6 Money Dilemmas (Part 3 of 3)

Of course, all that mortgage debt may be keeping you awake at night, especially if you are worried about losing your job or you're approaching retirement and hope to live on less.  You'd be grateful to be rid of that major monthly bill sooner.  In that case, prepaying your mortgage starts looking better.  Remember, though, that by prepaying your mortgage, you are reducing your liquid assets.  If you suddenly need money, it's easier to sell a mutual fund than it is to pull cash from your home, and you can always pay off your mortgage later with the money you invest now.  The bottom line: Investing wins.

Buy a home or rent a home?  You're relocating, or you're downsizing so you can harvest some real estate wealth.  Do you buy right away or rent and wait out the housing bust?  To get your answer, consider your monthly expenses, what you'd do with the profits from your old home if you didn't buy and your time horizon.  If you plan to stay put for at least a decade, buying wins, even if your monthly cash flow is more flush with renting.  Over time, rising prices reward home ownership.

Let's say you're 65 and own a $350,000 home in Edison, N.J., mortgage-free.  You're moving to the warmer climes of Albuquerque, where similar homes go for $175,000.  After commissions and closing costs on both sales, you'll net $152,000.  Buy a fixed immediate annuity with that money, and you and your spouse will get $10,500 a year for life.

What if you instead decided to rent in Albuquerque?  With the $329,000 you'd clear on the sale of your New Jersey home, you could buy an annuity that pays about $23,000 a year.  Even after spending $6,500 a year more in rent than you'd pay in property taxes and upkeep, you'd be ahead by $4,250 a year after taxes.  But if you had bought a home, you can cash in on any future price gains.  If you stayed in the new house for 10 years, the price would have to increase by 3.3 percent a year for buying to beat renting (assuming you invest the extra money you would have spent on rent).  That's a low bar considering that home prices nationally increased by an average of 6.4 percent a year between 1963 and 2005.

Owning, of course, has other benefits: knowing that you'll never be forced to move by your landlord; the freedom to redo your kitchen in any way that strikes you.  Renting, however, can spare you the onerous upkeep that comes with maintaining a home.  So, buying is best as long as you're confident you'll be staying put for several years.

Take Social Security early or late?  Collecting Social Security at age 62 cuts your annual benefit by about 25 percent compared with what you'd get if you waited until full retirement age that's 66 if you were born from 1943 to 1959, or 67 if you were born in 1960 or later.  To do the math, you need to consider whether you expect to live a long life.  Say you've just turned 62 and qualify for $17,280 a year now or $23,772 at 66 (in today's dollars).  Start early and you'll have collected $69,120 by the time you reach 66.  Wait, and higher payments will make up for those missed years in 10½ years.

If you live until at least 76½, postponing your benefits was worthwhile.  The odds are in your favor: According to the Social Security Administration, the typical 62-year-old man should live until 80½, while the life expectancy for a 62-year-old woman is 83½.  When you collect a Social Security check at 62, however, that's $17,280 you won't have to withdraw from your IRA.  Add in the extra tax-deferred growth (assuming 5 percent returns), and your break-even point moves out by three years to age 79½.  Even then, odds are you'll live that long.

According to new research from Boston College's Center for Retirement Research, the best strategy for many couples is for the wife to take Social Security at 62 and the husband to wait.  The reason is that men, on average, earn more and die younger.  In this scenario, a wife would take her benefit at 62 and inherit her husband's larger check later.

Finally, waiting to take Social Security assumes you can.  Forty percent of retirees are forced into early retirement through either downsizing or health issues.  Get a more precise handle on your break-even age with the Social Security Administration's Quick Benefits calculator at ssa.gov/OACT/quickcalc/.  The bottom line: If you're healthy and don't need the cash, wait.

By: Janice Revell, http://www.money.cnn.com/