will be fine either way.

[kork13]

Thanks for comments. I thought maybe it would be good not to tie up so much money in the house. The loan allows us to retain more money in stocks/bonds. Does that make sense?

If you were 40-50 years old, I would totally agree with you. At that point in your life, you would want to focus on growth, and the mortgage would be a great idea to get higher returns. But at your stage of life, the growth is already finished (and you've done great), and your focus should be more about wealth preservation & income generation. As I said, real estate can serve as an excellent tool in wealth preservation by holding equity in an asset that tends to increase in value similarly to inflation. Because you (presumably) have sufficient stock/bond assets to generate the income you need even paying cash for the house, better to avoid the debt.

Typical wisdom is for retirees to have all their debts paid off, not to take on more debt.

[feh]

If you were 40-50 years old, I would totally agree with you. At that point in your life, you would want to focus on growth, and the mortgage would be a great idea to get higher returns.

+1

I don't think a mortgage at 70 years of age is a good idea.

Still not clear what your annual expenses are. Need to know that before giving an opinion on whether the house is affordable or not.

[Fishindude77]

Congrats on the new place. We bought a second home about 6-7 years ago and really enjoy our time there. I'd go ahead and pay both mortgages off and put home payments in the rear view mirror.

Suggest you budget to have all of the routine maintenance type stuff hired out, so you don't wind up going to the vacation home and working.

[bigdaddybus]

One argument for taking out a loan is that your investments will beat the interest rate of the 30yr rate. I believe the lowest stock market return over a 30 year period was 8% with averages around 9. Assuming you can get a low rate of 4% (3% after tax deduction if you can take it) I'd be willing to bet that your money beats the mortgage in the market.

at your income with the pension and the 4% rule I don't see taking a loan out or paying it in cash as a make or break decision. You will be fine either way.

I support this 100%

but look at my role model, my dad lives in a 1.6M home with a 800K mortgage at 68yrs old. He loves his 3.5% mortgage and the 10% or greater returns his stock investments have averaged for the past 50 years.
Just like this poster, he can pay off his house today with cash many times over, but why? My fathers goal is wealth appreciation, period.

If your the type that feels stress having a mortgage then pay that sucker off. Lifes to short to add stress that isn't needed.

[Santamonica]

Thanks again. Our monthly expenses are about $13k, including tax payments in excess of withholding. That's about the same as take home income from pension, social security and wife's wage and private practice.