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Retirement Conundrum: Ocean View or Beefed-Up Portfolio?

Dr. Don's Portfolio Rx now appears twice weekly.

Editor's Note: With today's column, Dr. Don's Portfolio Rx goes twice weekly. Read it every Tuesday and Thursday.

We are a two-career couple in Southern California. At ages 57 and 58, we are looking to gear down and move to a less stressful life along the Central Coast of California. We own a home, rental apartment and small mountain cabin along with some shared-ownership timeshares vacation property. Our one son has graduated from college, lives locally and will manage the apartment until we find a tax-free exchange closer to our new location. We will be eligible for Social Security benefits and my husband has an ESOP Employee Stock Ownership Plan with age-62 eligibility. I have a rollover IRA account, and my husband has both IRA and 401(k) accounts. After moving, we both want to change careers to less stressful jobs. We're looking to earn enough in our new jobs to pay our living expenses and allow us to continue to save for retirement. We plan to continue working at least until we are eligible for Social Security benefits, but want to retire sometime between age 62 and 66. We recently had our portfolio reviewed by an investment professional and are comfortable with how the assets are invested. We're most concerned about how much house we should buy and how big a mortgage we should carry in our new hometown. We expect to receive $440,000 in cash when we sell our current home. Here's how I see our choices in buying a new residence: Buy a three-bedroom home with an ocean view for $440,000. Put $350,000 down and finance the rest for a manageable house payment. Use the remaining $90,000 to invest for future retirement. Buy a cheaper three-bedroom home without the view for $350,000. Put $260,00 down and invest $190,000. Buy a double-wide mobile home with all the amenities for $125,000 to $150,000. Invest up to $300,000. This option is the least desirable but we could do it if necessary. Regardless of which housing option we choose, we want to own the home free and clear when we stop working. When my husband turns 62, he has access to the ESOP account and can roll the money into an IRA. Which option do you feel is most appropriate? When do you think we could retire based on all of this? -- P.C.

P.C.,

An investment in real estate can be as attractive as an investment in stocks and bonds. For most homeowners, mortgage money is the cheapest-cost debt because of the tax deductibility of mortgage interest payments. Why own your home outright when you can take out a mortgage for 80% of the property's value and invest the balance? (An 80% loan won't require a private mortgage insurance policy and should qualify you for a lender's best rates.)

The national average for a 30-year fixed-rate mortgage is 7.6%, according to

Bankrate.com. If you're in the 36% federal income-tax bracket, your after-tax cost of debt is just 4.86%. (If your state income taxes are also reduced by the interest expense, your after-tax cost of debt is even lower.) You can earn more than your mortgage interest expense by investing in tax-free, insured municipal bonds, or take on some additional risk and invest the money more aggressively.

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So you've covered your interest expense, potentially earned a return on your home that is magnified by the leverage inherent in the mortgage loan, and pocketed the difference between what you earned after taxes on your investments and what you paid after taxes on your mortgage. And you want to give all that up just to be debt-free in retirement?

If $440,000 can buy your ocean dream house, I wouldn't be looking inland. Since deciding on what mortgage you can afford isn't the issue, choose the housing alternative that both meets your needs and has the best appreciation potential.

FinanCenter.com

has a

calculator that will help you decide how much money you should put down on your home using different tax and investment scenarios.

A rollover IRA may not be the best solution for reinvesting your husband's ESOP distribution. Before directing that distribution into an IRA rollover account, you should talk to a tax professional and the plan administrator about other strategies that would minimize or defer the tax obligations on that lump sum.

Can you avoid touching your investments until you retire? I think so, but you need to develop a cash budget to determine if it will work. Estimate your annual income and expenses. Work with a Realtor to estimate the costs associated with your new house. This simple cash budgeting

work sheet can help you estimate your cash flow. You should be less concerned about continuing to contribute to your retirement accounts than in keeping a positive cash flow in your monthly budget after gearing down.

Send In Your Portfolio

If you would like to submit your portfolio for a makeover, send it to portfoliorx@thestreet.com. Give us enough details -- dollar values or percentages -- so we can determine how your assets are allocated. Also tell us a little about yourself and your investing goals, and let us know how we can contact you if we have further questions. Though we'll only use your initials publicly, please include your full name so we can verify your identity. Unfortunately, we cannot guarantee your portfolio will be selected for a makeover, nor can we promise to respond individually to everyone who submits a portfolio.

Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at

portfoliorx@thestreet.com.