Savings

We have $5 million in savings and earn close to $7,000 a month. Should we spend over $2.1 million to build our dream home?

We plan to build a modern home on 26 acres in the Texas Hill Country. We would pay cash; the estimated construction costs excluding the land are $2.1 million. Including the land, it would be worth nearly $3 million. We are retired and this would be our forever home and investment. The land is in a highly desirable subdivision located 45 minutes southwest of Austin, TX.

We have $3 million in retirement savings, a 401(k), stocks, bonds, and cash, and the $2.1 million is on top of that. We have a monthly income of almost $7,000 from bonds and pension. We are both approaching 65. We think it would be a better investment for the $2.1 million instead of investing it in the stock market or the bond market.

We wonder at our age if we should do it, and should we do it during this time of high inflation? We are not getting any younger and this would be our last build. To think that we would live in the house as long as we could.

What are your thoughts and suggestions?

Sincerely,

To build or not to build?

“The Big Move” is a MarketWatch column examining the ins and outs of real estate, from navigating the hunt for a new home to applying for a mortgage.

Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at [email protected]

Dear build,

You and your husband are certainly in an enviable position.

On average, baby boomers have about $102,000 in personal savings and $139,000 in retirement savings, according to a 2021 study from Northwestern Mutual. And inflation has only gotten worse over the past year. With the cost of living rising so rapidly, many Americans find it very difficult to save even a fraction of the amount you have in savings.

I mention all of this so you can think about how lucky you both are to even have the opportunity to even consider building what appears to be quite a luxurious home.

I’m glad to see you’re thinking about this decision carefully before putting a lot of money aside – because I think it might be a bad deal.

Someone with only $100,000 in their bank account might think it seems crazy to suggest to someone with about 50 times that amount saved that building their dream home is not a good idea.

I would say, however, that you are asking the wrong questions. Your main concern seems to be whether building this house is a good investment. I’m afraid you can’t pay for the house without saving money elsewhere.

But really, the money you spend upfront is only part of the equation. As you say, your combined income is $7,000, or only $84,000 per year. It’s solidly middle class. The median income for a three-person household in 2020 was $90,131, according to the Pew Research Center.

You almost certainly have enough money to build the house. However, I warn you that it might cost more than you think. Most home builders are still struggling with shortages of workers and materials used to build and finish homes. These shortages can drive up the price of building a new home.

Owning a home is more than the purchase price

My biggest concern for you and your husband is the ongoing costs associated with such a large and valuable home. This concern has been echoed by several financial advisors I have interviewed to get an expert opinion on your situation.

“I spoke with a client over the weekend who found his ‘dream retirement home’ for almost a million dollars, but quickly realized he hadn’t considered a annual property tax bill of $36,000 in his retirement living expenses,” said Tim Sobolewski, president of the Financial Planning Center, a financial advisory firm based in Amherst, NY.

You haven’t mentioned where specifically the house will be located, but it can make a big difference in terms of any tax reduction you might see. If you were to build a $3 million home in Comal County, Texas, your annual property tax bill would be nearly $40,000, according to data from SmartAsset. But in neighboring Hays County, the tax bill would be $62,400.

In Texas, homeowners age 65 and older can qualify for a $25,000 homestead exemption, which lowers the bill you owe. There are other exemptions you may qualify for.

“For those who qualify for the over-65 exemption, there is what is called the property tax cap,” Patrick O’Connor, owner and president of O’Connor Tax Reduction Experts, written in a blog post. “This automatically limits school taxes to the amount you paid in the year you qualified for an over-65 property tax exemption.”

Still, you could be looking at a pretty large property tax bill, even after factoring in these exemptions. And property taxes are only part of the equation. A bigger, more luxurious home means the costs of everything from maintenance to insurance will be higher. Because the house is in a subdivision, there may be homeowners association dues to worry about.

Given all of this, I hope it’s easy to see how $84,000 a year may not be enough to handle such high housing expenses, even if you don’t have to worry about a payment mortgage.

I’m only scratching the surface. Consider that other expenses — health care, entertainment — will almost certainly increase in retirement. You might even find that the home you built may not be suitable for your lifestyle if your mobility declines over time, making it a questionable investment. The last thing you want is to not be able to enjoy your retirement because you constantly worry about bills.

And yes, buying a home is risky when the market may be at its peak. It’s not yet known what the full effect of rising interest rates will be on the nation’s housing market, or in Texas for that matter. But you might end up investing your money in an investment that might not yield a significant return in years to come.

If you want to define the best alternatives for what to do with your money, definitely consult a financial planner. Diversifying your holdings is smart. But there are many ways to invest in real estate other than building such a big house.

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