Continuing with the “Can I Afford…” this home theme this week, we’re going to look at the Empty Nester Home.
Our applicants, Dr. and Mrs. BBM, have already put 2 kids through college plus 2 years of med school and they’re finally ready to realize a lifetime goal of a special home…if they can afford to do so.
A big concern of the BBMs is ongoing costs of the new home – property taxes of $18k/yr and HOA fees of $3k/yr.
Their current home also has a mortgage of over 1/3 of the home’s value – is that a problem?
Personally, I also believe they may be second-guessing whether they should buy an “expensive” (to them) home before they are fully retired.
Should they wait?
My biggest concern was current and future living expenses, so I asked Mrs. BBM for details in a separate email.
If they are planning to significantly increase their lifestyle in retirement, would they regret buying this house?
According to the information she provided and my calculations, living expenses, even with the new house, should not change much in the next few years or in retirement.
The only big unknown is the cost of health insurance, but that shouldn’t be enough to impact their net worth and they have an HSA to address at least part of their healthcare costs in the future, so I marked that off my list.
* Savings + sales proceeds will be enough to pay cash for the ENH [Empty Nest Home]
o Note – I learned cash savings are from bonuses squirreled away in prior job
* Healthy 30% savings rate
* Frugal lifestyle
* Property taxes for the new home are only $2k/yr higher than old, so not much pain
* The nest is empty!!! Kids are up and out, no more ongoing expenses
* New job with fixed income – no more bonuses
* That’s it – I couldn’t come up with anything else and, admittedly, the above is not much of a negative 🤷♀️.
Assumptions (I use conservative estimates wherever there is an uncertainty.)
* 6% average long-term returns on savings (Assuming no emotional mistakes in upcoming bear markets and corrections)
o By my calculations, you will have between $5M and $5.5M at retirement
* Average inflation ~3%
* You retire in 8 yrs
* No more med school tuition
* You have plenty of appropriate life and LTDI in place.
* No divorces
* Savings of $105k/yr for next 8 yrs
* No significant financial assistance for other family members
* Reasonably good health
One reason we enjoy publishing these analyses is to help others in similar situations.
Since this week was a relatively easy call, I’m including suggestions to help the BBMs improve their quality of life and lower their long-term risk of 1) running out of money and 2) experiencing less than optimal long-term net worth, therefore 3) not maximizing future opportunities for the most fulfilling retirement possible.
* You should be financially independent before age 62 – consider retiring sooner.
* Reevaluate your planned equity-fixed income-cash allocations in retirement – I believe you are skewing too high to fixed income.
* Determine a realistic budget for any needed furniture, landscaping projects, and refurb’s on the ENH and set aside some of the remaining cash for those projects.
* After you have a plan in place for 5-year cash needs (outside of current savings), try to avoid large cash buildups. It sounds counter-intuitive, but it can make “splurge” spending more tempting (for some) if the cash is readily available and you don’t have a planned use. Put your cash to work instead.
* Consider planned Roth conversions between retirement and RMDs. [Required Minimum Distributions]
I recently published a guest post on challenges a couple faces when they reach the “Empty Nest” stage of life.
This couple exemplifies what can be accomplished with a savings rate that goes beyond the normal 15% recommended.
By doubling their savings rate to 30% they have already accumulated a great deal of assets at a relatively young age and can rightfully soar like an eagle.
They currently have $2.7 million in non-retirement assets and another $1.4 million in retirement assets giving them an already healthy net worth of $4.1 million.
Subtracting the value ($760k) of the desired empty nester home would give a usable retirement nest egg of $3.34 million.
- This would provide $133,600/year using the 4% safe withdrawal rate rule
- Even using a more conservative 3.5% safe withdrawal rate (the one I personally prefer) will give them $116,900/yr, which is within spitting distance of their anticipated retirement needs of $120k/yr.
The above figures are based on if they do not add anything more into the system and retire today.
Assuming the sale of the primary home happens first and they use the entire proceeds for the purchase of the new home, this couple will only have to pony up a worst case scenario of $160k.
With current liquid assets at $870,000 (I am curious for the rationale for this large a cash equivalent allocation as there can be cash drag that can happen), this will still leave them with a healthy $610,000 (the equivalent of 5 years of anticipated living expenses).
The fact that they anticipate working an additional 8 more years more than makes this decision an easy one for me.
I am floored with some of the numbers in the submission, most notably the property tax.
An annual property tax of $18,000 on a $760,000 home is essentially a 2.37% effective rate.
Conversely, where I live, my property tax is the equivalent to 0.73% of the assessed value by the county (and even that value I consider far lower than true market value).
Geoarbitrage certainly makes a difference.
[As a teaser, please come back and check in on Tuesday for a post telling the wild story of how I found my incredible property.]
Johanna Verdict: Thumbs up!
The reason I chose the BBM’s for this week’s analysis is that they have agreed to a followup review next year.
We plan to find out if they did or did not follow our recommendation and if they are happy or remorseful with their decision.
[I think this is a wonderful idea and if any of the past or future Doctor’s Bill submitters can touch base in 6 months or a year from the time of your analysis, I would love to do a follow up post on it.
It gives you the opportunity to tell us what we did right, where we went wrong, and how this analysis actually impacted your decision making]
Xrayvsn’s Verdict: Thumbs up
Agree or disagree? Please go back to the original post and voice your opinion in the comment section.
If you would like to be considered for The Doctor’s Bill please complete the submission form.