Couple should not be quick to give up their cash, even if mortgage would shrink
We may be coming into $100,000 this December. We have a $250,000 adjustable mortgage at 4.75 percent. The rate won’t increase for two years. Both my husband and I lost our jobs recently, and my husband has started a home repair business. We have about $60,000 in mutual funds, $10,000 in savings, and $150,000 in a frozen pension plan. In six years all the kids will be off to college. We have prepaid college plans. What would be the smartest thing to do with this $100,000?
P.P., St. Petersburg, Fla. The biggest asset you and your husband have is yourselves. I suggest you use this $100,000 as working capital for “US2 Inc.’’ Your second most important resource is cash. While you can cut your interest payments by paying your mortgage, paying it down will reduce your flexibility because it will reduce your cash resources.
I’ve got a CD coming due, and I’m still not seeing anything “safe’’ on the market that can beat a fixed-length deferred annuity. The one I’m in has the following features: 6 percent interest rate the first year, 4 percent the second and third years, and 3 percent (or higher) the fourth through seventh years. I can withdraw up to 10 percent annually with no penalty.
Better still, annuities issued by Texas-licensed companies are covered up to $100,000, and upon death of the annuitant, the beneficiary becomes a 100 percent-vested annuitant. What do you think?
B.W., Dallas We’ve all got a problem when it comes to investing for interest income. Traditional safe havens such as US Treasury obligations offer low yields. Bank certificates of deposit offer somewhat higher yields. And CD-like annuities can beat CDs - if you are willing to bet on an insurance company with a somewhat lower credit rating.
But getting a higher yield will take some real shopping around. Recently, Treasury obligations with a one-year maturity were yielding less than 0.5 percent, three-year maturities were yielding 1.79 percent, and five-year maturities were yielding 2.76 percent. Shopping for CDs in that maturity range will bring a higher yield, particularly at one-year maturities. Recently, one-year CDs were bringing as much as 2 percent, three-year CDs yielding as much as 2.8 percent, and five-year CDs yielding as much as 3.2 percent. The website www.bankrate.com has a good search tool.
You could also find yields of about 4 percent on three- and five-year CD-like annuity contracts. But if you limit your search to “A’’-rated insurance companies, the yields were very similar to what you could find on comparable-yield CDs. The annuity contract, of course, allows you to tax-defer and compound the interest earned. That works to increase the effective yield somewhat, particularly if you know your future tax rate will be lower. You can shop for these at www.annuityadvantage.com. When you compare annuity contracts with actual CDs, it’s pretty much a push if the insurance company has a top credit rating.
Scott Burns is a syndicated columnist. He can be reached at scott@scottburns.com. 
