Baby boomers' dilemma: Indulge now or save for later

By Ilyce Glink and Samuel J. Tamkin

Q: I have a $138,000 mortgage at 3.75 percent on a 15-year term with 10 years left to pay. The property is appraised at $300,000. I have $130,000 cash reserve. My wife wants to put in a pool in at a cost of about $100,000. I would rather pay off the mortgage.

What would you recommend? Should we refinance our loan and take cash out now? I am 52 years old and have an annual income of $250,000 with about $650,000 in retirement accounts.

A: We thought we'd use this question as an opportunity to deal with the issue of interest rates, spending and saving. Let's start with saving. Most Americans don't save enough for retirement. It seems that we spend money, spend more, and then spend beyond that.

Experts usually suggest that you'll want to have about 10 times your annual income in retirement savings. That's about $2.5 million at 10 times your income. What do you have? You have $650,000 in retirement accounts plus about $170,000 in equity and perhaps some other investments. Altogether, it's about $1 million -- far short of what you'll probably need even if you factor in the maximum from Social Security.

You don't have much of a mortgage on your home right now and the interest rate is very good. So, your expenses are low and in another 10 years, your house will be paid off.

But spending $100,000 on a swimming pool requires some deep thinking about priorities.

We know you can spend less and still have a beautiful pool, but you're thinking of spending upwards of $100,000 or about 33 percent of the value of your home. That's a huge percentage.

In some parts of the country, not having a pool might put your home at a great disadvantage. But we had a neighbor recently spend $30,000 to take out a pool from his property to make it saleable. No one would buy the home with an old, yucky pool.

Think about your property as both a home and an investment. As a home, you might do things that give you pleasure today and for years to come. Building a high-end swimming pool might fit into this category. If you and your family enjoy having a pool and you live in a climate that is kind to pool use, you can get years of enjoyment from it.

Likewise, you can enjoy a home spa, sauna, gourmet kitchen, fancy master bath, decked out basement, and the many other amenities people can put into their homes. Just don't count on them to provide a stellar return on investment. In fact, you may not recover the costs of these amenities at all, unless you stay for many more years or buy a home specifically to fix or you get lucky.

If you spend $100,000 to install the pool but the home's value stays the same now, and that value doesn't change if you sell 10, 20 or even 30 years down the line, the pool cost must be seen as an expense and not as an appreciable amenity. (And don't forget about annual maintenance, water and energy costs. Pools are expensive.)

We give you that example so that you may make an informed decision. If you and your wife love the pool idea, have the money to spend on it, and know that you make enough money now and will in the years to come to save for retirement, go for it.

But from a numbers point of view, it's hard to justify that level of cost. And if something happens to you, and you have to quit working years ahead of schedule, you might be very sorry you spent that money rather than setting it aside for your retirement.

So what are you going to do? If you feel that building the pool is the right move, borrowing today at these historically low interest rates is a good idea.

But let's say you decide not to invest in the pool. You may still want to borrow cash against your property because interest rates are low now and you'll pay back the loan by investing that money at a greater return.

Your preference for paying off your mortgage is the most conservative way to go. You might instead invest your cash in a diversified portfolio or beef up your retirement account at work.

Of course, you and your wife will have to sit down and make a decision about the pool and the mortgage, but the truth is you have to make a broader decision on your home finances, your mortgage, your retirement plans, your kids' educational expenses (if you have kids in school).

It's the issue every baby boomer should be discussing: whether to indulge in the now but have to do a lot of worrying later.

(Ilyce R. Glink is the author of many books on real estate and host of "Real Estate Minute" on her YouTube.com/expertrealestatetips channel. Samuel J. Tamkin is a Chicago-based real estate attorney. If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11a-1p EST. Contact Ilyce through her Web site, http://www.thinkglink.com.)

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