You can retire early, but it may require a 'reset'

Q. Am I too young to retire and survive? I am 55 years old, 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 at 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 near it, for Dallas. But while Dallas homes may 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 salary. 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 for which you are planning. So you've got to prepare for a major reset.

Downsizing isn't so bad. You should check the many personal stories readers sent about their downsizing. You can find them on the forums on my Web site, www.scottburns.com.

© 2008, Universal Press Syndicate