How it all pencils out–or at least, we hope so! (Our Big “Little” Move, Part 3)

I’ve written two recent posts about our decision to buy a new (to us) home and sell our condo. I appreciate all the comments and well-wishes I’ve received, but I’ve decided to be candid about one aspect of this big “little” move: It’s financially stressful at a period of life where that might not seem to be…prudent.

First, the nuts-and-bolts. The home we bought is more expensive than the one we’re selling (a little more than 50% higher if you go by both sales prices). We’re replacing a 3% mortgage we obtained in 2020 with one in the low 6%. We’re also taking on expenses for yard care, pest control, and other ongoing maintenance issues that come with buying an older house. And, significantly, we’re planning a substantial renovation (kitchen and master bath) almost immediately. Offsetting this somewhat is that we’re getting rid of $750/month of HOA dues and that our property tax increase will be capped because of California’s laws protecting seniors from major jumps when they sell/buy and move. In all, our monthly housing payment (just mortgage/taxes/insurance) will be about double what it is now.

So how are we going to manage all of this? I’ll first talk about the purchase and remodeling costs and then about the ongoing expenses.

Purchase and Remodel: We put 20% down on the home we bought. To come up with this rather sizable chunk of money, we took cash out of our high-yield savings accounts and maxed out our HELOC on our condo. When our condo sale closes in May, we’ll replenish the cash and pay off the HELOC. We have to pay one month of interest on the HELOC ($361) plus the loss of earned interest on the cash.

As for the remodel, we’ll pay for that with a combination of replenished cash from our condo sale and from withdrawals from my IRA. I don’t love paying taxes on the IRA withdrawal, but we see this as a one-time but necessary move. We will, however, keep a reasonable amount of cash liquid as an emergency fund.

Ongoing Expenses: Despite my 2025 retirement and my husband’s retirement plans, we still think it will all work out. With our current income (my pensions, my husband’s pension from his former state job, his salary), we were living very comfortably with relatively low housing costs and plenty of disposable income. There will be less of that going forward, but in the short run, here’s how we plan to make ends meet:

• My husband is going to semi-retire on October 1 rather than retire entirely. His employer has already approved him moving to 50% time then. So while we’ve have less income, his current income won’t disappear completely.
• I’m planning to file for Social Security next year at my full retirement age of 67. He’ll still wait until 70 so that one of us can max out the benefit (unless something changes with SS payouts, of course).
• We are cutting our financial support to our adult daughter–not completely, but substantially. We’ve been telling her for several years of our retirement time line, and we’ve conveyed to her in writing our intent to reduce our support gradually between now and October 1. If she can’t make it on her own, she’s welcome to move back to Davis and live in our guest cottage as long as she needs to.
• If she doesn’t use the guest cottage (because she’s able to increase her earning/manage her spending to live more independently in San Diego County), we’ll use the cottage as a source of income–either Airbnb or a longer-term tenant. I mentioned in the first article that the previous owner was making over $40K/year as an Airbnb host. Our college town is a great market for these kinds of rentals. We’re not going to decide about how exactly we want to deploy the guest cottage until after our remodel is done, as we’ll be using some of the space ourselves during that period, especially the kitchen.

My Social Security benefit will make up the difference between our condo payment and our new house payment. There is still the matter of my husband’s income being cut in half (and eventually disappearing when he fully retires), but the reduced support to our daughter and/or income from the cottage should help that balance out somewhat, and he’ll start drawing his own Social Security in several years plus will get a small pension from his current employer (not public sector, for the record).

We’ve also agreed that if the budget is tight between now and when we both take Social Security, we’re OK with taking a bit out of our IRAs each year. This will be less painful, tax-wise, after his income drops. We think that reducing our balance in advance of RMDs (which for us are still more than nine years away at age 75) makes some sense, especially if it funds continued travel and other fun activities during the “go-go years” of retirement.

So that’s how we hope it’s all going to work. I’d be lying if I said it doesn’t make me a bit anxious. I liked having cash on hand, I liked having a lower house payment with a good interest rate, I liked not touching our retirement accounts, and I liked having a comfortable enough income that we don’t have to watch our spending that much. This will be an adjustment, but we think it will be worth it. At the end of the day, why did we save all that money in retirement accounts and keep cash available if it wasn’t to do something like this? So now we’re doing it!