Can You Afford to Remodel Your Home in Retirement?

Your
spouse wants to remodel your kitchen and several bathrooms in your
house. You’ve received a quote for the work for about $100,000. Using a
strategic withdrawal approach and a Monte Carlo modeling approach, your
financial advisor has previously told you that you can only safely
afford to spend about $110,000 per year in retirement, so it looks like
paying for your normal annual expenses in addition to the remodeling job
your spouse desires is simply out of the question at this time.If
you, or your advisor, use the Actuarial Approach, determining whether
you can safely afford to spend on a specific item or project is an easy
process. It involves determining what your current Funded Status is and
what it would be if you went ahead with the proposed purchase or
project. It is as easy as that. To reiterate this important advantage of
the Actuarial Approach: Making an informed spending decision
simply involves answering the question, “What will happen to our Funded
Status if we choose to go ahead with this purchase or project.”Some
spending decisions involve simply a decrease in household cash (or
other liquid assets), while other decisions involve not only a decrease
in cash but also an increase in the present value of future associated
asset sales. For example, making a decision to spend $50,000 on a cruise
will generally simply involve a decrease of $50,000 in cash, and may
also involve increased taxes if investments are sold to raise the cash.
However, if you plan to sell your home in the future, making the
decision to remodel will involve a decrease in cash and it will likely
also involve an increase the expected future purchase price of the home
and may involve increased expected property taxes from now until the
anticipated time of sale. The net present value of the increased costs
and increased revenue should be estimated and reflected in the spending
decision.ExampleLet’s assume that Bill
and Susie have a Funded Status as of January 1, 2026 of 125% consisting
of the present value of their assets of $2.5 million divided by the
present value of their spending liabilities of $2 million. The $2.5
million of assets includes $300,000 as the present value of future sale
of their current home as a downsizing gain when they expect to reach age
80. They estimate that remodeling their home this year will decrease
their cash assets by $100,000, but the net increase in the present value
of their future home sale will be $70,000. Thus, the net present value
decrease in their assets associated with the home remodeling would be
$30,000 ($100,000 – $70,000) and they re-estimate their funded status to
reflect the remodeling to be 123.5% [($2,500,000 – $30,000) /
$2,000,000). Based on this analysis, they decide that they can move
ahead with the home re-modeling project.Relying on future asset sales to fund retirementAs noted in our post of January 31, 2026
you can rely on all sorts of future asset sales to fund your
retirement. For many reasons, these future sales are often ignored by
advisors as sources of retirement funding (especially if the advisor
uses a strategic withdrawal strategy). If households are will to use
such assets to fund their retirement, we believe that ignoring future
asset sales is a financing mistake. Note that while relying on future
asset sales will generally decrease portfolio assets (and therefore
possibly reduce assets under advisor management), the present value of
total assets drives how much the household can afford to spend each
year. It is important to note that depleting portfolio assets faster
than expected by relying on future asset sales to fund retirement may
result in future cash flow issues that can force earlier than the
desired sale of assets, so it is important to annually monitor the
expected value and marketability of such assets.For more details
regarding how to calculate present values of future asset sales using
the Actuarial Financial Planner, see our Advisor Perspectives article, “Advising a Retired Client Who Wants to Buy a Second Home (or Other Big-Ticket Item).”SummarySome
spending decisions simply involve decreases in cash assets. Other
spending decisions may involve decreases in cash assets offset, or
partially offset, by increases in the present value of associated future
asset sales. Many approaches used by current advisors to determine safe
spending in retirement ignore future asset sales to fund household
spending liabilities. We believe that ignoring future asset sales is
generally a mistake and one that is easily fixed by using the Actuarial
Approach and its Funded Status metric.