Fitting home renovations into your financial plan

How to ensure a new kitchen doesn’t burn a hole in your long-term savings.

For people spending more time at home, the desire to update living spaces may be stronger than ever. Perhaps it’s time for a dedicated home office or updates to make your bathroom safer and easier to navigate. 

Before you start dreaming of new countertops or building an addition onto the back of the house, you’ll want to determine how the cost of any renovation will impact your overall financial plan. That can be tougher in today’s environment, where construction supplies and labor are tight. 

“Have an advisor run a plan for you with and without those renovation expenses,” says TIAA Financial Planning Strategist Rob Stevens. “You want to ensure a renovation today doesn’t put you into a financial bind ten years later.”

One question to ask yourself: “Would you still want to move forward with the project if the cost means you’d have to work another year or more before retirement?” says Daniel Ruppel, a Financial Planning Strategist at TIAA. “You can confidently move ahead if that doesn’t bother you.” 

Here are a few more questions to consider:

Renovate now, or when you sell?

If your home could use some sprucing up, but you’re not sure you want to live there forever, some updates may still be worth it.

"Maximizing the enjoyment of a home you own is not frivolous—in fact, it can be an outright good investment, adding value that you or your heirs will reap when the time comes to sell."

The answer depends on multiple factors—including what is truly needed (overdue repairs versus “nice to haves”) and your current financial picture—but the upshot is “if you can afford to, don’t wait until you sell to make it nice,” says Stevens. “It’s a rough world out there, so make your home enjoyable.” 

Whether you’re moving soon, however, could influence how much you’re willing to sink into aesthetic choices. If you’re renovating to appeal to potential buyers, it’s better to keep the style of your upgrades neutral, Stevens says. You also may want to prioritize renovations that will add value when you sell. 

Is it the best use of extra cash flow?

If you’ve paid off your mortgage and are planning to stay put in your current home, you might be tempted to put that money you’re no longer sending to the bank toward a nice renovation. And certainly, you’ve earned it. 

But before you leap, consider if it’s better to hold off on home improvements and first use that money to bolster your emergency fund or make catchup contributions toward your retirement savings, says Ruppel. 

What are the unexpected costs?

Always leave room in the budget and timeline for surprises, especially these days. “Costs always pop up, or the contractor finds something unexpected when doing work that will require more money or time to address,” says TIAA Financial Planning Strategist Mark Schrader.

In addition to the expense of the renovation itself, it’s possible that the improvements you make will increase the assessed value of your home and thus your property taxes. 
Be aware of which types of renovations can trigger additional taxes—typically, they include most improvements that require a construction permit, such as building an addition, says Ruppel. And then do some calculations for how that extra cost will impact your long-term plans.

“If higher taxes will be burdensome, consider a smaller home refresh, such as putting in new flooring, painting or other improvements that are less likely to trigger a higher tax assessment,” Ruppel says. 

What’s the best way to pay?

Stevens explains that choosing whether to pay cash, tap a home equity line of credit (HELOC) or use a credit card depends on your financial situation. 

“Do you already carry a lot of debt, or do you have the cash on hand? A HELOC may make sense, for example, if you can’t pay for it in cash, but the repairs are necessary,” he says. 

Again, as with any big investment, it’s a good idea to contact your TIAA advisor to see how the cost of a renovation and any potential debt you might incur would affect your overall financial plan. 

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