Newsweek - When Your Paycheck Stops

April 17, 2006
Section: The Boomer Files
Edition: U.S. Edition
Page: 50

When Your Paycheck Stops
Ready to retire? Better make sure you can afford it. Here's how to make the most of what you've stashed in your piggy bank.
By Jane Bryant Quinn

Reporter Associate: Temma Ehrenfeld with Patrick Crowley and Ramin Setoodeh
Newsweek

One day, you'll look at your money and say, "That's all there is." No paycheck, no raises--only the income you generate from the work and savings you achieved in the past. Oof. What now? That's a scary question for boomers hitting the milestones of 60 and 55. For years, you've focused on earning, spending and (more recently) saving for the future. Now the future is heaving into view. You will retire--in fact, some of your friends are free already. Many went cheerfully; others were pushed. Some intend to work until 80, maybe including you. But you've entered the years when plans can go awry. Ready or not, everyone has to figure out how to make his or her savings last until 95. Wow. There's no way of nailing the future down. But good preretirement planning can hold your anxiety down. Here's a start:

Tap Your House for Cash

You can't count the value of your house as a retirement asset unless you're prepared to tap the cash. You might buy something smaller or move to a cheaper part of the country. Or like Neil and Nancy Collins, both 60, of Melrose, Mass., you might decide to rent. The Collinses aren't retiring yet (he's a financial planner, she's a teacher). But they're preparing for the change by selling their house, harvesting the equity and buying a condo in Estero, Fla. In Melrose, they'll move to an apartment. Renting "gives us tremendous flexibility," Neil says--"financial, geographic and lifestyle."

They're right to watch their costs. Planner Ron Rhoades of Joseph Capital Management in Hernando, Fla., sees too many retirees buying dream houses they can't afford. He says that for every extra $100,000 you spend on a home, you'll be out $7,000 in expenses and lost investment revenue.

But for everyone eager to move, there's someone who can't bear the thought. Take Elene Wilburn, 70, of Twinsburg, Ohio, who lives on her public-school pension and Social Security. "I love my house," she says. "I like planting flowers in the yard and don't want to move." Her solution? A reverse mortgage that put a pile of cash in her pocket. It sounded so good, she thought at first it was a scam.

With a reverse mortgage, you get a loan equaling 50 percent or more of the value of your home. But you never make any monthly payments. Instead, the loan gradually builds up--compounding interest costs and fees. You can stay put for as long as you want. The debt doesn't fall due until the house is sold, when you move or die.

Wilburn learned all the details at a sales meeting held by American Reverse Mortgage, and decided to sign up. She borrowed $286,000 on a loan insured by the Federal Housing Administration--some in a lump sum, the rest in a credit line for future use. She'll take a Caribbean cruise--"something I've always wanted to do"--and set up college funds for her grandchildren.

The drawback to reverse mortgages is their cost. You're charged a variable interest rate--now at 6.3 percent (and rising). The mortgage broker or lender can charge up to 2 percent--that's $5,000 on a $250,000 loan. There are also closing costs, servicing costs and insurance fees. All told, the expenses could reach $25,000 or more, says Ken Scholen, AARP's reverse-mortgage expert. The more your home is worth and the younger you are, the more the loan costs. Ideally, he says, you should consider this mortgage later in life.

REVERSE MORTGAGE - House Rich: Elene Wilburn, 70, was cash poor but had lots of equity in her home when she heard about a reverse mortgage--a loan to tap her home's value without requiring monthly repayments. She took one, paid off her existing mortgage and kept the rest for her grandkids, plus treats like a Caribbean cruise.