Should you cash out an investment to make a dream purchase?

It can be fun to daydream about finally making that long-planned-for dream purchase: the luxury car you always wanted, a collectible guitar, or the adventure of a lifetime. The next step is to consider how to make your dream a reality.

The good news: It’s worth exploring, and possibly sooner instead of later, especially if the big purchase has been included in your long-term plan. Because why not enjoy now that special thing you’ve been saving for if you can?

It’s important to first discuss with your advisor how you will fund the purchase versus taking actions that you may regret later. Actions that may have negative consequences include tapping into retirement savings or the cash value from an insurance policy, or even selling some investments.

Before you start shopping for a new jet or vacation home, you need to run the numbers, says Bob Petix, senior wealth strategist at Wells Fargo Wealth & Investment Management.

Petix says, “You want to consider all the potential impacts of spending some of your investments so you can be at ease that you likely won’t need that cash down the line.” Here, he shares the important questions to ask yourself during the process, some common mistakes to avoid, and other options to consider before you take funds from your investments.

The top question: Can I afford to cash out now?

“A dream purchase, whether it’s a high-priced collectible, a lavish wedding, or a vacation home for the family, is by its very nature a splurge,” Petix says. “Making that purchase assumes that you have the surplus funds for it.”

He suggests checking in with your financial advisor to help ensure your big purchase is within reach. Before the check-in, ask yourself the following questions (and then talk with your advisor about your answers):

1. Will this impact my life in retirement? If you’re planning to spend some of your retirement funds now, Petix says, you need to consider how the change could affect your lifestyle in retirement. “Do you want to travel? Move somewhere sunny?” Petix asks. If you can fund your big purchase without potentially impacting your retirement wishes and needs, you’re likely in the clear. Another item to keep in mind: Petix points out that household spending often increases immediately after retirement but then tends to decline until later in life when health care expenses can increase. So make sure your big purchase likely won’t impact your ability to pay for medical care. For what it’s worth, Petix frequently sees clients hold off on big purchases until they’re a few years into retirement. That way, he says, they may have a better idea of how their spending and needs have shifted, which can make them more comfortable making the big purchase.
2. What do the numbers really say? Petix relies on modeling to help clients understand how today’s financial decisions could affect tomorrow by looking at a variety of possible scenarios. “It can be reassuring to see the potential outcomes and know that you’re likely covered,” he says. “And sometimes you might run the numbers and discover that a big purchase could have a negative impact. In that case, you can make changes and adjust your plan so you can continue to work toward your goal or choose to enjoy other things that bring you joy.”
3. Will I continue to enjoy this once I make the purchase? “There’s a famous joke about boats,” Petix says. “Your second-favorite day is when you buy a boat. Your favorite day is when you sell it.” Big-ticket items like boats, private planes, or vacation homes can be expensive and require a lot of maintenance which could include additional ongoing costs. Petix always encourages clients to consider (before cashing out for that big purchase) how much enjoyment they will really get out of the big purchase compared with the effort and money they will put into maintaining it.

Often overlooked: Growth and taxes

One of the biggest drawbacks to tapping into assets to make a big purchase is that the investments won’t continue to grow or be there if you need the money in the future. “I always remind clients that there is a reason they have investments, a retirement fund, or a life insurance policy,” Petix says. “Don’t jeopardize your security if that need is still there.”

There also can be tax implications for using certain types of funds to make a big purchase. Before you cash out, make sure you have a plan for covering any additional taxes and fees that may apply to liquidating those funds — so you can have a full picture of the costs. For example, in order to raise cash to make the purchase, you may have to liquidate assets that will result in a capital gains tax to be paid.

Explore all your options for your big purchase

Petix encourages clients to consider all their options instead of only thinking about tapping into their investments. For example, financing a purchase with a traditional loan may be a better choice for some clients. There are other options, too, he says.

“Is there something you can sell instead of selling your investments?” he says. “Sell one house to buy another, for example. I like the idea of identifying an existing asset that could be liquidated to make the purchase, especially if it otherwise might not be used.” He also suggests taking a test run before committing to a purchase. “For example, if you want to live the RV life and are thinking of purchasing a $500,000 camper, maybe rent one for a bit to see if you really enjoy living like that,” he suggests. “Make sure you’re ready for the lifestyle commitment that your purchase might require.”

With all that in mind, no matter what your dream is, Petix says a good financial advisor can help you find a way to help make it happen. “A good investment plan will have several components, including a spot for the ‘fun’ things you want,” he says. “That’s where cash flow and planning come into play. Running the numbers can help you determine if — and how — you can afford it, not just in terms of dollars and cents but as part of your overall investment plan.” So make a plan that can help you work toward things you’ll enjoy either now or later.