Whether you’re a working professional who dreams of building a legacy of memories for your children, or a Baby Boomer approaching retirement, eager for a retreat that will draw your friends and family near, the second home trend has its appeal.

A second home looks different for everyone – it may be a house in Ocean City, a cabin set on a lake in Maine, or a peaceful retreat in the countryside. But no matter what it looks like, the big-picture questions are the same: Is it a smart investment? How should it figure into your long-term financial goals and retirement plan? How do you weigh the financial investment with the time and emotional investment?

Here are a few benefits and considerations to keep in mind when evaluating whether investing in a second home is right for you:

Turnkey convenience, tailored to your taste and needs

When you have a second home, you can pick up and go with little to no notice – no reservation required. When you arrive, you’re home – no need to settle in and no chance of being disappointed if your rental doesn’t match the pictures from the online ad. The home is decorated to your specific style and taste, with the amenities that you value and enjoy. Plus, all your vacation clothes, linens and recreational items are in one place and ready for use. Another added benefit is the opportunity to invest in your own equipment – whether it’s camping gear, beach chairs, kayaks, etc. – that you can enjoy year after year.

Immediate return with potential long-term value

At the point of purchase, there is immediate value in the utility of the home. To help offset maintenance and upkeep costs, you can choose to rent out the house. But, keep in mind that managing a rental takes time and resources and that you will need to fit yourself into the rental schedule. In the long-term, the house may serve as a retirement residence. Or, if you monitor the market and sell when conditions are favorable, you can aim to make a profit.

A place to make memories and build your legacy

A second home is more of an emotional investment than traditional investments, such as stocks or bonds. Whether you have a young and growing family or you’re nearing retirement, a second home can serve as a gathering place for family and friends – a place to retreat, discover new hobbies and passions, start traditions and make lifelong memories. Establishing a secondary residence also gives you the opportunity to build new friendships and community outside of your hometown. For many families, the sentimental value attached to a vacation home far exceeds its financial value.

Maintenance and upkeep costs

There are carrying costs associated with a second home, including taxes, insurance, utility bills, and general maintenance. As the owner, you are responsible when something goes wrong – whether it’s a broken window, leaky roof, or liability from an injury on the property. Some homeowners will hire a management company to clean and maintain the grounds, particularly if they plan to rent out the property – however, this additional cost can cut into revenue. Homeowner insurance rates and mortgage financing terms also tend to be higher and more restrictive.

Reduced flexibility to travel and experience new places

Keep in mind that if you’re paying a mortgage and taxes on a second home, you’re probably going to spend most of your vacation time there. To make the most of your investment, you may feel compelled to visit your vacation home as often as possible, foregoing other options. Plus, the associated costs may start to cut into your budget to travel elsewhere. If you like to explore new places and go somewhere different every summer, tying yourself down to one destination might not be the most strategic move.

Financial risk and tax complexities

As with any investment, there is financial risk involved in owning a second home. Real estate is illiquid – there’s no predicting what the economic climate will be in 20-30 years and whether conditions will be favorable to sell. Before you decide to buy a second home, consult with a trusted financial advisor to evaluate your options. A financial planner can conduct an overall cost-benefit analysis and help gauge the impact of the purchase on your long-term financial security and retirement plan. You should also consult with a CPA to evaluate the tax implications, weighing factors such as expected use and revenue from rent.

For decades behavioral finance was largely an academic pursuit, more recently this body of knowledge has been recognized for its impact on investing. Daniel Kahneman and Richard Thaler have been awarded Nobel Prizes for their contribution to this field of research. What follows is behavioral finance in plain English. Knowing these mental blind spots might make you a better investor.

Legendary economist and investor Benjamin Graham said it best “The investor’s chief problem – and even his worst enemy – is likely to be himself.”

Your own behavioral biases are often the greatest threat to your financial well-being. As investors, we leap before we look. We stay when we should go. We cringe at the very risks that are expected to generate our greatest rewards.

Most of the behavioral biases that influence your investment decisions come from mental shortcuts we depend on to think more efficiently and act more effectively in our busy lives. Usually these short-cuts work well for us. They can be powerful allies when we encounter physical threats, or even when we’re simply trying to stay afloat in the sea of decisions we face every day. These same survival-driven instincts that are otherwise so helpful can turn problematic in investing.

Let’s take a look at these concepts…

Anchoring: Going Down With the Ship. Fixing on earlier references that don’t serve your best interests.
Real life scenario: I paid $11/share for this stock and now it’s only worth $9. I won’t sell it until I’ve broken even.

Confirmation: The “I Thought So” Bias. Seeking news that supports your beliefs and ignoring conflicting evidence.
Real life scenario: After forming initial reactions, we’ll ignore new facts and find false affirmations to justify our chosen course … even if it would be in our best financial interest to consider a change.

Familiarity Breeds Complacency. “Familiar” doesn’t always mean “safer” or “better.”
Real life scenario: By over concentrating in familiar assets, you decrease global diversification and increase your exposure to unnecessary market risks. This is very common when employees own a large stake in their employer’s stock.

Fear: “Get Me Out NOW!”. The panic we feel whenever the markets encounter a rough patch.
Real life scenario: While you may be well-served to run from a dangerous physical situation, doing the same with your investments might lock you into a loss without participating in the recovery.

Greed: Excitement Is an Investor’s Enemy. Fear of missing out, Chasing hot stocks, sectors, or markets, hoping to score larger-than-life returns.
Real life scenario: When you speculate, you can get burned in high-flying markets. Remember to focus on what really counts: managing risks, controlling costs, and sticking to the plan.

Loss Aversion: Avoiding Pain Is Even Better Than a Gain. We are hardwired to despise losing even more than we crave winning.
Real life scenario: We attempt to time the market by selling before it drops. Ultimately, market-timing is more likely to increase costs and decrease expected returns.

Overconfidence: Better Than Average? Everyone believes they’re above average. Clearly, not everyone can be correct.
Real life scenario: Overconfidence makes you believe you’ve got the rare luck or skill required to consistently “beat” the market, instead of patiently participating in its long-term returns. Slow and steady wins the race.

Sunk Cost: Throwing Good Money After Bad. It’s more painful to lose something if you’ve already invested time, energy, or money into it.
Real life scenario: The past is past. Don’t let sunk cost fallacy stop you from unloading an existing holding once it no longer belongs in your portfolio.

Don’t go it alone – your brain has a difficult time “seeing” its own biases. Having an objective advisor dedicated to serving your highest financial interests is among your strongest defense against all of these mental traps.

Whether your kids or grandkids are 4, 14, or 24, teaching them about money is one of the most important gifts you can give them. Good money skills last a lifetime. Budgeting, prioritizing savings, living within your means, long-term investing, are all skills that we can teach. Obviously, the application of these skills will differ based on the child’s age, but it is best to start when they are young.

If we teach them our values and principles about money today, they will be well positioned to succeed in the future.

Younger kids tend to live in the moment, with little consideration of the future. Encourage them to save a portion of each cash gift with an eye on the future. Show them how a savings plan can help them obtain a more expensive or treasured item in the future.

For teenagers with a job, help them understand their paycheck. Explain FICA (Federal Insurance Contributions Act is a United States federal payroll contribution directed towards both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for retirees, people with disabilities, and children of deceased workers). To help them get started with savings, offer to make a matching Roth contribution if they are willing to save some of their hard earned pay.

If you thought it was challenging explaining good money habits to teenagers, just wait until they are in college and have everything figured out. They will be out on their own for the first time with little money and lots of spending opportunities. College students are flooded with credit card solicitations. Credit cards can be useful in an emergency or to help build a credit history, but they can easily lead to overspending. This is a good time to discuss credit cards and avoiding high interest debt.

As your young adult starts their career, make sure they prioritize savings from the start. Encourage the establishment of an emergency fund and contributions to a retirement account. Their lifestyle will adjust to their take home pay. As bonuses and pay increase, so should their commitment to savings. Show them how slow and steady savings grows over 40 years.. According to Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

What should we tell them about investing?… focus on the long-term, stay invested through all market cycles, and own a low-cost diversified portfolio.

We frequently field questions about this topic and have many resources to share. If this involves an adult family member, please feel free to make an introduction to us. If you would like additional advice and guidance, please reach out, we are here to help.

Who doesn’t enjoy tying up year-end loose ends? The original SECURE Act was signed into law on December 20th 2019. Its “sequel,” the SECURE 2.0 Act, was similarly enacted at year-end on December 29th 2022.

Both pieces of legislation seek to reform how Americans prepare for retirement while juggling current spending needs. How, when, or will each of us retire? How can government incentives, regulations, and safety nets help more people safely do so—or at least not get in the way?

These are questions we’ve been asking as a nation for decades, across shifting socioeconomic climates. Throughout, a hard truth remains:

Employers and the government play a role in helping you save for and spend in retirement, but much of the preparation ultimately falls on you.

That’s America for you. The good news is, you get to call your own shots. The bad news is, you have to. Neither the original SECURE Act nor SECURE 2.0 has fundamentally changed this reality. SECURE 2.0 has, however, added far more motivational carrots than punishing sticks. Its guiding goal is right there in the name: Setting Every Community Up for Retirement Enhancement (SECURE). Following is an overview of its key components.

Note: Implementation for each SECURE 2.0 provision varies from being effective immediately, to ramping up in future years. Many of its newest programs won’t effectively roll out until 2024 or later, giving us time to plan. We’ve noted with each provision when it’s slated to take effect.

Below are a few provisions that may have an impact on your future financial planning:

• Required Minimum Distributions (RMDs) pushed back in 2023 (Age 73 if born between 1951-1959, Age 75 if born in 1960 or after)
• Elimination of RMDs for Roth accounts within employer-sponsored plans in 2024
• Employers may deposit matching or profit-sharing contributions to Roth accounts, which would be taxable to employee in year of contribution in 2023
• High wage earners (wages in excess of $145,000 in previous calendar year) will be required to use Roth account for catch-up contributions in employer-sponsored plans, which would be taxable to employee in year of contribution (beginning 2024)
• 529-to-Roth IRA transfers – may be able to move unused 529 plan money into Roth IRA –subject to numerous restrictions and limits in 2024
• Post-death option for surviving spouse beneficiary to delay RMDs until when deceased spouse would have reached RMD age – only applies if younger spouse pre-deceases older spouse in 2024
• IRA catch-up contribution limit ($1,000) indexed for inflation starting in 2024
• Increased employer-plan catch-up contributions when in 60’s – catch-up contribution limits will be higher (at least $10,000 and inflation adjusted) for those ages 60, 61, 62, and 63, starting in 2025
• New QCD rules which start in 2024 include:
• Maximum annual amount of $100,000 indexed to inflation
• One-time $50,000 QCD allowed to charitable trust/charitable gift annuity

How else can we help you incorporate SECURE 2.0 Act updates into your personal financial plans? The landscape is filled with rabbit holes down which we did not venture in this article, with caveats and conditions to be explored. And there are a few provisions we didn’t touch on here. As such, before you proceed, we hope you’ll consult with us or others (such as your accountant or estate planning attorney) to discuss the details specific to you.

Come what may in the years ahead, we look forward to serving as your guide through the ever-evolving field of retirement planning. Please don’t hesitate to reach out to us today with your questions and comments.