Money Magazine
Money Magazine's undercover financial planner

Putting your nest egg in one basket

A new home could make you happier, but mortgaging your net worth is a risk most retirees can't afford.

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By The Mole, Money Magazine's undercover financial planner

Ask Money Magazine's undercover financial planner a question. Send e-mails to:

(Money Magazine) -- Question: Should we build a new $500,000 home if it will be most of our net worth? Would it be better to stay in our paid-off townhome? We are retired and live on a pension and social security.

The Mole's answer: This is a hard one to answer because it's not a pure investment question. We are not comparing mutual funds or portfolios where only a simple analysis of expected returns and risk are required. Here we need to also weigh the intangible of whether it will make you happy.

So let's examine both the financial aspects and the impact it could have on your lives.

Planners debate all the time whether a home is an investment or a personal asset. I happen to think of it as an investment, but also one of the few investments we can buy to enjoy that also generally appreciates in value. Thus, the house is the one personal asset I include in the financial plan.

With that said, at your stage of life I think sinking more than half of your net worth into a home is a bit dangerous, financially speaking. Diversification is the only way I know to lower risk, and having most of your net worth in one single asset seems pretty risky to me.

Aside from the lack of diversification, don't overlook the additional costs of the larger home. Last I checked, energy wasn't getting any cheaper and the costs to heat and cool the home will be substantial. And there's always the insurance, maintenance, taxes and other expenses that increase with the size of a home. Of particular importance is that these costs tend to increase over time and your retirement income might not keep pace.

And finally, don't underestimate the cost of building a new home, which consistently goes over budget. Even though you may have a fixed contract with the builder, all those little change orders seem to add up. Thus your $500,000 home is likely to cost you closer to $550,000.

Now that we've addressed the financial pitfalls, let's look at what this new home might do for your personal well-being. I just want to offer a reminder that I'm a financial planner, not a life coach. I am completely unqualified to tell you what will make you happy.

Nonetheless, studies have shown that people who live in the nicest neighborhoods are roughly as happy as those that live in more modest houses. Thus, statistically speaking, it's unlikely that the new home will make you as happy as you may think it will. But you may find that not having a mortgage to pay will make you happier than living in that new home and writing that monthly mortgage check.

My advice:

I'd stick with your current home. Admittedly, having a nice new home has many advantages and you can always tap the equity later with a reverse mortgage, (though they can be expensive and also carry some risks).

As for those who say "you can't take it with you," I couldn't agree more. I've never developed a financial plan that allowed a client to take their nest egg with them when they leave this world. I truly believe it's important to enjoy what you've worked so hard to earn, but without risking your security for the rest of your living years.

So, I'd think twice about building that new home. Having most of your retirement plan based on your home is something I recommend against. The enjoyment it brings may fade away, but the costs can last a lifetime. To top of page

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More from the Mole in Money Magazine:

Retirement: How much you'll really need: Sure you could live more cheaply in retirement. But some costs will go way up.

Payday for financial planners: Plenty of clients with plenty of cash and a shortage of advisors. That means clients will have to be even more watchful.

Where planners (sort of) get it right: Diversification. Risk tolerance. Planners are sounding the right notes, but missing the big picture.
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