How To Make a Vacation Condo Part of Your Retirement Plan
February 08, 2012

How To Make a Vacation Condo Part of Your Retirement Plan

Q. I have considered re-allocating my monthly 401(k) contributions and buying a small condo in Florida. My 401(k) account is down to breakeven (at best) and we are not getting any enjoyment from it. However, if we invested in a condo we would at least get some enjoyment. Wouldn’t such a purchase also be a form of diversification? —H.M., by email

A. If you buy it as a vacation property it would not be diversification. It would simply increase the portion of your assets and net worth devoted to real estate. Since we value home ownership so highly, all but the most wealthy people in America have the bulk of their net worth in personal real estate. Another limitation of this idea is that your Florida condo would be a “consuming” asset, not an “earning” asset. That means it would take your income rather than produce income for you.

You could, however, make this an investment by paying for it over time with the long term intention of selling your primary house and moving to your lower price condo in Florida when you retire. I've had letters from readers whose entire retirement plan was based on selling a house in a high cost, high tax area (think New York, Washington, D.C. or Chicago) and moving to a low-cost, low-tax area such as Florida, Texas, or Arizona.

How would it work? Easily. They could sell their expensive house and retire to the less expensive retirement house. Any cash remaining after paying off the less expensive condo mortgage becomes their retirement nest egg.

You can't do that, of course, if you are moving from North Dakota. But it may really compute if you live in a high cost urban area, selling your house for $500,000 and retiring to a $150,000 condo in a lower cost area.


Q. How quickly— or how slowly— should we proceed in consolidating assets now spread among three institutions, into one financial institution? My husband and I are retired and in our mid-60s. We have assets of about $2 million. Most of it (about $1.5 million) is in stocks and in tax-deferred and taxable accounts holding mutual funds with a trust company. The trust company charges 1 percent a year for management.

A second sum (about $500,000) is in 457 accounts with a second institution. The third account is with Vanguard where I am regularly investing in stock and bond mutual funds. I set up the Vanguard account to consolidate and to reduce management fees.

My questions: Are there any financial benefits (other than temporarily avoiding fees from 3 institutions) of doing the move all at once. Or should it be done more slowly— say, over a period of months, using dollar averaging? What are the advantages or disadvantages?

Second, if I take the slower approach, about how much time should I take to move about $2 million?

Other facts: The capital gains impact, I am told, of the move will be negligible since we will not sell our individual stocks. We will stay in the stock market conservatively over the long haul, or as long as our wits remain intact. —J.S., Austin, TX

A. If the assets in any account will be invested in a similar way in the new account there is no reason to delay making the change. Suppose, for instance, that your trust account is invested in a large cap domestic stock fund and U.S. Treasury securities fund. You could make the move immediately if you invested in similar funds in the new account. You'd be changing manager risk (eliminating it if you move to index funds) but you wouldn't be changing the overall risk of your portfolio.

The harder choice is when you want to invest differently in the new account, as in moving from a portfolio of CDs to a mixture of stocks and fixed income securities. This is changing your risk level and it is psychologically easier to do that over a period of time, such as a year.

It's very easy to let our investments become complicated and spread out. One advisor I know likes to call it “scattered asset syndrome.” That's when confusion sets in. So our goal should always be to simplify. Remember, the advocates of complexity are generally people who are making their living from the complexity they create for us.

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