Clients who are planning to retire soon or who are already retired often get busy first fixing up the retirement nest.
Before you get too deeply enamored of that kitchen remodel, do the financial reality check. How much budget is really needed? Will the contractor stay on budget? If a variable interest loan is used, can you pay the loan off within a year to 18 months? If the answer is maybe, or no, rethink the project.
Many people do not see the risk of a financial blowout of their plans. Avoid renovating in retirement if projects threaten your cash flow, exceed 30% of your home’s value, or cause high-stress disruption without improving safety. Abstain when you have limited savings, when renovations are “wants” rather than necessary mobility related upgrades, or if you will sell within five years.
While some people say they have no plans to relocate, a health event can force a decision to list a house earlier to downsize, or to move closer to family. Here is a short checklist of red flags to consider when making the right decision for you.
Financial Issues:
- Cash Shortfalls: Renovating when it drains emergency funds needed for health related emergencies, or in-home care.
- High-Cost/Low-Return Projects: The project would exceed 30% of the home’s value or does not add market value, such as luxury additions or swimming pools.
- High Tax Impact: Sale of stocks from a taxable account, or withdrawals from an IRA to fund renovations can trigger significant tax liabilities.
- Uncertainty: Using high-interest debt or risking retirement income on renovations that are financed from the sale of income stocks or bonds.
Lifestyle & Safety Risks:
- Imminent Downsizing: Doing major work shortly before selling the home, as you likely won’t recoup the costs.
- High-Stress Disruption: The renovation process can bring high stress, noise, or safety hazards (like dust and construction debris) that affect your health.
- Over-Customization: Making highly personal aesthetic choices may make the house harder to sell later, such as converting a porch into a yoga room.
- Maintenance Burden: Installing features that require extensive, ongoing maintenance, which becomes a burden later.
Better Alternatives:
- Moving: Instead of renovating, moving to a home that already fits your needs is often more cost-effective.
- Delaying: Postponing non-essential renovations for a few years to see if they are still desired, or to wait for your savings to grow to cover the expected bill.
- Recrunching the numbers: Get several bids from licensed contractors, rather than a single bid from a handyman. The initial project cost may come in higher but end up costing less in time spent on building permits and inspections. Handymen may walk away from a difficult job if they have no license to lose.
