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Dr. Don Taylor, CFA, Bankrate.com advice columnistDown-sizing home for her daughter

Dear Dr. Don,
My husband (45 yrs old) and I (48 yrs old) have a home on five acres that could probably be sold in the low $300,000 range. We have $130,000 left on the mortgage at 5 percent interest rate with payments at $1,700/month including taxes for 12 more years.

I have just recently left a fairly lucrative career as a registered nurse to home school my 13-year-old daughter. We were paying $700 per month year-round for her to attend a local private school. I can show her the world for $700/month and not have her in such a competitive, popularity-contest environment.

Our question is: Should we consider paying cash for a smaller house -- around $150,000 -- and invest the rest toward retirement, possibly a target date fund? We have no other retirement and felt this may be our only chance. What do you think? Thanks in advance.
-- Kim Crossroads

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Dear Kim,
I won't pretend to know whether you home schooling your daughter is the right decision. Nor can I tell you that leaving your lucrative career as an RN is right for you or your family. You've lined all that up and made those decisions. I will say that you should keep up with your nursing skills so you can transition back into nursing if that's your choice after your daughter gets her high school diploma.

I can't make your math work on downsizing, paying cash for the new house, and investing the leftover money for your retirement. If you buy a $150,000 home for cash with the $170,000 you have in equity on your current home, there's only $20,000 remaining to invest for retirement. Invest that for 20 years to earn 7.5 percent annually in real returns in the stock market and you'll wind up with about $85,000 in today's dollars when you're age 65.

It's a start, but $20,000 invested in your mid forties isn't going to earn enough to ensure a particular standard of living in retirement. Put your money in a target-date mutual fund and you're not likely to match that 7.5 percent in real returns because you'll have a blend of stocks, bonds and cash that varies over time as you approach your target retirement date.

That doesn't mean that downsizing isn't the answer in becoming a single-income family for at least the next four to five years. Put together two monthly spending plans; one with you staying in your current home and one with you in the new home, and look at what downsizing allows you to accomplish. Remember that your home, besides being shelter, is also an investment and downsizing cuts that real estate investment in half.

I recommend spending a little money talking to a fee-only financial planner to decide how best to put all this together. An earlier Dr. Don column, "Picking a financial adviser," discusses choosing a financial adviser.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & investing" or "money."

Bankrate.com's corrections policy -- Posted: June 14, 2006
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