Retirees with mortgages are putting their investments and security at risk
Q. My retired parents are looking for a house. They are thinking about paying cash. They have almost $620,000 in savings and want a house for $200,000. They also have about $1,300 in Social Security income each month. Their combined monthly expenses are less than $1,900.
They prefer CDs and FDIC-insured accounts over bonds and stocks, but are warming up to the idea of a low-cost balanced fund. Should they pay cash for the house or finance it?
A.H., Dallas
A. Given their caution and age, what income could they get from an inflation-adjusted joint life annuity, assuming a 75 percent survivor benefit?
Answer: $2,354 a month on a $420,000 commitment. (The figure comes from the Vanguard website, where such life annuities are offered.) Add their Social Security benefits and they would easily have enough to cover their living expenses and the operating expenses of a $200,000 house.
Putting all their money into a life annuity, however, wouldn't be prudent. A better option would be to pay cash for the house. Then put about $240,000 into an inflation-adjusted joint life annuity that would provide about $1,300 a month. And, finally, invest the remaining $180,000 in a low-cost balanced fund such as Vanguard Wellesley Admiral shares (current yield about 4.3 percent) or Vanguard Wellington Admiral shares (current yield about 3.2 percent).
Q. At 85, with a mortgage and a wife, I'm worried.
I sold our home for $288,000 free and clear. I also had $200,000 in a brokerage account.
We moved to San Antonio and my new broker said: "Don't pay cash for your house. It's better to have a mortgage and put the money to work. You can pay the mortgage and still have more money to live on." I put $30,000 down on a modest home. In September I had $460,000 in my brokerage account. Now I have only $336,000 - but I still have a mortgage balance of $112,000.
My investments are in mutual funds like Mutual A shares and Franklin Income A shares. My wife is 54, and I want to leave her the house free and clear, and something to live on. What should I do?
R.T., San Antonio
A. It's easy for a broker to say your investment will earn more than you'll pay on a mortgage because he will have more money to earn commissions on, even if the investments don't pan out.
To make the mortgage payments, you'll need to withdraw more from your investments. This may trigger the taxation of Social Security benefits. While you'll have an interest deduction to offset some of the investment income, you may have to pay income taxes on some of your Social Security benefits.
Your funds are reasonable in terms of expense and historical performance. But to invest most of your money in equities, while recommending a mortgage, is foolish. I suggest redeeming some of your shares to pay off the mortgage.
Scott Burns is a syndicated columnist. He can be reached at scott@scottburns.com.
