 Borrowing
to meet current income needs
|
 Dear
Dr. Don,
I am 56 years old, unmarried, have a very substantial amount
of money invested in an IRA (enough to last my expected lifetime) and about $30,000
in a savings account earning over 5 percent interest.
I have
needed to withdraw money from my savings to keep up with everyday bills, repairs,
etc. I don't want to have to take money out of my IRA yet because of the interest
and penalty fees. My house is paid for and is probably worth about $240,000
on today's market. My working income is limited. If
I end up depleting my savings, what are my best options for income other than
my IRA? I was thinking of refinancing my home or a home equity loan. What
other good options might I have?
Thank you very much!
-- Claudia
Consumption
 Dear
Claudia,
You can take money out of your IRA without paying a penalty prior
to age 59½ if you annuitize the distribution. You'll still
owe income tax but won't pay the 10 percent penalty tax. A calculator
on the CCH Web site can give you an idea of what those payments
would be and explains the approach in depth, but you don't want
to use this approach without discussing it with your tax professional.
At 56, you're too young for a reverse mortgage. Lenders
require you to be at least 62 years old to take out a reverse mortgage.
A mortgage
accelerator loan could be used as a proxy for a reverse mortgage,
but I can't really recommend that approach in your situation.
Refinancing or taking out a home equity line of credit,
or HELOC, can make sense. The problem lies in borrowing to fund
current income requirements. A HELOC is interest-only in the early
years of the loan, so you could draw enough on the line to both
cover your interest expense and your income requirements. A refinancing
gives you a large lump sum that you then have to reinvest along
with managing the principal and interest payments.
You've been a little coy about the size of your retirement
portfolio, your income and your monthly spending. It's always better
to take a holistic view of your income and assets. Are you trying
to finance an income gap until you qualify for a reverse mortgage,
Social Security, Medicare or something else?
My best advice is to hire a fee-only financial planner
to help you sort through these issues. An earlier Dr. Don column,
"Picking
a financial-planning professional,"
can help you with that decision.
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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