Q Dear Rick:
I have been retired for a few years now and unlike many of my friends, I’m actually in very good financial shape. In fact, since I retired three years ago I have spent less than I thought I would. Between Social Security from my wife and I, along with a modest distribution from our IRA it is more than covering all our expenses. I don’t see any major expenses coming in the future, our house is paid for and we have no debt. My question is what I should do with a $75,000 CD that matures early next year? My wife says we just buy another one-year CD, while I prefer to use the money to do a variety of home improvement projects around our home. I think that by making these improvements, it will increase the value of our home when we eventually sell it. What are your thoughts?
A Dear Jerry:
The first thing I would tell you is I would not consider the money you plan to use for home improvements as an investment, but rather, a quality of life. I’ve always been a believer that homes are not necessarily good investments. Furthermore, I don’t believe that by upgrading your house it’ll mean that you’ll get the money back when you sell it. Just ask people who did home improvements over the last 10 or 15 years to see if they’ve gotten a return on their investment. The bottom line, I’m not telling you that you shouldn’t consider doing the home improvements but rather, what I would tell you is not to consider it as an investment, but rather as a quality of life issue. In other words, if redoing your kitchen would increase the quality of your life, that’s one thing. On the other hand, if you’re only redoing the kitchen because you think it’s a good investment, that’s something totally different. I like the former, I don’t agree with the latter.
The issue you need to be concerned with, and probably the most important, is not if the home improvement would be a good investment or not but rather, do you anticipate sometime in the future needing that $75,000. If it appears that in a few years down the road you will need the income from that $75,000, then I certainly would think twice about doing the home improvement. On the other hand, if after looking at your situation you and your wife decide that there is no realistic chance you will need the $75,000, then certainly the home improvement is something to consider. The key is not whether you’ll need the money today or tomorrow but rather, will you need the money 20 years down the road.
I recognize that it is difficult to determine what your needs are going to be in the future. If we had a crystal ball and we could look into the future, it certainly would make things easier; unfortunately, we’re not so lucky. One of the tests I use to determine whether you have excess resources or not is to take your investable assets and multiply them by 3½ percent. I think the 3½ percent number is a conservative way to determine what you can withdraw from your portfolio on a year-by-year basis without jeopardizing your future. Therefore, in the case at hand, if without factoring the $75,000 into the equation, will the 3½ percent along with your Social Security cover all your needs? If it does, the home improvement is something you should consider. If it doesn’t, then either you choose not to do the home improvement or maybe you do a portion now and delay the rest for down the road.
You would think that people would have learned the lesson by now that just because you put money into a home doesn’t mean you’ll get it back when you sell. There are literally millions of people who have lost money when it came to home improvements. That is why I believe when you do home improvements, your focus should be on quality of life. If doing the home improvements is not going to increase the quality of your life, then there’s probably no reason to do it. If you focus on the quality of life, then even if you don’t get your money back when you eventually sell the home, you have gotten something just as valuable and that is increasing your enjoyment of the home and increasing the quality of your life; which is extremely valuable, even though you can’t quantify it in dollars and cents.
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at email@example.com