While having a big house is nice, the cost of maintaining that house may severely crimp your standard of living in retirement. Here are some numbers you might want to consider before you commit to buying or keeping that big home.

Let's look at a simple example. Assume you buy a \$600,000 house at age 45, and that house appreciates in value to \$1,000,000 by the time you retire at 65. Let's also assume you got the mortgage paid off before you retired. Now, you have a free place to live. Well, not exactly.

In addition to purchasing the house, you're going to need to set aside a pretty good chunk of change just to pay for the taxes, insurance, annual maintenance and long term upkeep of the house. Most people don't realize how much this can cost and how much of your retirement assets it can consume.

Depending on where you live, your property taxes can range from 1% to 3%, or more. Let's assume your property taxes are 2% of the value of the home. So that will cost you about \$20,000 a year for taxes.

Because houses fall apart and need constant maintenance and upgrades, you need to budget every year for those costs. Remember, you'll eventually need a new roof, new driveway, sewer line repair, basement repairs, furnaces, air conditioners, and the list goes on. And the bigger the house, the more these things cost. A conservative estimate is at least 2% of the cost of the home. On a \$1 million home, that's another \$20,000 a year.

Then you have to insure the house. Again these rates will vary, but it's not free. So estimate another \$2,000 for insurance on your \$1 million house. That brings the total cost to about \$42,000 a year.

In retirement, a good estimate for distributions from your retirement plan is about 4% to 5% a year, depending on the markets. We'll split the difference and go with a 4.5% average distribution rate. That means to generate \$42,000 of distributions to maintain your \$1 million house, you need \$933,333 in retirement assets (\$933,333 x 4.5% = \$42,000). So your \$1 million house now requires almost another \$1 million in asset to support it.

• Probably a bit more when you consider the taxes you have to pay on those distributions.
• Another way to think about it is assume you will have a 30-year retirement. At \$42,000 a year, the upkeep would cost \$1.26 million, and that's without factoring in inflation.
Buying a big house is a lifestyle decision. There's no right or wrong answer. For some people, the house is incredibly important and serves as their primary asset and source of entertainment in retirement. And dedicating a large percentage of their assets to their house is worth it.

For others, the house may end up restricting their ability to engage in other activities, such as travel or enhancing their lifestyle in other areas.

Bottom line. Before you buy or decide to keep the big house, think about how much it will cost you over the long-term, and make sure that's where you want to spend your retirement money.

Learn More: Want to learn about a simple way to manage your personal finances and prepare for retirement, investigate my new book Your Money Ratios: 8 Simple Tools For Financial Security, available in bookstores and at amazon.com The Wall Street Journal called the book "one of the best finance books to cross our desks this year." WSJ 12/19/09.

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