Q: I know CDs are not paying anything, so I decided to look at the lowest-risk Vanguard fixed-income funds. When my CDs matured, I switched to Vanguard Intermediate-Term Treasury Fund and Vanguard Short-Term Investment-Grade Fund. I have other investments, but want to keep a portion safe. Does this make sense?
A: Your decision makes sense, but it is not without risk. With a CD, you have neither interest-rate risk nor credit risk. By moving some money to the Vanguard Intermediate-Term Treasury Fund (ticker: VFITX) you’ve taken on some interest-rate risk to get a 0.77 percent yield. With an average maturity of 5.6 years, this fund would be damaged by an increase in short-term interest rates. Even a small increase in rates could offset a year or more of interest income with losses in net asset value.
Vanguard Short-Term Investment-Grade Fund (ticker VFSTX) has a higher yield (1.7 percent) and a lower average maturity (2.9 years), but it has more credit risk than the Intermediate-Term Government Treasury Fund. Neither risk can be ignored, but you are taking the risks necessary to have some income from your investments.
Q: My wife and I are both 72. We are considering buying a home in a Georgetown (Texas) area that is like Sun City. We are both retired. My wife and I have a total income of $45,323 annually, most of which is hers. My income is about $10,000 a year, but I have several hundred thousand in savings. Most of our income is from Social Security and pensions. We are currently renting an apartment that costs about $1,200 monthly. If we buy a house, we plan to pay equally on it, like half the mortgage and expenses. Do you think this would be a good idea, and if so, how much home can we comfortably afford? What mortgage rate would you recommend, like a 15-year or a 30-year?
A: According to the Del Webb website, Sun City Georgetown now offers homes priced from about $150,000 to $373,000. Using one of the online home affordability calculators, I found that you could, in theory, afford a home that cost about $240,000 if you have no auto loans, no consumer loans or credit-card debt, and a good credit rating. You would also need to make a down payment of about $40,000.
As a practical matter, this price level is very likely on the high side, largely because lenders are concerned with your capacity to make payments. They don’t care much about how often you have to have soup and crackers for dinner.
If you try to keep your mortgage, taxes and insurance payment close to your $1,200 monthly rent payment, the house you buy should be priced closer to $200,000 with a $40,000 down payment. Having those ownership expenses — mortgage, taxes and insurance — match your monthly rent, however, does not mean your shelter costs will be the same after you move.
The house will likely be larger than your apartment, so the utilities will be higher. You will likely have a homeowner’s association fee to pay, and you’ll also have responsibility for ongoing repairs and replacements.
Even figuring with an optimistic and well-sharpened pencil, my bet is that a $200,000 house will have total out-of-pocket costs of at least $18,000 a year. So your half would be $9,000. That doesn’t leave much room for any other personal expenses.
This suggests that you and your wife should have a long discussion about how you pool and share your income.
Finally, don’t count on tax deductions from home ownership to cut your income tax bill. On a $200,000 house with a $160,000 mortgage at 3.5 percent (and assuming a tax bill equal to 2 percent of the home’s value), your itemized tax deductions for interest and taxes would be about $9,600.
The standard deduction for a joint income tax return is $12,200 for 2013. That means no tax reduction unless you have a lot of deductions from other sources.
Most people don’t unless they live in a high-income-tax state like New York or California.
In Texas your state income tax is nada, but you pay more in real estate taxes than do people in most other states. Deductions are a big deal for the affluent, but they do nothing for most home buyers.
Questions about personal finance and investments may be sent by email to scott@scottburns.com.