Well-off retirees need a 'good times fund'

By SCOTT BURNS
Published March 27, 2007

Q: My husband and I have saved for 18 years. We now have a substantial retirement fund. He has been the primary earner; I have worked part time. We each recently recovered from serious illnesses. So here is the problem:

His habit is to save as much as possible, and I have gladly supported that. But now I feel we need to spend money on ourselves and to travel while we still can. He just can't agree with me, saying we need it for our retirement.

I'm threatening to go alone, or to ask for my half of our savings to manage for my use. No more saying "someday we'll . . ." - someday is now!

A: Many people are constitutionally incapable of cutting themselves some slack or, for that matter, having a good time. For them, "a good time" will be in the future - it's never this week, or this year.

The best mechanism for dealing with this is to separate some amount of money from your retirement funds and earmark this as your "good time fund." A couple need to agree that they will spend it on having a good time.

The hard part is getting on the same page about the amount. It can call for a long heart-to-heart.

So here's a suggestion: Suppose you are 65 and you decide to take 10 percent of your retirement assets to spend now, over the next 10 years. If these "good time" assets earn 5 percent, that means each $10,000 you put aside will give you an allowance of $1,273 a year.

Your spouse may ask, "But what about the future?"

Your answer is simple: "We're taking care of the next 10 years first. If we've still got plenty of money in 10 years, we'll create another good times fund."

The basic task here is to find the amount of money your spouse thinks is necessary to keep invested and the amount that he can let go. Ask the questions smoothly and you'll be able to find some amount that works for him. The same exercise will be instructive for you: Find out how much money you could put into a good times fund without feeling foolish or endangered.

Invest proceeds from sale

Q: We own a house worth about $100,000; there is no mortgage on it. We have been thinking about buying a new house, in the $150,000 to $165,000 price range.

We have $70,000 in the bank and are debt-free. Between us, my wife and I make $65,000 a year.

Should we put the proceeds from the sale of the first house on the balance owed on the second house and then pay off the second house in two to three years?

A: Probably not. What you do depends on your other deductions.

If you netted $90,000 from the sale of your current house and applied all of it to the new house, you would have $60,000 to $75,000 in mortgage debt. Unless your other itemized deductions real estate taxes, charitable donations, state income tax, etc. are substantial, there is a good chance there will be no income tax benefits from your borrowing; the standard deduction on a joint return is $10,700. You benefit only when your itemized deductions exceed that amount, and your mortgage interest would not be that large.

If you are young, the best course is to borrow more for your house and trust that inflation would reduce the value of what you have to pay back.

If you are in late career, say age 50, you might consider a large 15-year mortgage. The shorter term will reduce the interest rate slightly, and you will enjoy the maximum tax benefits in your peak earning years.

When you retire, the loan would be paid off and thus your income requirement would be lower. You'll also have the benefit of being able to invest some of your equity.

If the new house costs $150,000 and is financed with an 80 percent mortgage, you'll only need about $30,000 of the $90,000 equity from the sale of your first home. So you would have $60,000 to add to your retirement savings.

Scott Burns has been a financial writer and editor for more than 25 years. Questions about personal finance and investments may be sent to scott@scottburns.com those of general interest will be answered in future columns. His Web site is www.scottburns.com .

[Last modified March 27, 2007, 08:27:24]