[Editor's Note: This guest post was submitted by physician financial blogger and Los Angeles resident, the Darwinian Doctor. It's a timely post considering that earlier this week we ran 12 Reasons California is a Terrible Place for Doctors to Build Wealth. Darwinian Doc's parents had a small amount of money saved up for retirement but still had a chance of making it work for them until the death blow of moving to California to be closer to Darwinian Doc and family. When you try to stick it out in California, you've got to come up with creative ways to overcome the consequences of negative geographic arbitrage. Here's The Darwinian Doc's solution to solving both his childcare problem and helping out his parents. We have no financial relationship.]
“Just Support Us When We're Older”
When I was in high school, I was always surprised that despite living in a rental house, my parents still somehow found some cash to pay for my music lessons and other extracurricular activities. Clearly, if we had enough to pay the tutors, we couldn’t be in such dire financial straits, right?
Whenever I asked my mom about money, she would joke and reply, “Just support us when we’re older.”
As I went through college and then medical school, I often ended up being the one to fill out the forms for financial aid. I realized that unless my parents had a secret stash of gold bars under the floorboards, they had very little saved for retirement. I also realized that my mother hadn’t been joking at all about likely needing financial help later on.
How to End Up at Retirement Age With No Retirement Accounts
After a brief foray into the dry cleaning business, my dad spent the majority of the 1980s as a commercial real estate broker. That work dried up in the recession of the early 1990s, starting an increasingly grim decade of austerity for my family, complete with a repossessed house and all the awful money stress that comes along with stuff like that. My father tried to keep us going by starting a construction business, and eventually, my mom went back to work as a hair stylist to make ends meet.
Needless to say, during this time my parents had little ability to consider retirement planning. The majority of their time was spent just trying to make ends meet. There was no 401(k) account, no employer match, nor was there any inheritance coming.
In recent years, I’ve learned that this situation is very common. Studies have shown that nearly half of working-age Americans have no retirement savings at all! In 2013, the average American working-age family had only $5000 in retirement accounts.
A Crash Course in My Parents’ Finances
After I left for college, my parents’ money situation seemed to get better. The real estate business picked back up, and they seemed more comfortable. My mom was able to stop working again. Over the next decade, they retired and moved to Nevada for the low cost of living. But I still had no real clue about the particulars of their financial health.
It was the birth of my first child that started to open the door to the murky area of my parents’ finances. Shortly after he was born, my mom decided that she wanted to move to Los Angeles to be closer to her grandchild.
My wife and I were ecstatic at the thought of free childcare, so after a few months, my mom made the move. Leaving my father to temporarily fend for himself in Nevada, she took up residence in a studio apartment by our home. After my wife went back to work, my mom shared childcare duties with our nanny. My wife and I paid for her studio, which was around $1200 a month. My mom usually traveled back to Nevada over the weekends to make sure my dad was getting along okay in her absence.
After another year or so, my dad sold their house in Nevada and came to Los Angeles as well. They moved from the studio to a larger apartment near our house where the rent was about $3000 a month. It was by no means a fancy apartment; this was just the going rate in our area of Los Angeles at the time.
We offered to pay for half of their rent, which prompted, for the first time, a frank discussion about their finances.
I learned that even with splitting the rent, my parents didn’t have enough cash flow to cover their rent and living expenses in the long term. Although they were much better off than those dark days in the 1990s, I learned that the vast majority of their retirement portfolio consisted of:
- A condominium (rented)
- Cash from the Nevada house (in CDs)
- Social security
The total cash flow from these assets yielded just over $1500/month.
My Wife and I Inadvertently Doomed Their Meager Retirement
On one hand, my parents both helped immensely with childcare, and my son (and now sons) benefitted enormously from their loving care. On the other hand, by luring my parents from their cheaper existence in Nevada, I doomed the sustainability of their retirement.
In Los Angeles, the expensive rent, food, and utilities alone would eat through the value of their portfolio in about 10 years. And if one of them became sick and needed to go to a care facility? Their assets would be gone in a few years at most.
Solving the Problem
Wracked with guilt, I debated the situation endlessly with my wife. I wanted a solution that improved my parents’ quality of life, while not completely derailing my own desire for financial independence. We eventually came up with a few options to stabilize my parents’ living costs:
#1 Allow my parents to move in with us
This option was a non-starter. My wife told me in no uncertain terms that we would likely end up divorced if my parents shared a roof with us. Getting a divorce would violate the “one house, one spouse” rule of financial wellness, so we moved onto the next option.
#2 Buy a nearby duplex and have them live rent-free in one unit
It turns out that duplexes in Los Angeles, like single-family homes, are crazy expensive. We would have had to take on another sizeable mortgage to purchase an LA multifamily property, even if we used my parents’ cash for a downpayment. This made us uncomfortable, and to top it off, we realized that the rent from the second unit alone wouldn’t come close to covering the costs of the new mortgage. Charging my parents rent would defeat the purpose of this option, so we decided against this as well.
#3 Move to a house with a larger lot and build an accessory dwelling unit (ADU) for them on our land
We ended up choosing this option. We moved to a property with a larger plot of land of about a third of an acre and expanded our garage to an ADU (accessory dwelling unit). An ADU is just a fancy term for an in-law suite or granny flat. It has all the essentials, including a bathroom, kitchen, and sleeping space.
While Los Angeles has historically made the process of legally building an ADU about as easy as placing an IV in a screaming 2-year-old, recent changes to state laws have made the approval process much easier. In California, there is now the general recognition that increased utilization of existing land to create more housing units is a good way to ease the housing crisis.
The Accessory Dwelling Unit (ADU) Solution: A Win-Win
We took bids, got over the sticker shock, and then forged ahead with our plan to make a fully permitted ADU. Our priorities were speed and quality of construction, as well as minimizing legal risk. So we went with a licensed and bonded contractor who would obtain all necessary permits from the city.
We took out a low-interest personal loan from my parents for $150k and paid for the rest out of our savings. The construction was about $175k by itself, and the appliances and fixtures cost another $25k. We didn’t want to pay for a designer or full-service architect, so my wife and I selected and purchased everything from the dishwasher to the flooring. This was significantly more annoying and time-consuming than I thought it would be.
I'm surprised that the contractor bid didn’t include things like the HVAC unit, the bathroom tiles, or the oven, but this seems to be a universal phenomenon amongst LA contractors.
Was an ADU a Good Financial Decision?
So this all begs the question: Was this a good investment in addition to being a good long term solution for my parents’ needs?
Let’s consider some of the benefits from this situation (in no particular order):
- Added value to our property
- Free childcare (about 25 hours a week)
- The relationship between my kids and their grandparents
- Economies of scale for utilities, food, and toiletries
When we delve deeper into the numbers, first to consider is the $150k loan we received from my parents. With their blessing, we will pay the personal loan back to them over a 10 year period, plus 3.25% APR, to help improve their cash flow. This is $1466/month.
Finally, considering that we were previously burning through over $36k annually on just their rent alone, my parents simply have to live in the ADU for 5-6 years before it essentially pays for itself.
Looking down the road a few years, I envision being able to get by without a full-time nanny as both kids start going to school full time. After my kids come home from school, they can hang with their grandparents until my wife and I get home from work.
Looking even further down the road, I see a place where my parents can safely age in place. If minor health problems arise, I’ll be able to intervene conveniently and frequently, as they’ll literally be in my backyard.
The specter of more serious health problems that might need a long term care facility haunts me still, but one problem at a time, right?
It took about 6 months from start to finish, but the occupancy permit finally came through. My parents are set to move into the ADU next week and will have 600 square feet of newly constructed living space all to themselves.
As long as we all continue to get along, this arrangement should be mutually beneficial. My parents can be deeply involved in the lives of their grandkids while allowing me to help support and repay them for the sacrifices they made to allow me to become a physician.
Of course, I wish they had the means and foresight to have ample retirement savings to support themselves in retirement. They actually ended up better off than most retirees, but the expensive cost of living of Southern California did them in.
Unexpected family expenses can easily derail your journey to FIRE (or moFIRE). But by paying upfront to stabilize parental living costs with something like an ADU, you can get back on track.
Do you have an accessory dwelling unit as part of your home? How have you used it? How have you helped out non-financially independent parents? Comment below!