Should You Buy Your Retirement Home Before You Retire?

When should you buy your retirement home? Buying a retirement home too early could be short-sighted, despite long-term intentions. Whether you’re in your 30s or 60s, it’s important to objectively weigh the pros and cons before purchasing a retirement home to avoid making a potentially costly financial decision.

The temptation to buy your retirement home while you’re still working

There are several common reasons investors may be inclined to purchase their retirement home, before they actually retire:

Fear of missing out (FOMO): homebuying is a very emotional time for many investors and it’s common for the fear of missing out to drive purchasing decisions. Perhaps you’re convinced the property is a ‘really good deal’ or values will skyrocket, leaving you priced out of the market in retirement. Either way, fear isn’t a good reason to buy a house.
Justifying the purchase of a vacation home: we’ve all done it: give ourselves permission to buy something we want—but don’t need. Especially for individuals still a ways off from retirement, a vacation home may seem like the perfect reward for all the long hours, even if it is a stretch financially. But think of how much we’ll end up saving when we retire here!
Ready to retire, just not financially: especially for individuals or couples nearing the end of a long career or getting close to an early retirement date, the day you can finally turn in that ID badge cannot come soon enough. But if you need to keep working to bridge the health insurance gap before Medicare or build more savings, buying your retirement home early may be able to help you feel closer to your end game. Without careful planning, this could extend your retirement date.

The risks of buying a retirement home before you retire

Making financial plans for retirement is essential, but sometimes even the most well-intentioned actions can have negative consequences. Before buying your next ‘forever’ home, consider these potential downsides.

Your tastes will change over time

Do you have the same style today that you did five, ten, or fifteen years ago? Maybe not. If you’ve owned a home for a long time before retirement, you may need sizable renovations to keep the home current, even if you plan to sell.

Even if you are willing to take on a renovation, not all aspects of a home can be changed. This is particularly true of location. Perhaps you bought a vacation-retirement home in a sleepy beach community, the perfect escape from the stresses of the daily grind. Once retired, you may find this setting a bit lonely or lacking enough activities to fill your days.

Needs change in retirement

Retirees generally need somewhat less space than they did during their working years, but the space itself can also change. Fewer stairs (if any) becomes more important, as does having a master bedroom on the main floor. Private outdoor space or a big yard may no longer top your wish list.

Increasingly, Americans are moving out of rural areas and into more urban settings. Retirees are often in search of a more convenient lifestyle and better access to everything from medical care to opportunities to socialize. This may not jive with the priorities of pre-retirees looking for a second home and future retirement setting.

For retired individuals, it can be valuable to have a living situation where an association is responsible for maintenance and upkeep. As you age, these physical demands become harder to do yourself. This arrangement also frees people up to travel and enjoy themselves without worrying about what’s going on back home.

Proximity to quality medical care may not be on your radar when buying a home in your 40s or 50s. Especially for those with serious conditions, having access to the best care at a specialized facility is essential.

Another major change between working years and retirement life is the need for social interaction and stimulation. Loneliness and boredom have even been linked to Alzheimer’s disease. When you’re working you likely interact with people constantly as a requirement of the job. In retirement, this kind of built-in social network doesn’t usually exist and must be sought out.

Even if you’ve been looking forward to retiring for years, it’s still a major change to go from having limited free time to having nothing but. For retirees, it’s important to find the right living situation to support this new lifestyle.

Owning two homes can cause financial strain

Buying a second home can strain your financial situation and ultimately push retirement farther away. While some buyers are open to the idea of renting the property (which can be a significant amount of work to manage), others may balk at the notion of strangers living in their future full-time home.

Unless the property is rented enough to yield an after-tax profit, the move will ultimately reduce your cash flow available for saving and investment. For some, this could end up hurting retirement goals and further delay retirement.

It’s also worth keeping in mind that your breakeven point can change over time, even with a fixed mortgage. Changes to tax law, such as the ones made at the end of 2017, can increase the carrying costs of a home or second home. For example, state, local, and property taxes are now capped at $10,000 per year for single or married taxpayers.

The overall limit on deducting mortgage interest has also been reduced to $750,000 for new loans starting in 2018, down from $1M. While any of these rules could change in the future, there’s no guarantee they won’t become even more stringent. If you have the cash on hand to buy a home without a mortgage, that’s an option, though it’s worth doing the math to see if you’d be better off getting a loan and investing the cash instead.

If you rent the home, it’s always possible to offset rising property taxes or unfavorable tax changes with higher rents, but not every market will support it. Other changes outside of your control, such as an economic downturn, environmental changes, or wave of new rental inventory, can also impact your bottom line.

Different ways to approach buying a retirement home

There’s no one-size-fits-all approach, but for some, it can be advantageous to wait until you’re much closer to retirement to begin seriously searching. If you’re thinking of moving away, consider spending extended vacation time in the town or city. Ideally, renting a home in the neighborhood you’re thinking of moving to can help you experience life as a local. It’s one thing to visit as a tourist—but living somewhere can be an entirely different experience.

The same approach could apply to individuals or couples looking to stay nearby their current home. Even if you’ve only lived 20 minutes outside of the city, moving downtown could be a shock. Even if you just move down the street, you’ll still want to try and experience what retired life would look like. How do you plan to fill your days?

If you’re a ‘snowbird,’ you may ultimately decide to forgo the traditional two-home arrangement. Through rental websites like Airbnb or VRBO, it can be quite easy to explore a new city or country every year for a period during the winter months. This model offers flexibility, potential cost-savings, and helps keep individuals engaged with new activities.

Homeowners who are eagerly looking to move on from a house that will take some time to sell may want to consider putting their home on the market early enough to capture more than one selling season. To avoid carrying multiple homes, you could consider renting if your house sells before your retirement date.

Buying a house at any stage is a major purchase, so it’s important to discuss your plans with your financial advisor and a real estate professional. Flexibility can pay off financially, which is something worth considering before buying a retirement home too early.