(MONEY Magazine) – Last April, George Littrell got a $30,000 check he didn't want. The money represented the returned principal from a 16% second mortgage he held from the 1982 sale, for $155,000, of his former business, a Provincetown, Mass. guesthouse called George's Inn. Encouraged by sharply lower interest rates, the inn's new owners had decided to refinance. For Littrell, 66, a lifelong bachelor now living in retirement in the central Florida city of Winter Park, that decision caused trouble. He had depended on the mortgage payments for more than 30% of his total monthly income of $1,300. Now his income was reduced and he was forced to confront the problem of reinvesting the prepaid principal at distinctly stingier interest rates. Perhaps equally vexing, Littrell also faced an additional capital-gains tax bill of as much as $1,800. Says he: ''I was in a bind.'' He is not alone. Like Littrell, millions of investors have found that hunting for income is a trickier sport than it was just a few years ago. With interest rates expected to stay low this year, it promises to remain so in 1987, thus maintaining a trend that began five years ago. Since 1982, interest rates have been in a swoon. The rate on one-year Treasury bills, for example, has dropped from 14.3% in January 1982 to roughly 5.8% now. The plunge unleashed one of the greatest bond bull markets in history. But investors whose capital has been released to them by matured bonds or CDs -- or, as in Littrell's case, by refinanced mortgages -- find they can no longer lock in the high income they had grown accustomed to. Retirees such as Littrell have been particularly hard hit. Had Littrell simply left the returned capital in a money-market fund yielding about 6%, he could have expected to earn only about $150 a month, well short of the $407 he had been receiving from the mortgage. Instead, after considering various alternatives, he split $25,000 of the sum among three Fidelity bond mutual funds -- Mortgage Securities, High Income and GNMA -- now yielding between 7.8% and 11%. He divided another $3,000 equally among three Fidelity Select sector growth funds: Biotechnology, Computers and Software & Computer Services. The combined income from all these funds in 1986 was $187 a month, $220 a month less than he got from the mortgage. The difference has caused Littrell to wonder whether he made the right moves. He also needs advice on another real estate deal that has boomeranged. Four years ago, Littrell sold a three-bedroom house on Bower Road in Winter Park, which he had owned equally with his mother and sister. This past October the buyers, a group of local real estate speculators, told him that they expected to default on a $50,000 balloon mortgage payment, due in July 1987. The money was part of the total sale price of $79,500. To save the trouble and expense of foreclosing, the financially strapped partners offered simply to give back the property, now worth about $90,000. The increased value was small consolation. Even with the cancellation of the mortgage, the house still carried $44,000 in debt -- mostly in a $34,900 second mortgage at a crushing 18% -- which drove the monthly carrying costs to around $800, about $100 more than the rent. Littrell had no interest in becoming a landlord, especially of a money-losing property. There was, however, little choice but to accept the house back. ''I had misgivings about this deal even as I was signing the contract in 1982,'' he fumes. ''I feel snookered.'' Counting the negative cash flow from the house, Littrell's monthly income had shrunk in six months from $1,300 to barely over $700, of which roughly $397 comes from Social Security. The total is enough to meet day-to-day expenses, he says, but increasingly he has to pay bills by dipping into capital. ''Recently,'' he says, ''I got both my tax bill and my auto insurance bill in the same week. I was doing fine until I got hit with these.'' Littrell's finances might have turned out better had he held on to George's Inn a few years longer: similar Cape Cod businesses today fetch more than $500,000. After 16 years of owning and managing the place, however, he had had enough. At the closing, he recalls, ''I was just tremendously relieved that I didn't have to face another tourist season.'' Besides, in mid- recession 1982 the $155,000 price seemed generous. ''At the time,'' he says ruefully, ''I thought I had made out like a bandit.'' Littrell had bought the place in 1965 for $20,000. The purchase was an act of mid-life rebellion against 15 years of corporate existence at Texaco, where he had been an office manager at the company's New York City headquarters. The inn never produced much income -- for example, in Littrell's final season, 1981, profits were just $5,500 on revenues of $26,000 -- and when he retired he had no pension or retirement savings. ''Everything I made I put back into the business,'' he says. ''The inn was my investment in my future.'' As a result, the proceeds from the sale were his sole provision for retirement. Of the inn's sale price, closing costs absorbed nearly $13,000, and a little over $30,000 was covered by the second mortgage that was prepaid last April. Of the balance, about $25,000 went into a portfolio of Oppenheimer, IDS and Fidelity mutual funds, most of which he later consolidated into one fund, IDS Extra Income, recently yielding about 10.1%. He used another $35,000 to pay cash for his retirement home, a one-bedroom condo in Winter Park, and helped his mother Bernice, now 91, and sister Jean, now 67, buy a three-bedroom unit in the same complex. There was enough left over for Littrell to treat himself to a two-week tour of Europe that cost about $2,000. Until 1986, Littrell had been able to leave his income-producing capital undiminished. In 1983, when his mother moved into a retirement home in nearby Winter Garden and his sister to Arkansas, Littrell sold his apartment and moved into theirs. As part of the sale price, he accepted a $22,000 mortgage at 12%, which bolstered his monthly income by $226. This year, however, he sold the three-bedroom condo and repurchased his old one-bedroom place for $39,000 by canceling the mortgage and paying $17,000 in cash from the sale of the three-bedroom unit. Most of the remainder of his profits from the three- bedroom condo went to moving costs, new furniture, repairs to his new home and paying off the $7,520 balance of the 16% loan on his 1984 Toyota Corolla. Fortunately for Littrell, he has few family responsibilities. Sister Jean supports herself with investments and Social Security. Bernice, frail and somewhat forgetful, uses Social Security benefits and the earnings on savings to pay the $495 monthly charge for room and board at her retirement home. Littrell's own expenses are minimal. He has no debt, other than the mortgages he inherited from the buyers of the Bower Road house. ''I was a Depression baby,'' he says, ''and my father drilled into us that if we couldn't pay cash for something, we couldn't afford it.'' His father, a miller in Nebraska, avoided debt so thoroughly that in 1954, at age 67, he hadn't enough credit history to get a mortgage on a retirement home. The bank granted the loan only after George, then 34, cosigned. Littrell's pastimes tend to be intellectual rather than expensive: reading (the Civil War and current affairs), painting (beach scenes and architectural abstractions) and researching his family genealogy. He is an omnivorous student at the Winter Park Adult Vocational Center, where he has studied subjects ranging from software to microwave cooking. Currently he takes a daily three-hour painting class and a smattering of weekly computer and software classes. $ Traveling -- including trips to out-of-state libraries to research his ancestry -- is the first expense he expects to cut as he adjusts to his new, lower-income life style. It hasn't been easy. He is ready to sell the art and antiques he has collected, to take a job at a fast-food restaurant or even to keep drawing down his capital to avoid lowering his standard of living. ''I'll put off becoming a total recluse until next year,'' he jokes. Suddenly serious, he adds: ''I don't want to become one of those embittered old men who are terrified of running out of money.''

BOX: Cash surplus, income squeeze The sale of one residence and the liquidation of the mortgage on another gave George Littrell a big one-time influx of cash. But most of this money went to buy, repair and furnish a home and to repay the loan on his car. Far more important was the liquidation of the mortgage he held on his former Cape Cod business, because he depended on that to produce much of his income. Income and outgo for the 12 months that ended Oct. 31:

Income Sale of three-bedroom condo $40,285 Liquidation of Cape Cod mortgage 30,555 Liquidation of Florida mortgage 21,800 Interest 7,707 Social Security 4,740 Tax refund 405 Total $105,492

Outgo Purchase of residence $39,000 Mutual fund purchases 28,000 Car loan expenses 8,442 Moving and refurbishing 8,420 Travel, entertainment 5,118 Contribution to money-market fund 4,175 Food, clothing 2,135 Taxes and insurance 2,002 Condo and housing fees 1,875 Utilities 1,486 Legal and accounting 1,250 Medical 1,221 Car expenses 1,145 Classes and subscriptions 751 Miscellaneous 252 Gifts, contributions 220 Total $105,492

Assets (as of Oct. 31, 1986) Mutual funds $52,769 Condominium 39,000 Share of Bower Road house 30,000 Personal property 13,000 & Cash accounts 6,670 1984 Toyota Corolla 4,950 Total $146,389

Liabilities Mortgages on Bower Road house $14,667 Total $14,667

Net Worth $131,722

BOX: The advice Filling the gap

George Littrell wants to bring his income and expenses back into balance without eroding his standard of living. One immediate concern is whether to sell his money-losing Bower Road property and, if so, where to reinvest the proceeds. Money invited Littrell to raise these questions with Winter Park, Fla. certified financial planner Peter H. Blackwell and Gary Stark, a vice president and resident manager of the brokerage house Kidder Peabody & Co. in Fort Lauderdale.

Peter Blackwell: You can't afford a property that's going to run $1,200 in the hole each year. To solve the problem, you could sell the house. You might clear about $12,000 after paying off the mortgages and splitting the proceeds with your mother and sister. But that sum probably wouldn't generate more than $1,200 or $1,400 of income, which wouldn't help your cash crunch much. Thus I would recommend keeping Bower Road and restructuring the debt. If you took $34,900 out of your mutual funds to pay off the second mortgage, you'd lose the earnings on those funds. But, freed of that debt, the house would produce about $5,000 a year of positive cash flow, which would leave you $3,000 ahead. In addition, the house is an excellent inflation hedge. It's in a good neighborhood and should grow in value by about 3% to 6% a year. By my calculation, this strategy would reduce your negative cash flow before taxes to about $1,500. You should be able to go through your budget and save that amount without too much trouble.

Gary Stark: Holding on to the Bower Road place would likely leave you overconcentrated in tangible assets. If real estate values go down or you can't find a tenant, you could be in real trouble. So I say sell. I would also sell the Fidelity sector funds. All of them are in relatively high-risk sectors of the market, and at this point, you need to hold on to your capital rather than increase it. For the same reason, you should also sell your Fidelity bond funds and about 80% of your IDS fund. Interest rates have declined substantially in recent years, and it seems prudent to anticipate an upward move from here. Bond funds will lose value if rates rise. These sales should generate about $60,300 in cash. I would reinvest this money, along with $1,500 now invested in a money-market fund, in a split- funded annuity. In this case, $20,000 would go to buy an immediate five- year annuity that will give you a guaranteed monthly income of $390. The rest goes into a deferred annuity, such as Executive Life Insurance's 5+5, where it would grow tax deferred at 8.25%. After five years the deposit will have increased to $61,800, essentially preserving your original investment. This reshuffling of assets gives you an extra $1,370 of annual income and a lot more peace of mind. To bring your budget further into balance, you'll have to do some serious belt tightening, or better yet, consider a part-time job.

After the meeting, George Littrell said he leans toward holding the Bower Road house and restructuring the debt, with an eye toward selling when the current tenant's lease expires later this year. He added that he had already been thinking about taking a job and now probably will, perhaps in an art supply store.