Interested in a quick $500,000?
Let me show you how the Burns family saved more than a half million dollars in a single year. You may be able to do much the same by making a single decision: where you will live when you retire. It will help if you take advantage of what it really means to be an “empty nester.”
The story begins in Santa Fe, a place my wife and I love and have visited for years. While there on vacation last Christmas we found a small adobe house with a lovely courtyard, kiva fireplace, and great light. Walk ten minutes in one direction and you are having lunch at Geronimo’s on Canyon Road. Walk ten minutes in the other direction and you are on the Atalaya trails behind St. Johns College.
We bought the house for $219,000 with the intention of vacationing there, letting our adult children vacation there, and using it as a family gathering place on holidays. Eventually, we intend to retire there.
So how do you save $500,000 by spending $219,000?
By understanding the true costs of housing.
The biggest single lever on retirement security is where we choose to live. Our house in Dallas was worth $300,000. More important, when you added all the bills ( done meticulously on Quicken) it cost about $20,000 a year to support, exclusive of mortgage payments. One reason the expenses were so high is that it was a large house— 3,500 square feet, three bedrooms, 3 ½ baths, an office, 3 living areas, and a pool, all lovingly landscaped— a lot more house than two people need.
If we chose it as our retirement house, we would need to save its $300,000 capital cost from after-tax income. In addition, we would need to build an investment fund that would pay the $20,000 in operating expenses. If you figure a 5 percent return, that means we would need a second fund of $400,000. ( More if you get precise and start to think about after-tax investment income.)
The Dallas house, in other words, meant a lifetime commitment of $700,000… and every dollar of it would be after-tax money.
Now compare that to the 1,400 square foot, two bedroom, two bath house in Santa Fe with a $219,000 cost and annual expenses of less than $4,000. The operating expense fund for this house would be only $80,000.
Why are the operating expenses so low? Many reasons. Insurance is inexpensive. Real estate taxes are among the lowest in the country. Utilities, lacking temperature extremes, don’t cost very much. Plus there is no pool to maintain and minimal yard work.
Santa Fe isn’t unique. Many resort/ vacation areas have relatively low taxes because there is a lot of property relative to the services needed. There are areas with lower utility expenses than New Mexico.
Bottom line: our retirement house in Santa Fe would require a total investment of $299,000, a saving of $401,000 over the Dallas house.
Note that all of this is after-tax money. If you figure it pretax in the 28 percent tax bracket, we’d have to earn $557,000 before taxes to produce the $401,000 difference. In the 31 percent tax bracket it would be $581,000.
Now lets compare this to the potential of a 401k plan. If you were 50 years old and contributed the maximum $9,600 a year, increased it 3 percent a year, and earned 15 percent a year, you would accumulate $580,000 by age 65. On a 10 percent annual return you’d accumulate $570,000 by age 67.
One highly personal decision, in other words, can be worth a major, long term investment program.
“That’s fine”, you say, “But how do you support that big house and the retirement house? Doesn’t it cost a lot more?”
No, it doesn’t. We sold the big house in May and bought a smaller house. No more pool. No more Museum of The Grown Child Rooms. No more long term storage for kid stuff. And we put guests up at the local Embassy Suites.
We bought a house for Empty Nesters. In spite of the larger total investment, the cost of operating both houses is about the same as the cost of operating the big house.
The moral: Real investing starts at home. Your personal numbers may be larger or smaller but the impact on your financial security can be major.
Want to learn more? One of my favorite places, after a visit to Borders, is to get on the internet and visit Amazon.com, the bookstore of the web with some 2.5 million titles. Doing a quick search there under the words, “Retirement, Places of”, produced a list of some 80 books. The listings included books on retiring to Belize, Costa Rica, and Cuba, as well as all around the United States. As a starter book, I suggest “50 Fabulous Places To Retire In America”, a regularly updated book that looks at places ranging from Cape Cod in Massachusetts to San Diego in California. With 50 places to choose from, it’s sure to stimulate your thinking about retirement moves.
Two others that I read are by the same author, John Howells. Mr. Howells seems to have made a career out of retiring, traveling around the Southwest and Mexico to ferret out attractive places. His “Choose the Southwest” covers Arizona, Nevada, Utah, New Mexico, Colorado, and Western Texas. He notes that Santa Fe is one of the more expensive locations, largely because of real estate prices.
Feeling adventuresome? Then read Howells “Choose Mexico.” Subtitled “Live Well on $600 a Month”, the book lays out all the basics for retiring in Mexico. I first found the book in Puerto Vallarta where it is core reading for aspirant early retirees, once they have escaped the time-share salespeople. You can order it from Amazon. The new edition announces that some 175,000 copies have been sold which is probably about equal to the number of Americans living in comfortable enclaves like Lake Chapala, San Miguel Allende, and Mexico City.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo by Jeremy Thompson
(c) A.M. Universal, 1997