|
Whether you hope to spend your retirement in a conch house in Key West, Fla., or a cottage in Cape Cod, Mass., it's tempting to turn the dream into reality early, at least for part of the year, by buying a second home. And boomers, the bulk of whom are just now reaching their high-earning years, have the means to do it.
But before you tap your nest egg to buy your little piece of paradise, take time to figure out whether owning a second home fits both your lifestyle and your budget. Too often, what you envision while gazing at sales fliers on Duval Street in Key West is miles away from the realities of second home homeownership.
Can you really afford it?
Answering that question is not as easy at it appears at first glance. After all, wealth is relative: One man's rich is another man's poor. To figure out if you have the funds to take the plunge, look at all aspects of your finances, from your monthly cash flow to your net worth. Any money over and above what's necessary to manage your lifestyle and continue to save for retirement and emergencies is discretionary.
If you need to carry a mortgage, make sure that your discretionary money covers the principal and interest payment, taxes, insurance and then some. Without a buffer, you will be in financial trouble if wildfires or hurricanes send your insurance premiums through the roof.
If you plan to use part of your nest egg to buy the second home outright, make sure that you still have enough liquid assets leftover to fund your retirement. A good rule of thumb is for your retirement portfolio to be worth 25 times the amount you anticipate living off each year (for example, $2 million for an $80,000 per year lifestyle) plus extra for the home, says Jan Dahlin Geiger, author of "Get Your Assets in Gear!"
| Planning to buy a second home? Know what you're getting into before you make the move. |
|
 |
|
Bankrate tip: Don't use the second home as a retirement savings vehicle. Too often, people grow accustomed to owning two homes, and they never sell the first one in order to permanently move into the second, says Christopher Dalto, principal of Delessert Financial Services. Limit real estate to a conservative 10 percent to 20 percent of your assets.
Remember the not-so-little extras
The true cost of ownership goes far beyond the second home's sales price, taxes and insurance. When you're calculating the cost, don't forget to add in these not-so-little extras:
Duplicates of everything. The second home will need major items, such as window treatments, rugs, furniture, appliances, and pots and pans, and you may want to leave extra sundries, including toiletries and clothes, there for convenience.
Transportation. Not only do you need to pay to travel to and from your second home, but if you fly there, you will need transportation once you arrive, whether you rent a car, ship your own car, pay for cabs or leave a "beater" there year-round.
Utilities. In addition to paying the monthly service fee for standard utilities, in some climates the air conditioning or the heater must run even when the home is vacant to ensure that mold doesn't grow or the pipes don't freeze.
Maintenance. Whether you pay someone or do it yourself, both the interior and exterior of the home require routine maintenance, such as housecleaning and yard work, as well as occasional big-ticket repairs, such as a new roof or hot water heater. And don't forget about homeowner's association fees.
Bankrate tip: If you end up with lots of visitors at your second home, expect your food and beverage bills to go up as well, says Mark Mills, co-author of "Boomers! Funding Your Future in an Age of Uncertainty."
|
