Q. My son-in-law's parents are urging me to take a reverse mortgage to increase my income so I have more freedom to travel and don't have to budget so tightly. I am 70. My house is worth around $200,000. I have about $200,000 in financial assets and no debt. My income is about $26,000 from Social Security, retirement, and dividends. Life would be easier financially with a bit more money to spend on travel, entertainment, etc.

The kids are all OK, so it is not as important to leave as much as possible. Would it pay to invest some of the money from the reverse mortgage?

I am a careful spender, but my health is so-so. That makes me want to really get going now because I may not be able to later.

---N.B., by email from Dallas

  

A. Reverse mortgages are improving, but they are still relatively expensive ways to access home equity. They have significant front-end fees. And the interest still mounts up. Interest rates on these loans appear to be similar to interest rates on home equity lines of credit.

So I think there are simpler and less expensive ways to accomplish the same thing.

You're absolutely right about the now rather than later approach: At some point we all have to ask the same question: "If not now, when?"

I believe one of the reasons surveys show that spending declines in our mid-seventies is that many people have health issues by then. The issues may not be life threatening. But even simple things, such as impaired vision or balance, are likely to reduce your enthusiasm for travel, driving at night, eating dinner out, etc. (Links to earlier columns about how spending declines as we age are below.)

Here are two ways to create your travel spending fund.

First, estimate a travel fund that will last for 5 years. With a current income of $26,000, I'll bet an added $5,000 a year would make a big difference. So take about $22,000 from your investments and put it in a money market mutual fund. It will earn nearly 5 percent interest these days, so you'll be able to spend about $5,000 a year for the full 5 years.

You'll have no risk because it will be in a money market fund. You'll be able to pay the bills for travel as they come in rather than carrying them on a credit card. And you'll know you have a specific amount of money to spend in the next five years. At the end of the period, examine your health and your finances. See if you want to do it again.

An important thing to remember is that all you are planning to do is spend about 5 percent of your net worth. If your house appreciates at 2 percent a year--- well under likely inflation--- your house alone will have appreciated by the amount of capital that you have spent. Your net worth may be the same, but your financial flexibility will have decreased somewhat.

The second method would leave your current investments intact. Instead of taking out a reverse mortgage, take out a home equity line of credit. This is a competitive lending product, so the loan will likely cost nothing to create, you'll pay a reasonable interest rate, and you'll only pay interest on the money borrowed. Recently, rates for credit lines of $30,000 to $50,000 were about 7 percent. You can check current rates by visiting www.bankrate.com.

If you get a credit line and the interest rate costs 7 percent, the cost of interest in the first year would be no more than $350. In the second year it would be about $700, $1,050 in the third, $1,400 in the fourth, and $1,750 in the fifth. Altogether, you'd pay about $5,250 in interest for $25,000 of travel over the five years.

I've put the loan method second for a reason. It should be. With your income, it's unlikely you would have any tax benefit from deducting your interest payments. Also, you probably won't earn 7 percent on most of your investments. That's why it's better to sell a portion of your investments and put it in a money market mutual fund.

Bon voyage! Related columns on the web:

Sunday, July 17, 2005: A little savings grace

Tuesday, August 15, 2005: Senior spending tapers off

Sunday, April 4, 1999: In the future, you'll need less money --------------------------------------------------------------------------------------------------------------------------

Personal finance writer Scott Burns is syndicated by Universal Press. His twice weekly column appears in newspapers from Boston to Seattle. He is the Chief Investment Strategist for AssetBuilder, Inc. Readers can register at www.scottburns.com. Questions/comments can be posted directly. They can also be sent, without registration, to scott@scottburns.com. Questions of general interest will be answered in future columns and on this blog.

Click on the "Archive" navigation to see other columns. All comments are welcomed and appreciated