Invest, or pay off debt?

Q: My husband and I are retired and in our 70s. We live on about $8,000 a month from a combination of Social Security, an inherited annuity, my pension and required minimum distributions from our IRAs. I also take $700 a month from a brokerage account to pay on a home equity loan.

Our home mortgage is $1,810 a month, at 3 percent interest. The balance is under $160,000. Our home's value is $550,000. Other monthly expenses, beyond general household, are long-term care, $452; Medigap, $293; a car loan of $16,000 at 5 percent, payment $472; and the home equity loan at 3.4 percent.

We have about $1 million in our managed brokerage account. They take 2 percent in management fees. Our income tax adviser recommended the firm when I inherited a variety of accounts from my mother. I haven't been unhappy with our adviser,

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but it does seem we pay a lot for management. I'm including a table of our investment totals for the past years. We draw our two IRA distributions from that account, and it stays about the same.

We will need a new roof shortly. Our financial adviser recommends using the home equity loan and leaving our assets with our broker. She argues that we earn more interest than we would pay on the loan. Do you agree?

We plan to stay in the house another five years, or more, depending on our health. My main question is the buildup of debt and making those monthly payments. Why not just pay off the loans from investments and let the assets continue to build? -- S.A., Seattle

A: You do pay a lot for management. A great many registered investment adviser firms would be delighted to manage a $1 million account for half that much. In addition, virtually all of the low-cost mutual funds I mention regularly would manage your money for far less.

Let me walk you through this. Over the five years ending December 2015, your account grew slightly from about $974,000 to $1,028,000. You also withdrew $700 a month, or about 0.84 percent a year. You also took your required minimum distributions, which averaged a bit over 4 percent a year. So your withdrawal rate was a bit under 5 percent a year, about $4,000 a month.

Now let's examine the opportunity cost of this adviser versus alternatives. To do this, I went to the portfoliovisualizer website, entered your starting principal, your monthly withdrawal, and asked it to provide results for the three funds I mention most often in this column: Vanguard Balanced Index (a 60/40 stocks/bonds index fund), Vanguard Wellington (a 60/40 managed fund) and Vanguard Wellesley (a 40/60 managed fund). In each instance, Admiral shares were used because your investment would have qualified for the lower expense version of the fund.

Had your money been invested in Vanguard Balanced Index, you would have ended the period with $1,210,564, excluding any tax considerations. In Vanguard Wellesley, the end value would have been $1,171,052. And in Vanguard Wellington, the end value would have been $1,241,535.

In all three cases, the end result is well over $100,000 greater than the results your manager achieved. Yet the manager was paid about $100,000 over the same period. So I think it is fair to say your manager did not earn her keep. You would have been better served with a low-cost, no-commission alternative.

While you did earn more on your money than you are paying in interest on loans, a growing amount of debt isn't good for your retirement and increases the amount you need to withdraw each year. So it would be good to pay off the loans with the highest interest rates.

Before you seek another recommendation from your income tax adviser, you might ask if a referral fee was involved. Sadly, there is no data to support the idea that high-cost management earns its keep. When someone provides positive data, I will be delighted to report it.

One easy step you might take is to visit a local credit union and refinance your car loan. Odds are you'll be able to walk away with a 2 percent interest rate.

• Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. Questions about personal finance and investments may be sent by email to scott@scottburns.com.

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