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Q. My son-in-law's parents are urging me to take a reverse mortgage to increase my income so I have more freedom to travel and don't have to budget so tightly. I am 70. My house is worth around $200,000. I have about $200,000 in financial assets and no debt. My income is about $26,000 from Social Security, retirement, and dividends. Life would be easier financially with a bit more money to spend on travel, entertainment, etc.

The kids are all OK, so it is not as important to leave as much as possible. Would it pay to invest some of the money from the reverse mortgage?

I am a careful spender, but my health is so-so. That makes me want to really get going now because I may not be able to later.

---N.B., by email from Dallas

  

A. Reverse mortgages are improving, but they are still relatively expensive ways to access home equity. They have significant front-end fees. And the interest still mounts up. Interest rates on these loans appear to be similar to interest rates on home equity lines of credit.

So I think there are simpler and less expensive ways to accomplish the same thing.

You're absolutely right about the now rather than later approach: At some point we all have to ask the same question: "If not now, when?"

I believe one of the reasons surveys show that spending declines in our mid-seventies is that many people have health issues by then. The issues may not be life threatening. But even simple things, such as impaired vision or balance, are likely to reduce your enthusiasm for travel, driving at night, eating dinner out, etc. (Links to earlier columns about how spending declines as we age are below.)

Here are two ways to create your travel spending fund.

First, estimate a travel fund that will last for 5 years. With a current income of $26,000, I'll bet an added $5,000 a year would make a big difference. So take about $22,000 from your investments and put it in a money market mutual fund. It will earn nearly 5 percent interest these days, so you'll be able to spend about $5,000 a year for the full 5 years.

You'll have no risk because it will be in a money market fund. You'll be able to pay the bills for travel as they come in rather than carrying them on a credit card. And you'll know you have a specific amount of money to spend in the next five years. At the end of the period, examine your health and your finances. See if you want to do it again.

An important thing to remember is that all you are planning to do is spend about 5 percent of your net worth. If your house appreciates at 2 percent a year--- well under likely inflation--- your house alone will have appreciated by the amount of capital that you have spent. Your net worth may be the same, but your financial flexibility will have decreased somewhat.

The second method would leave your current investments intact. Instead of taking out a reverse mortgage, take out a home equity line of credit. This is a competitive lending product, so the loan will likely cost nothing to create, you'll pay a reasonable interest rate, and you'll only pay interest on the money borrowed. Recently, rates for credit lines of $30,000 to $50,000 were about 7 percent. You can check current rates by visiting www.bankrate.com.

If you get a credit line and the interest rate costs 7 percent, the cost of interest in the first year would be no more than $350. In the second year it would be about $700, $1,050 in the third, $1,400 in the fourth, and $1,750 in the fifth. Altogether, you'd pay about $5,250 in interest for $25,000 of travel over the five years.

I've put the loan method second for a reason. It should be. With your income, it's unlikely you would have any tax benefit from deducting your interest payments. Also, you probably won't earn 7 percent on most of your investments. That's why it's better to sell a portion of your investments and put it in a money market mutual fund.

Bon voyage! Related columns on the web:

Sunday, July 17, 2005: A little savings grace

Tuesday, August 15, 2005: Senior spending tapers off

Sunday, April 4, 1999: In the future, you'll need less money --------------------------------------------------------------------------------------------------------------------------

Personal finance writer Scott Burns is syndicated by Universal Press. His twice weekly column appears in newspapers from Boston to Seattle. He is the Chief Investment Strategist for AssetBuilder, Inc. Readers can register at www.scottburns.com. Questions/comments can be posted directly. They can also be sent, without registration, to scott@scottburns.com. Questions of general interest will be answered in future columns and on this blog.

Click on the "Archive" navigation to see other columns. All comments are welcomed and appreciated   

The QuickPlace offline feature is an ideal way to deal with slow or unreliable internet connections. QuickPlace offline works by downloading a full replica of your QuickPlace to your local computer (workstation or laptop) and then operating disconnected from the internet. You can then schedule or use the automatic schedule to synchronize to the server on the internet. So, this means you are immune from any internet disruptions while you are working. You can upload or attach as many large files as you like and because you are working locally, the speed is as fast as your computer can handle.
After you have finished working, you can start the synchronization process and leave your computer do all the hard work. It uses a very solid approach to synchronization that ensures the information is broken up into small enough chunks to get through any type of connection. It will then assemble them at the other end and retry any part that did not work (without having to start uploading from the very start). This process can take as long as it needs and does not require you to wait for any progress bars or retry any uploads.

So, if you have to work with very large attachments and your internet connection gets clogged and need another solution rather than "retry later", you can use QuickPlace offline to work and synchronize to share the files with your team. To work offline, you just need to click "work offline" from your QuickPlace (ProjectLounge Premium and above) and follow the instructions. ProjectLounge has already done all the hard work on the server side to make sure it "just works".

by: Lydia Graslie
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by: Lydia Graslie
NEWS - Because everybody loves to trick out their PS2, PSP, DS (and DS lite), and GBA like a pirate with these snazzy accessories from Pelican. Theres face plate armor for the PSP, a pirate themed controller for the PS2, and the Davy Jones' Locker pack for all the other portables. I'm almost at a loss for words.Comment

by: Lydia Graslie
NEWS - Because everybody loves to trick out their PS2, PSP, DS (and DS lite), and GBA like a pirate with these snazzy accessories from Pelican. Theres face plate armor for the PSP, a pirate themed controller for the PS2, and the Davy Jones' Locker pack for all the other portables. I'm almost at a loss for words.
More On : Pirates of the Carribbean: Dead Man's Chest | Buena Vista | Comment

Q. Two years ago we took out a 5-year, interest-only mortgage on a $207,000 home. The interest rate is 5.25 percent. We have been paying $500 a month on the principal, which is now $202,562. The home was recently appraised at $227,000. With rising interest rates, should we consider refinancing now? Or should we continue on this course and refinance at the end of the 5 years?

---D.W., by email from Houston, TX

  

A. If we knew what home mortgage interest rates would be three years from now, that would be an easy question to answer. But we don't. The best any of us can do is look at the options we face and pick the one that seems best. The operative word is "seems."

So let's examine your options.

--Refinance Now. If you refinance now to a fixed rate mortgage you face closing costs and fees plus a higher interest rate. According to Bankrate.com, for instance, the average 30 year mortgage now costs 6.30 percent. Using the mortgage search tools on that website I found that the stated rates for 30 year mortgages in the area ranged from a low of 5.875 percent to a high of 7.125 percent. Fees to place the loan ranged from a low of $295 to a high of $8,513.

Needless to say, those fees can raise the effective interest rate. Worse, the shopping process ranks up there with the trauma of car buying.

--Hold your current mortgage.   If you wait, you will save refinancing costs plus about 1 percent a year on the interest rate. That's about another $2,000 a year. In addition, you'll pay off about $18,000 of principal over the next three years.

So whatever your interest rate is when the mortgage resets, you'll be paying interest on about $184,000. This is important because it reduces your exposure to dramatically higher payments. Suppose, for instance, that the mortgage resets to a variable rate that starts at 7 percent over the remaining 25 years. Your monthly mortgage payment would be $1,300. That's less than the $1,386 a month you are now paying on the interest only mortgage with an additional $500 principal payment.

Could variable rate mortgages cost more than 7 percent? Of course. But if they do, you have a big incentive to direct more of your savings to a rapid mortgage pay-down.

--Move. The other option is that you might move in the next three years. If that is a possibility, refinancing would be foolish.

If I was in your shoes, I'd hold.

  

Q. I am 52 years old with 32.5 years with a large corporation. They are changing the pension system. Until December of this year I have a choice between an annuity of $1,800 a month or a lump sum of $360,000. After December the annuity is the only thing available. I have savings that total about $450,000.

My wife will work another 10 years, and she makes $78,000. Should I take the lump sum and look for work, or should I stay? I worry that if I stay, work for 10 more years and accept the annuity, the corporation could arbitrarily reduce or eliminate the annuity. I would like to work somewhere for at least 10 years. I just hate to leave that lump sum on the table, and I don't trust my company to keep its promise in the future.

---M.G., by email from San Antonio, TX

  

A. A corporation with a defined benefit pension plan can't "arbitrarily" reduce or eliminate it. They can "freeze" the plan and stop the accrual of new benefits. But they can't just chuck the plan and its promises.

If a full and unemotional re-assessment of your employer still ends with a low level of trust, however, you would be better off working elsewhere, particularly if you are eager to be "repotted." (The change will be easier if you can find another job that pays as well elsewhere, if your wife's job is secure and pays more than yours, and her job can provide your health care coverage--- a lot of ifs.)

Your $810,000 ($360,000 lump sum plus $450,000 current savings) will provide a sustainable annual income of about $32,000, assuming a withdrawal rate of 4 percent. You would have to earn something over $35,000 to have the equivalent income from work.

The private pension crisis hasn't been in the news much of late but it's still there. Pension funding, as measured by the Ryan Labs indexes, has improved this year, but pending legislation is likely to make defined benefit pensions even less attractive to corporations than they are now.

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Personal finance writer Scott Burns is syndicated by Universal Press. His twice weekly column appears in newspapers from Boston to Seattle. He is the Chief Investment Strategist for AssetBuilder, Inc. Readers can register at www.scottburns.com. Questions/comments can be posted directly. They can also be sent, without registration, to scott@scottburns.com. Questions of general interest will be answered in future columns and on this blog.

Click on the "Archive" navigation to see other columns. All comments are welcomed and appreciated.

Red River, New Mexico. While much of the country is suffering from overwhelming heat, Jim and Chris Rett are living here, enjoying the coolness that comes from being at 8,900 feet. In summer, days here average 75 degrees. Nights average 38 degrees.

Yes, you read that right: 38 degrees.

"When it gets hot," Jim says, "you can move north--- or you can move up. Up is closer."

Rich people have done this kind of move for centuries. Well-to-do Bostonians summered Down East, dotting primo spots on the Maine coast with palatial "cottages." Wealthy Texans have fled the heat and humidity of Dallas, Houston and San Antonio for decades, escaping to Santa Fe during its summer monsoon season. Others went on to Red River, which some have called "Little Texas."

But Jim and Chris Rett aren't rich people. At least they aren't rich by the usual definition--- having lots of money. I call them Reimagined People.

Officially, they are domiciled in South Dakota, but they have never lived there for any period of time. Instead, they are "full-timers"--- people who live in an RV and travel the country. Earlier this year they were living in Big Bend National Park. Come October, they will be moving on. Now 58 and 55, they have been full-timing for three years.

I met Jim while admiring the hummingbird feeder planted outside his 30 foot New Horizons 5th Wheel, having just bent the stout metal rod of our hummingbird feeder stand trying to get it into the incredibly solid soil at the Road Runner RV Resort. He and Chris are camp hosts--- meaning they exchange some time helping operate the resort for an RV spot, free electricity, propane, cable TV, and laundry access. This allows them to avoid over $900 a month in cash expenses.

"This is a surprisingly inexpensive way to live," Jim told me. "We're Escapees and we spend a couple months a year in Benson, Arizona." (Escapees is the name of the Livingston, Texas organization that provides services and campsites to full-timers and aspirant full-timers.)

How inexpensive?

Try $2,000 a month for expenses, including medical insurance, and an additional $200-a-month reserve for federal income taxes. That, he told me, is what they've averaged per month so far this year. Earlier, when they traveled more and did not serve as camp hosts, their expenses ran to $3,000 a month, he said.

Then again, their expenses in Big Bend were about $1,350 a month, nearly half of which went for medical insurance. "You don't spend much money when you have to drive 80 miles to a grocery store," Chris smiled. It also helps to live in an RV--- when something new is purchased, something old has to leave.

While it is common to view "early retirees" as a euphemism for corporate cast-offs, as the victims of an increasingly desolate corporate culture that views people as expenses rather than assets, you don't have to spend much time with Jim and Chris to understand that they are true free agents, unencumbered.

They aren't rich. They aren't poor. They aren't victims. They are people who examined their lives and decided to leave the 9-to-5 world behind. They went on to build the healthy, active, outdoor life that most people on the planet would envy.

I asked Jim what he had done in their previous life. Jim said he was a mechanical engineer, explaining that he and Chris had always lived below their income and had spent years living on a sailboat in the Pacific Northwest. Just before their shift to full-time RVing, Jim had been teaching at a community college. Then two of his colleagues quit, and he had to teach five courses a semester.

"And we had 77 consecutive days of rain," he added. After those 77 days they decided it was time to invent a new life.

They sold their paid off house. They sold most of their possessions. Jim converted a major part of his savings into a life annuity. They ordered a custom-made 5th wheel, adding solar power, extra batteries, more windows, XM radio, and other goodies. It cost about $75,000.

Jim, always an engineer, customized a relatively small GM truck to increase its torque and horsepower so it could pull the 15,000 pounds of trailer and contents. The truck brought their total investment, paid in cash, to nearly $115,000.

Is that a lot?

For many, yes. With a careful purchase of used tow vehicle and trailer, I figure you can be on the road for less than $50,000. But here in America, the Land of the Infinite Upgrade, it's also possible to spend much, much more.

Avoiding the ersatz glitz of many RVs--- the bizarre carved velvet couches, the ludicrous beveled glass cabinet fronts, the plethora of flat panel televisions, and other touches that make $500,000 motor homes feel like mobile bordellos--- the Retts custom designed their 5th wheel with birch cabinets, simple flooring, and crisp brushed stainless-steel fittings. The result is a bright, airy and very efficient one-bedroom apartment on wheels.

Then they hit the road, gravitating toward the Southwest. They spend time in Arizona and California. But they've also windsurfed Laguna Madre by Padre Island--- and they ride their bicycles everywhere. Both are lean and fit. Both love to cook and are quick to admit that they spend over $600 a month on food.

Is there a fly somewhere in all this ointment?

I don't think so.

For one thing, their modest living expenses are entirely voluntary. They could spend more, but don't feel a need. They live on less than their current income. They are living on what they will eventually receive in Social Security benefits, alone. And when Jim shared their investments with me, I entered it all in ESPlanner, the dynamic programming software that was the subject of a recent column series.

What did it tell me? At an assumed return of 7 percent, just 4 percent over inflation, they could safely live to 95--- even if they doubled their spending.

So there it is. Free time, airport-free travel, a healthy life and more income than you need. It's available today, not tomorrow. It requires some savings--- more than most people have. But it doesn't require a fortune.

The real price of entry: The courage of re-imagination.

On the web:

Escapees RV Club

Roadrunner RV Resort

New Horizons RV

Scott Burns' columns: Investing in an RV Lifestyle

Scott Burns' columns: Living Lite

Scott Burns' columns: Consumption Smoothing

ESPlanner website

GoRVing website (information on RVs)

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Personal finance writer Scott Burns is syndicated by Universal Press. His twice weekly column appears in newspapers from Boston to Seattle. He is the Chief Investment Strategist for AssetBuilder, Inc. Readers can register at www.scottburns.com. Questions/comments can be posted directly. They can also be sent, without registration, to scott@scottburns.com. Questions of general interest will be answered in future columns and on this blog.

Click on the "Archive" navigation to see other columns. All comments are welcomed and appreciated.