Given the sum I am inheriting, and the pension and Social Security I am eligible for, can I afford to buy a house for $950,000?
I'm inheriting $2,200,000. I'm 61 years old and my wife is 60 years old. We own a co-op worth $315,000. I have a pension of $33,000 per year and my Social Security will be $1,720 per month if I wait to take it out until I am 62 years old. My wife's pension and Social Security will be around the same amount. We have one daughter in her last year of college. She will also be going to graduate school. Can we afford to buy a house for $950,000?
Congratulations on receiving such a large inheritance! Although condolences for your loss are also in order, of course.
The key piece of information to answer your question is the amount of your annual expenses, especially if you purchase the house for $950,000. If you start your Social Security next year at 62 (which is another issue worth investigating!), your annual income will be around $53,000 with the pension and SS. Your wife's income will be about the same, although you don't mention her age. Assuming she is also currently 61 and will collect her SS next year, too, your combined incomes will be around $106,000 per year. How does this match up to your expense needs, taking into account the expenses common with home ownership as well as what you'd like to contribute to your daughters graduate school?
Your remaining inheritance of $1,250,000 could generate an additional cash flow of $43,750 (3.5%) to $50,000 (4%) per year, if needed. If this amount, plus your pensions and SS income, isn't sufficient to cover your expenses, including taxes, I'd recommend finding a less expensive housing option. Selling the co-op may be planned as well, and if so, that would reduce the amount of money needed to purchase the new home, leaving more funds available to generate additional cash flow.
Of course, it's also important to maintain an adequate emergency fund, which hopefully you already have outside of the amount you're inheriting.
Best of luck and feel free to contact me if you have any other questions.
The short answer to your question is "yes" if you are willing to pay cash for the house. But now I must put my Money Coach/Financial Planner hat on...
First, congrats on the inheritance. If it was due to the loss of a loved one, my condolonces for your loss. For someone to amass that amount of money, they had to be a disciplined saver, investor and live below their means. My first recommendation is to try to glean a life lesson from them. Too often I see inherited wealth evaporate because the person inheriting feels compelled to raise their lifestyle beyond what is normal for them. Based on the data you shared, it appears you and your wife have a comfortable but moderate lifestyle. Buying this house will elevate your lifestyle and the expenses that go with it considerably. Are you considering this house because it has income potential?
By purchasing a house for $950,000, you are buying something that eats up close to 50% of your inheritance. Is that really what you want to do? If the house is much larger than your current residence, do you really want the upkeep, taxes, utility bills etc. that will go along with the house? My professional advice would be for you to really look at all the expenses involved with buying this house. Regarding Social Security, my rule of thumb is to wait until you are full retirement age to draw. Starting at 62 reduces your payout by 25% for the rest of your life. If you and your wife have earned income, you will pay a large penalty on the social security income until you reach full retirement age. Since you are obviously not desparate for money, it does not make any sense for you to start your social security pension early. By making prudent, thoughtful decisions you will have a better chance of having this money last beyond your lifetime.
If you have a windfall of $2.2 M, you can buy the $950k house outright, plus some money for new furniture and interior decorating, and use the remaining money for investment. This scenario works if you don’t have other large amount of loans with high interest rates, and you have a large nest egg in the form of 401k or IRA.
Based on your description, you and your wife have a $107k annual income from pension and social security. If you have an annual living expense that is less than $100k, the income from pension, social security, and investment may be ok. But, a higher living expense plus some of other retirement goals, such as the first decade of travel cost, daughter’s graduate school expenses, your medical expenses and long-term care cost, leaving a legacy to future generation, etc. may make the initial plan (i.e. buying the $950k home) less certain.
Thus, having a budget is the key and may be your first step to learn if all of your resources can last your lifetime. If not, you and your financial planner should work out a plan to see how much income you need to live one the inheritance and use the remaining money to buy the house without additional financial burden. Best!
I'd like to offer my condolences. While losing a loved one is never easy, your relative has left a significant financial legacy that should be cared for with diligence. Another factor to consider throughout this process would be financing a portion of the house and funding the payments with income from the inheritance principal. This would allow you to reap the benefit of living in the residence as well as retaining the inheritance principal for the purpose of generating further income. The reality is, you need a detailed cash flow projection considering income needs, financing needs, etc. I'd be happy to run some preliminary numbers for you on a no-cost, no-obligation basis. Feel free to reach out to us at your convenience.
1. There really is only two numbers that matter in retirement. What is coming in? What is going out? Whether or not you can afford this home is a function of analyzing expected flow in, and flow out.
2. I would consider waiting longer to take your social security out. 62 is the earliest you can take it, with a substantial reduction in your payout for the rest of your life. When do you plan to stop working? Why take it at 62?
3. Prior to buying this home, I would sit with a fee-only fiduciary advisor and have them work with you on constructing a financial plan.
4. Questions to consider. Why this home? Why now? Is this a good home for retirement? Are there lots of stairs in this home? Do we want to live in this home in retirement? Where are we in the economic cycle, is this a good time to deploy cash into real estate? What's the local real estate market like right now? Is this a house or a home?