Q: My wife and I are planning to build a house. I'm 56 and my wife is 60. Here's where I need perspective: The dream home, although of modest size, is to be very energy efficient and architecturally distinctive (I'm an architect and the design is a personal expression). I'm sure that the house, garage and site costs will be in the $600,000 range. I can't yet get my head around the whole deal leaving us with a new $450,000 mortgage How can we get a sense of the likely selling price, mortgage premiums vs. other investments, etc.?


A: That's a lot of debt to take on as you enter into the traditional retirement years. A ­sensible financial guideline for homeowners is to have paid off the mortgage by the time you near retirement. What's more, while you can make reasonable assumptions about home values over the next decade or so, you can't get rid of the uncertainty, including the swings in the business cycle, changes in consumer preferences concerning shelter, and so on.

You could buy a small condo in the Twin Cities and bank a fair amount of money from the sale of your existing home. It also matters how much in other assets you have to support the debt.

That said, I would run two tests on the wisdom of building your dream home. The first test is thinking through its opportunity cost. Whenever you make a decision to do something — like build a new home — you foreclose using the money and time for other purposes (such as travel). The value of the goods and services you sacrifice in making a choice is its opportunity cost, which helps us better understand the return we expect from our choices.

If you go this route, you might not be able to travel or pursue other bucket-list projects. Your time and your money will go into the home. Are the trade-offs worth it?

The other test is to focus on risk or, more accurately, which risks you're more comfortable living with. The key question is always "What's the downside? What could go wrong?" I would ask your financial adviser to run some worst-case scenarios to gain a grasp of your degree of financial vulnerability.

Thinking through its opportunity cost and crunching the numbers to understand your downside risk should help guide you toward a sensible decision.

Chris Farrell is senior economics contributor, Marketplace, and economics commentator, Minnesota Public Radio.