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Personal Finance Q & A

Don't Let A Reverse Mortgage Backfire

Municipal or taxable bonds? A simple equation helps you figure yields

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Q I am 69 and retired. My wife just retired. We are concerned that as we get older we will be unable to pay our bills. My hope is that we can get a "reverse mortgage," and spend it down. If we get older, we will depend on our house appreciating. Our income is principally from Social Security and small retirement plans. We don't owe a penny. We don't own second houses, cars, boats, planes or employ anyone. What should we do to avoid poverty?

- D.W.B., Chicago

A "You cannot depend on your home always appreciating in value," says Sanford Schlesinger, an attorney dealing in needs of the elderly at Kaye, Scholer, Fierman, Hays & Handler in New York.

There are several types of reverse mortgages: "Tenure reverse" would provide a steady stream of income over your lifetime; "Term reverse" would provide higher payments over a shorter time frame; "Line of credit" reverse would provide an emergency fund that you could tap if you need cash. Mr. Schlesinger says that last option may make the most sense for you. "But in our age, a person of 69 years usually has many years ahead of them," and owning a home represents an important long-term asset. He suggests looking for a part-time job, if you are able, to add to your income.

Q Can you tell me how a tax-free investment yielding, say, 7 percent a year, compares with an investment that is not tax free?

- F.A., Boston

AEd Dunn of John Nuveen & Co. in Chicago offers this equation: Take your tax-exempt yield (7 percent), and divide that by 100 minus your marginal tax rate. For example, if you are in the 31 percent federal income-tax bracket, you would divide 7 by 69 (that's 100 minus 31), which comes out to 10.15 percent. In other words, a taxable bond must yield 10.15 percent a year to match 7 percent tax free.

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