Q: We just bought a new house. We need to decide between a 15-, 30- or possibly 20-year mortgage. My wife and I are both 51. We will probably work only another 10 to 12 years at most. At that point we will probably sell the house and move into something smaller (kids should be gone at that time). Any thoughts on how long a mortgage term we should select?
A: The answer depends on what you are doing in other areas of retirement preparation. At a minimum, you want to be certain that you are saving enough in qualified plans to capture your employer match (assuming there is one). If the higher payments on a 15-year mortgage would interfere with that, then it would be better to take out a mortgage with a longer term.
It would be better still to save the maximum allowed in qualified plans, then take out the shortest mortgage you can handle easily. The operative word here is “easily” — you don’t want to put yourself into a monthly payment straitjacket, particularly with kids still at home.
Selling the house later will create a nice “liquidity event,” allowing you to make a well-considered “right-sizing” decision on your retirement shelter, so maximizing mortgage paydown is a really good idea.
Q: I would like to know what to do with money in an IRA account. I am 77. I have a pension and Social Security. I also have a five-year CD coming due in my IRA. This CD has been earning 5.3 percent. Now, the most I can get on a super-jumbo CD for one year is 1 percent. I do not want an annuity, and I am not comfortable with the stock market. Is there anything out there that would earn more than 1 percent? I know I am going to have to start withdrawing principal. This is a common problem for seniors, and I don’t hear anyone addressing it.
A: The question isn’t being addressed because there really aren’t any answers that people will accept. Every investment that provides a higher yield than bank CDs involves some degree of risk. There are lots of ways to get yield out there — the big telecom stocks come to mind, as do the “dividend aristocrat” stocks, real-estate investment trusts, preferred-stock mutual funds and junk bond funds — but none is guaranteed. And all can fluctuate in value by more than 20 percent a year. That’s the way it is. You can thank the Federal Reserve for the policy.
Q: I turn 62 this year. My plan is to retire at 65. I have three pensions plus a 401(k). I am single, have no dependents and am in very good health. I have purchased my retirement home and have a mortgage of approximately $216,000 at 3.75 percent. I will soon be closing on the sale of my prior home and should have approximately $100,000 net proceeds after the cost of the sale. Should I take the sale proceeds to apply on my mortgage amount, or should I purchase a $100,000 life annuity that hopefully will generate enough income in five to seven years to pay my monthly mortgage? At 3.75 percent, I think I’m better off generating income rather than having a lower mortgage balance. I will still have to pay the same monthly amount, just for a shorter time. Maybe I am way off base.
A: That’s an interesting idea, but it’s not nearly as lucrative as you seem to think. According to the website immediateannuities.com, a single male buying a $100,000 life annuity can expect a payout of 6.52 percent a year, or $543 a month. In comparison, the monthly payment on a $100,000 mortgage for 30 years at 3.75 percent is $463. That would leave you with about $80 a month in extra spending money for the rest of your life. That’s not bad. But if you wanted to pay off the mortgage in seven years, you’d have to make payments of $1,355 a month, which is $812 a month more than the annuity income.
Questions about personal finance and investments may be sent to scott@scottburns.com.