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Americans are at risk of falling short of what they may need to live on financially in retirement.

One potential reason is lifestyle creep, or the tendency to upgrade your lifestyle as you earn more.

An upgrade people are often tempted to make – the purchase of a second home – may be particularly risky for long-term planning, financial advisors say.

“Those bigger purchases, if not done really deliberately and diligently, can almost end up being almost like a grenade in your otherwise well-planned retirement,” said Patrick McGinn, president of Retirement Resources Investment Corp. in Peabody, Massachusetts. The firm is ranked at No. 29 on the 2023 CNBC FA 100 list of top financial advisors in the U.S.

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The purchase of a second home takes away from money that could be invested elsewhere in an asset that’s more liquid than an extra property, according to Stephen Cohn, a certified financial planner and co-president of Sage Financial Group in West Conshohocken, Pennsylvania. The firm is No. 22 on this year’s CNBC FA 100 list.

Importantly, the return on those liquid investments may far exceed what someone may earn on a second home.

“There are people who think they can afford it, but don’t realize it’s going to impact their ability to reach their other financial goals, one of which is retirement,” Cohn said.

However, many people tend to convince themselves the house will appreciate, which they then can monetize or liquidate when they need it for retirement, he said.

“Typically, what happens is most people don’t want to give that second home up after they’ve lived in it for a certain amount of time,” which adds to their cost of living, Cohn said.

Some retirement ‘wants’ just don’t hold water

The purchase of a boat is another example of a big-ticket transaction that can significantly reduce a retirement nest egg, according to McGinn.

A $50,000 boat may cost $15,000 to $25,000 per year to keep up between insurance, storage and maintenance, he said.

“In a sense, you’re pre-spending your retirement,” McGinn said, by putting your current consumption ahead of your future retirement needs.

To help clients evaluate the impact of a boat purchase, McGinn said he typically runs an analysis of the financial impact five to seven years out.

When evaluating a second home purchase, which typically costs more, McGinn said he does a deep dive analysis on the cash flow needs associated with the property and the investment growth that may be sacrificed as a result.

Likewise, Cohn said he also runs a financial analysis for prospective second home buyers that includes the impact it will have on them being able to retire at a certain age and to maintain a certain lifestyle.

If the purchase may derail clients’ financial goals, Cohn said he urges them to consider alternatives, particularly renting.

“Renting is by far, in our opinion, a much more efficient way of enjoying a destination,” Cohn said.

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