A Suze Orman exclusive

Now, I know that $390,000 sounds great at the age of 60, but let's see if you can really live on that, without eating into your principal. And trust me, you can't afford to start eating into your principal this early in your retirement. If you start reducing your principal, you have less money earning interest. It is a vicious cycle you should make sure not to get caught in.

Okay, so we're taking the $390,000 and investing it in bonds - since you're not working now and you're depending on this money, keeping it in stocks seems a bit too risky - which means we can figure you will earn 5 percent interest. That comes to $19,500 a year in interest you will earn. But that's before taxes, my friend. When you withdraw money from a 401(k), you pay income tax on the entire amount withdrawn. You don't even get to pay capital gains tax, which is typically a much lower rate. No matter how long you have had your money in the 401(k), it is always hit with tax at your ordinary income rate. So I'm going to be nice once again and assume you will be in the 20 percent income tax bracket. That means the $19,500 is going to be $16,000 once you finish paying your 20 percent tax bill. (And this is more generosity on my part: given the big federal deficits we have today, I wouldn't be surprised if income tax rates 15 years from now are a lot higher.) That $16,000 works out to $1,333 a month. Barely enough to cover the mortgage, and certainly not enough to cover your property tax, insurance, and other expenses.

Even if I ease up a bit and let you earn 7 percent a year by staying in stocks, rather than 5 percent in less risky bonds, you are still going to be cutting it way too close. That $390,000 will generate $27,300 in annual income for you. If we again assume you will pay 20 percent tax on that sum, the after-tax cash you're left with is $21,840. That comes to $1,840. You'll be able to cover the housing costs and have a few hundred dollars left for food and utilities, but that's about it.

The only way to survive is to go back to work-or to eat into your principal.

Clearly your 401(k) is not the best solution to your retirement quandary. In the example we just walked through, I gave you every break I could think of. I assumed you would always get a generous company match, I assumed you would always be able to make a hefty contribution to your 401(k), I assumed the tax rate on your withdrawal would be a reasonable 20 percent - when the truth is rates could be a lot higher in the coming years. And I let you earn 7 percent on your 401(k) money in retirement, which I think is a bit aggressive and optimistic. And yet with all of those best-case scenarios, the numbers still didn't come out in your favor.

Now can we please consider my better idea: Get your mortgage paid off before you retire.

Home In On Your Retirement
I want you to continue contributing to your 401(k) each year to get your maximum company match. That's free money you shouldn't pass up. Not all employers offer a company match, but I will assume you have a super great employer who gives you a 50 percent match up to $2,000 a year. That would mean you need to contribute $4,000 to get that $2,000. But after that amount, I want you to stop your contributions and use the money to pay down your mortgage. If you contribute just $4,000 next year, rather than the $13,000 that you alone were contributing, that would free up $9,000 to pay down your mortgage. But of course that money is going to get taxed if it's paid to you as salary (remember, those 401(k) contributions were made pre-tax). So I am going to assume your taxable income is about $100,000 a year, which puts you in the 28 percent tax bracket today. That's going to reduce the $9,000 to $6,480. But it's still about $540 a month you would have available to add to your mortgage payment.

Okay, hang in there, we're almost done. Remember we started with a 30-year mortgage that has 25 years left on it, so it won't be paid off until you, our 45-year-old, will be 70. But by making that extra $540 payment each month, the mortgage will be paid off in about 12.5 years - when you are just 58. Two years before you retire/get laid off, you own your house free and clear. No more $1,200 a month to stress over.

And you still have two years until D-day, when you get laid off. If during that stretch you took all the money you used to pay on the mortgage-the $1,200 plus your extra $540 a month-you would have nearly $44,000 saved up after two years, assuming you earned 5 percent on the money.

We'll come back to this $44,000 chunk of change in a moment. First I want to remind you that while you were paying off your house quickly you were still contributing to your 401(k). For fifteen years you had a total of $6,000 going into the account annually ($4,000 was yours, and $2,000 was a company match). Assuming a 7 percent annual rate, you're looking at having more than $158,000. Add in the $44,000 and you're over $200,000. You have your mortgage completely paid off and you still managed to save a bit more than half of what you would have if you had stuck solely to the 401(k) investing plan.

Granted, $200,000 isn't a huge nest egg, but it's something. And remember you no longer have to pay $1,200 a month on the mortgage, so the income you do earn on the $200,000 is going to go a lot farther in paying for your other living expenses.

And I just want to anticipate the flurry of emails that will say if you took your savings from the mortgage interest deduction and invested it, you could build up a savings account that would exceed my idea. Maybe yes, maybe no. But are you really going to tell me that after procrastinating about retirement for 20 years, someone is going to have the wherewithal to know what they are saving on the mortgage interest deduction and invest it each month? Come on.