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Americans face a potential shortfall in their retirement savings, putting them at risk financially.
One factor that contributes to this is lifestyle creep, where people upgrade their lifestyle as their income increases.
However, one particular upgrade – buying a second home – can be extremely risky for long-term financial planning, according to financial advisors.
Patrick McGinn, the president of Retirement Resources Investment Corp., warns that these larger purchases, if not made with deliberate and diligent consideration, can derail a well-planned retirement.
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Stephen Cohn, a certified financial planner and co-president of Sage Financial Group, explains that buying a second home takes away money that could be invested in more liquid assets. The return on these liquid investments can often exceed the potential gains from a second home.
Cohn emphasizes that many individuals believe they can afford a second home, but fail to realize the impact it will have on their ability to reach other financial goals, including retirement.
Cohn also highlights that individuals tend to convince themselves that a second home will appreciate in value and can be monetized or sold for retirement funds. However, in reality, most people become attached to their second homes and are unwilling to part with them, leading to increased living expenses.
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In addition to second homes, boats are another example of big-ticket items that can significantly deplete retirement savings, warns McGinn.
Maintenance, insurance, and storage costs can range from $15,000 to $25,000 per year for a $50,000 boat, effectively “pre-spending” retirement funds on current consumption.
McGinn conducts financial analyses five to seven years into the future to help clients understand the impact of a boat purchase.
When it comes to evaluating second home purchases, McGinn emphasizes the need to analyze the associated cash flow needs and how the investment growth may be affected.
Cohn also conducts financial analyses for prospective second home buyers, considering the impact on retirement age and lifestyle maintenance.
If the purchase is likely to hinder clients’ financial goals, Cohn suggests exploring alternatives such as renting, which can provide a more efficient way to enjoy a destination.
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