 Down-sizing
home for her daughter
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 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
 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."
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