I have a retirement planning question that I would like other people to give feedbacks on.
We are a family of 4 (a father 56 yrs; a mother 52 yrs; first daughter 22 yrs; and second daughter almost 11 yrs). We live in a house in San Francisco Bay Area, with a mortgage which will be paid off in about 3 years. We do preschool/daycare business in our house as the only source of income. The first daughter graduated from college last May, and is back at home, doing a part-time job. I have done some financial analysis on our finance, and I don’t think we have enough savings for us to retire in our area. Our income from our business fluctuates from month to month, and it is low for our area. Although we have been thrifty, we have not been able to save for our retirement for the past 11 years, and I don’t think we can make enough savings for the next 10 years or so (until our normal retirement age), which are significant enough to change our retirement situation. I had been in finance/accounting field and got laid off 11 years ago; and my wife had been a home maker until that time. I looked for a new job, but could not land any for a year, so we decided to open a family daycare after much consideration. We have been doing this family business since then.
About 3 years ago, I received a lump sum gift money for a little over one hundred thousand dollars from my father who wanted me to use that money to grow our business so that we can help ourselves. To grow our business, I looked for a rental property suitable for preschool in our area for 2 years, but I came to a conclusion that it is almost impossible since this urban area is already very much developed and crowded. So, I abandoned that idea.
My wife and I have been trying to find a good strategy to secure better retirement by utilizing this fund in another way.
Through my financial analysis, I realize that putting this money into our IRA or other financial products wouldn’t yield significant and secure enough returns at our retirement that would change our retirement situation.
We also considered using the money to purchase a single family home/duplex/triplex in an area with lower cost of living and renting it out. At a certain point in time, we would sell our house in San Francisco Bay Area, and move into this rental property. The proceeds from the sale of our house would be used for our retirement. However, there are many issues with this option. First, it is very difficult to find an ideal area for the rental property (i.e. retirement place) with the amount of the money. Second, even if we could find one, it would likely be far away from our Bay Area house and the rental income would be very small. The distance would necessitate hiring a property management company, which would further reduce return, and along with other costs, the rental income would be at a point where it would not be worthwhile. Third, the timing of this transition is complicated and risky to our financial situation. We would not want to sell our Bay Area house after our second daughter finishes college because she would not qualify for much financial aids since we would have a rental property. The rental income would be small, and we would somehow have to come up with funds from our monthly cash flow to pay for her college education. We would not want to sell our house during her college years, because up until the house sale, we would be in the situation described above; and after the house sale, we would have to use the proceeds from the house sale to pay for her college expenses and that would reduce the proceeds for our retirement. So, we might want to sell our house before our daughter goes to college, and put all the proceeds from the sale into our retirement accounts so that she would get full financial aids. However, this would mean relocating our daughter before she finishes high school. It may have negative impact on our daughter’s emotional state, which may have negative effects on her grades, and above all I don’t want to put our sensitive daughter through such turmoil for our own retirement sake. For those issues, we don’t think this is a good option to take.
My wife and I have considered many other options for retirement, and we’ve come to think that ageing in place and renting part(s) of our house through home sharing for rental income is the most desirable option (especially emotionally). Fortunately, our house is configured in a way that we could block off certain doors and make a rentable unit, and we would live in the remaining area. According to my analysis, this rentable unit would help with our retirement but it would not be enough for our retirement in this area. My wife came up with an idea of using the money from my father to build a bedroom addition (with a bathroom and a wet bar) to our house. For the next several years, this addition will serve as a place to live for our older daughter who has recently graduated from college and does not yet have a career job (currently, she shares a small bedroom with her younger sister). After she becomes independent and leaves our house, or at the latest, after our second daughter graduates from college and we retire, it can serve as another rental unit through home sharing arrangement. It will provide another rental income every year, which will not diminish but will grow over the retirement years (whereas the distributions from IRA or other financial products will diminish over the retirement years), and the cash we spent will remain in the house as equity. Our housing market is in a strong urban area, and it has not weakened for several decades. I don’t foresee this market becoming weak in the next 10 or 20 years. I estimate that this additional rental income will make our retirement finances feasible.
We are at the point where our city will approve the building permit as soon as we choose a builder. We have gotten 2 quotes from prospective builders, but they have turned out to be much higher than expected (about $200,000). We are currently trying to find less-expensive builders. To fund those costs, we will likely need to use the money from my father, and some savings (if my wife allows), and use our home-equity line of credit (has never been used). I will get a distribution from my father’s life insurance when he passes away in a few years, and it will more than cover the borrowing. (I am grateful to my father for his love and wisdom to set this life insurance up himself.) The building costs seem like a big hump that we need to go over but I am afraid of and hesitant with this situation. I think we can cover the interest expense on the home-equity line of credit from our cash flow, but the interest expense amount will depend on the amount of the borrowing, and that worries me.
I would appreciate it if I could get some feedbacks on our situation.