Immediate annuities can be a useful tool
Q. I wonder if single-premium immediate annuities (SPIAs) are for me. I am 75. My wife is 73. We have no debt, $850,000 in IRAs (mostly in the American Fund family) and $150,000 in a Roth IRA, again with American. We also have $150,000 in CDs and money markets in taxable accounts.
We live decently on Social Security, pensions and my IRA minimum required distributions. I don't feel that I can think very "long-term." So I want to avoid some market risk. SPIAs have come to my attention via an AARP offer with New York Life. I am considering spreading some of my funds around in laddered SPIAs. Is this a good idea? Most financial advisers I have spoken with jump immediately to variable annuities (with "living benefits"), I suspect due to larger commissions. -- D.P., by e-mail
A.
You're on the right track and, yes, the salespeople who promote the living-benefit route ARE receiving handsome commissions. You can reduce your risk and possibly increase your estate by doing exactly what you suggest -- laddering a number of single-premium life annuities. While the principal will be gone, your current monthly payments will increase. Less (or none) of your required minimum distributions will need to come from liquidating equity investments. You'll get the security of a solid monthly income, and your equity investments may grow with less risk of being sold in a down market.
Research has shown that using some amount of SPIAs is a good option for all households, including those with a desire to leave some money to heirs. As I pointed out in an earlier column, the expenses of a popular living-benefit product are so high that you'd be far better off dividing your existing money between a life annuity and regular low-cost mutual funds.
Q:
I am 70 and own a house in need of repairs such as foundation work, floor leveling, window replacement (windows are aluminum frame and drafty) and repainting. With repairs, my debt-free house would be worth about $95,000. I also have $200,000 in financial assets. Since I live on Social Security income and a little interest from my savings accounts, I think I would be better off getting a reverse mortgage rather than taking out a home improvement loan. What do you think? I am in good health and will probably live another 20 years. My only debt is $1,500 in credit card bills for auto repair. -- N.C., Greenville, Texas
A:
Reverse mortgages have come a long way in the last 10 years, but they are still an expensive way to finance much of anything. The interest rates are higher than the rates on conventional home mortgages, and the cost associated with putting a loan in place also raises the effective cost of accessing your equity. This is particularly true with relatively small loans, as yours would be. So if you have to borrow money for repairs, you might consider a home equity line of credit. These loans have relatively low (but variable) interest rates. Most can be done with no front-end cost to you. Recently, interest rates on these loans were about 5.25 percent. Borrowers often get a small break for arranging to have the monthly interest payment automatically deducted from their checking account, if they bank where they borrow.
The caveat on home equity lines of credit is that the interest rate is variable, so it could rise to an uncomfortable level. This, however, should not be a problem for you since you have $200,000 in financial assets. If future interest charges rise to an uncomfortable level, you've got the money to simply pay the loan off.
Another thing you should consider is selling your house and becoming a renter. The future will hold more repairs. Your desire to do home maintenance yourself isn't going to increase over time. If you sold your house, you could add to your savings and eliminate all the chores of ownership. While rental markets vary all around the country, in the Dallas area it is possible to find apartments where the monthly rent and utilities will be similar to the operating and repair costs of your current house.