by Archie M. Richards, Jr.
June 5, 2006

Marion writes, "My husband and I, in our early 50's, would like to retire in 7 years. We will then have pension income of $4800 a month, with our health insurance premiums paid for life. We jointly earn $150,000, have no dependents, and can save $2,000 a month. Here's the rest of our financial situation:

• Home worth $850,000; mortgage $410,000
• Rental property worth $340,000; mortgage $94,000
• Vacation condo worth $179,000; mortgage $98,000
• Two cars, on which we owe $37,000
• Savings account: $7,000
• Roth IRAs: $9,000

"If we sell our home and downsize into the rental property, we could be debt free by the time we retire. This is probably the best plan, except that we love our home.

"If we sell the rental property, we'd generate a net of $130,000 cash. But we hate to pay the $75,000 capital gains tax. The vacation condo we're not planning to sell.

"Finally, we could continue as we are, save as much as possible, and hope for the best. Which one is our best choice?"

I'm in no position to engage in financial planning from afar, Marion. I only know what I would do, given just the facts you've supplied:

First maxim: Emotions have a higher priority than money. I'm not referring to an emotional need to commit murder and mayhem. I do mean that reasonable emotional needs trump having marginally more money.

Since you love your home and prefer not to sell your vacation home, keep them both.

Second maxim: Don't limit your life just to save taxes. Make good investment moves for reasonable emotional purposes and let the taxes fall where they may.

Sell the rental property and pay the darn tax. This will provide, as you say, $130,000 cash. You already have $7,000 savings, and you'll save $2,000 a month. Invest all this according to the Suggested Portfolios in my website.

Let's assume a compound annual rate of 10 percent growth. The capital gains tax from annual rebalancing and the ordinary income tax on REIT dividends and bond interest would reduce the net annual return to about 9 percent.

Compounding at 9 percent a year, your $137,000 cash would amount in 7 years to $250,000.

The $2,000 monthly additions, compounding at the same rate, would add $233,000, for a total of $483,000.

The $9,000 in your Roth, compounding at 10 percent a year (no tax on Roths, ever), provides another $17,000. This makes a cool $500,000, which should repay your remaining debts.

Retiring with two properties you love and no debt sounds good to me. In the meantime, diversify out of the condo into securities. Shoot, if you have to work an extra couple of years, you'll still be youngsters.

Finally, if your mortgages don't already have variable interest rates, switch to those that do. In my opinion, interest rates will fall significantly in the next 7 years. Take advantage.

I repeat: This is not a financial plan. All too often, clients have their facts wrong when they explain their situations to a planner (although of course this may not apply to you). You might contact the National Association of Personal Financial Advisors (www.feeonly.org, 800-366-2732) to find an advisor in your area with whom you can present documents and discuss your affairs in detail. Since NAPFA members receive no commissions, their conflicts of interest are much reduced.

Irwin writes, "We would like to invest for the college education of our 8-month-old grandson, starting with $5,000 and adding $100 a month. Should we use a 529 plan?"

Yes, indeed you should, Irwin. The earnings from investments held by 529 plans are not currently taxable. Withdrawals aren't either, as long as they're used for higher education. The 6/20/05 column gives more information.

Vanguard (800-523-7731) has excellent 529 plans. I suggest the Total Stock Market Index Fund. A year later, when the account accumulates to $6,000, put half into the Total International Stock Market Index Fund.