One of the biggest questions anyone needs to ask before buying a home is whether or not they can afford to do so. Unfortunately, once you buy a home, you’re stuck with it, at least for a little while, so this can’t be a decision you might make without knowing everything.
One Redditor posting in r/ChubbyFIRE is currently experiencing this scenario. They are debating whether they can afford a $1.5 million home. They hope to stop working shortly, so they want to purchase the home now while they still have plenty of income to show to a mortgage company.
The Financials
Looking at this Redditor’s information, we know that he and his spouse are both 45 years old and hope to stop working before they turn 50. The family’s current household income is around $325,000 annually, with yearly spending around $65,000. As a result, they are putting away or investing around $200,000 per year in their goal to ChubbyFIRE before 50.
Intending to stop working in the next 2-4 years, they are building up a nice little nest egg with around $3.5 million invested, including a $1.2 million brokerage account. The goal is to have enough to purchase a $1.5 million home and increase their annual spending to around $150,000 upon retirement.
As the family currently rents a home associated with the original poster’s job, they know they must find their own housing once they quit work. Without any kids, there aren’t any other missing factors here, like funding 529 accounts or anything of the like, so it’s all about whether they can increase their spending and buy a home of their dreams.
Reality Sets In
While the Redditor acknowledges that they live in a costly real estate market, there is one thing that this Redditor is not considering. They believe that the tax on this home will only be around $5,000 per year, while the commenters are trying to explain homestead exemptions and the likelihood that once the house is reassessed post-sale, the taxes could jump to over $20,000 based on the purchase price.
Not to mention utilities, taxes, and general upkeep will significantly increase all of their expenses. Surprises, like a leaky roof, a broken air conditioner, or some other cost associated with owning a home, will undoubtedly occur.
Beyond this, tying up 35% of the family’s net worth in a home, on top of the increase in monthly expenses related to taxes and insurance they are not accounting for, makes this a pretty tricky decision.
Ultimately, the question isn’t whether they can afford the home as they clearly can based solely on their current net worth. The real question is whether they can afford the home, increase their expenses, and stop working simultaneously.
It’s okay to want to be set in a housing situation before pulling the trigger on retiring early, but it’s another thing to put so much of your worth into a house that may not pay you back on your return for 10 years or more.
The Next Step
Realistically, this Redditor should be working with a financial advisor who can help them devise a few different financial scenarios. It is a big question to know where they stand regarding their risk tolerance with investments and what 4% would look like as a starting point for yearly withdrawals.
Without knowing a little more, like what kind of down payment they are considering to determine monthly mortgage payments, it’s hard to say how much of their $150,000 annual spend would go toward a home. The reality is that they are looking at buying a smaller home that’s no more than 2,000 square feet, so there is no concern over professional cleaners or help.
Still, if this family wants to travel and enjoy the world, tying all of this money up in a home will significantly crimp that lifestyle. The real question is the couple’s priorities post-retirement, as everything revolves around this question. They should consider looking at a more reasonable area to spend $1 million or less and get a similar-sized, if not larger, home that wouldn’t chew through so much of their net worth.
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