THIS STORY HAS BEEN FORMATTED FOR EASY PRINTING
SCOTT BURNS

Early retirement plans can be short-circuited by a crisis of one kind or another

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August 9, 2008

Q. Am I too young to retire and survive? I am 55, and before company reorganization and the elimination of my position, I had a plan. I was cutting back on spending and focusing on retirement, 401(k), savings, and paying off my mortgage early.

I have $600,000 in my 401(k) and had planned to continue contributing 10 percent of my annual salary. I have purchased the home in which I had planned to retire. Its current estimated value is $400,000. I have a 15-year fixed mortgage at 4.75 percent with a current balance of $200,000. I had planned to increase payments and pay it off by age 60.

I also have another $180,000 in savings that I had planned to use to pay off my mortgage early, as well as savings bonds and other stocks worth about $25,000. And my car is paid off.

As I continue my job search, how do I continue to prepare for retirement?

Some suggest that I downsize and sell my house. For the moment I plan on relying on savings while looking for a job. In terms of my home, this is exactly what I wanted to retire in.

P.W., Dallas

A. In the wonder days of homeownership, it was very easy to think about holding onto your home during a tough period.

If a home appreciates at 6 percent or more a year, every dollar you take out of your savings to pay the mortgage magically reappears in the appreciated value of your home. In areas of high appreciation - such as many vacation areas - the annual appreciation has often been greater than the entire out-of-pocket ownership expense. So a second home functioned as a high-status savings account.

I'd love to make that argument, or anything near it, for Dallas. But while Dallas homes might skate through the current residential real estate decline relatively unscathed, it's still unlikely that your appreciation will equal your shelter spending.

Worse, you're in the 50s minefield. Jobs don't come easy, and the new salary may not replace the old one.

Still worse, you're 10 years from Medicare, and private insurance premiums are climbing very rapidly.

So I suggest you set a time limit on your job search. If you haven't found a new job in, say, six months, then it's time to do a reset. Continue to search for a job, but put your house on the market and plan to rent when the house sells. This will cut your shelter expenses and increase your investment income at the same time. With an $800,000 nest egg, you'll have a sustainable income of about $32,000 a year. That income will rise seven years from now, the earliest date you'll be eligible for Social Security.

Compare that income to the cost of supporting your current house, and you'll see that a protracted period of no employment or underemployment would destroy the retirement you are planning. So you've got to prepare for a major reset.

Scott Burns is a syndicated columnist. He can be reached at scott@scottburns.com.

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