Should You Sell Your Home?

You’ve heard the stories. Multiple offers over asking as soon as a house goes on the market. Bidding wars. Cash offers. Contingencies and inspections waved. Buyer misery. Seller glee. It’s enough to have us all wondering if we should just cash out and sell our homes too.

It’s an exciting day dream, but impractical for most for one obvious reason: sell your home to capitalize on a hot market and you have to turn around and buy a replacement home in the same hot market. Now, if you planned to sell your home soon anyway and this hot market is pushing you to act faster, great. Go for it. You’ll likely be happy with the outcome. The rest of us may need to wait.

But there is one situation where I think it’s almost a no-brainer to go ahead and jump into this market.

Beach home

Sell Your Vacation Home…If

If you own a vacation home and you’re either not renting it, or it’s an unprofitable rental AND your retirement plan is not in good shape, consider selling that home in this market.

Reinvesting the house proceeds somewhere else and reducing your expenses by not owning two homes can meaningfully improve your retirement plan – even if you are now forced to rent a similar home every year for family vacations.

Here’s an example:

Using my firm’s financial planning software, I created a fictional client.

  • 54 year-old married couple
  • Retiring at age 65
  • Joint life expectancy 95
  • Joint salary of $300,000 pre-retirement growing at 2.52% per year for inflation
  • Contributing $28,500 per year to retirement accounts adjusted for 2.52% inflation annually until 65
  • Expenses without taxes and the mortgage on their primary residence of $175,000 per year adjusted for 2.52% inflation annually
  • Vacation home worth $350,000
  • Costs related to the vacation home of $15,000 per year
  • Retirement portfolio of $965,667 initially earning 6.8% per year
  • Social Security during retirement

Straight-forward situation, but unfortunately their plan is not too healthy. Based on the numbers above, they run out of money by 80.

There are many ways to improve the plan, but the one related to this piece is selling the vacation home.

Let’s say that after costs, taxes, and realtor fees they net $290,000. They invest that $290,000 in the retirement portfolio and save $15,000 in expenses related to the vacation home. But now they need a place to vacation, so let’s assume they spend $20,000 per year to rent a new place every summer.

What happens?

The plan goes from unhealthy and running out of cash at 80 to having the portfolio last all the way to the age of 95 with some money left over. Put another way, it goes from zero chance of success to 100% chance of success.

A bit extreme. I was surprised at the dramatic outcome shift, even though I expected the sale to help. However, the vacation home value of $350,000 is not crazy. The $15,000 in home costs are reasonable. $20,000 to rent every year seems fine, maybe even a bit high.

But they turned an unproductive asset into something that can now double in value almost every ten years and start retirement with $3.0 million instead of $1.9 million. This leads to a healthier withdrawal rate in retirement, which overall leads to a healthier plan.

This is an example. Your outcomes will be different. Maybe stronger, maybe not. But one thing that’s worth thinking about now in this hot market is whether you would be better off selling that second home.


Suggested Further Reading

Your Safe Retirement Withdrawal Rate – How much money do you need to retire is a popular question? What’s my safe retirement withdrawal rate is a better one. This post looks at the famous 4% rule and whether it still applies.