American Chronicle, February 17th, 2011
Q. I am 47 years old and bought a house when I was 42 (30-year mortgage
at 5.12 percent). My job requires me to retire by 65 years old (police
officer), but I can retire as early as 57 years old. My mortgage won’t
be paid off until I am 72 years old. I have extra cash at the moment
(currently in a 1 percent savings account) that I have been debating on
investing in stocks or paying my mortgage principal down. What would the
wise choice be?
If we’ve learned anything from 2008, it’s not to be
over- leveraged. The historical return of the stock market at 9 percent
to 10 percent would suggest you could do much better in stocks –
especially if capital-gain rates stay at 15 percent — but let’s not
forget that during the last 10 years the Standard & Poor’s 500 was
flat. The math may work, but the certainty of return is not there.
Personally, I like the discipline of paying down a mortgage. If you
were to pay down your mortgage let’s say $100,000 on a $300,000 mortgage
at 5.12 percent, you would save about $153,000 over the life of the
mortgage.
You could, however, consider an investment strategy
that offers a guaranteed return or principal protection such as a
variable annuity. Let me briefly describe one general type of variable
annuity in which the amount invested, say $100,000, is guaranteed to
adjust (reset) annually at either 8 percent more or the actual account
value, whichever is higher.
The $100,000 in the variable annuity
is invested in a portfolio of mutual funds that diversify your
investment. On the anniversary date of the investment, the insurance
company looks at the account balance. If it has appreciated less than 8
percent or even lost money, your annuity base for calculating future
withdrawals is increased by 8 percent on your initial investment to
$108,000. If we had a good market that year and the account was up 15
percent or at $115,000, this higher amount is locked in and becomes your
base for applying the 8 percent, so the next year the annuity would
increase by $9,200 ($115,000 x 8 percent) to $124,200.
On a
$100,000 investment, assuming the market never beats the guaranteed 8
percent rate, the account benefit base will grow to about $196,000
($100,000 plus $8,000 per year over 12 years).
Depending on your
age when you start withdrawing the money, the insurance company will
guarantee you either 4 percent at age 62 or 5 percent at age 65 of the
benefit base (i.e., $196,000) or $7,840 at age 62 (or $9,800 at age 65) a
year for the rest of your life. It is important to understand that the
benefit base of $196,000 is available only as a withdrawal benefit. You
can, however, opt to withdraw the account balance of your mutual funds
at any time (subject to surrender charges usually in the first four to
six years).
Read more of this article.
Annuity advice for retirement: Annuities are hardly the proper solution for everyone, but they do have a place in reputable retirement planning. Find out how much it can assist you at NewRetirement.com
Do you think it’s a wise idea to take part of your retirement savings to purchase an annuity? That’s what the US Government Accountability Office (GAO) recommends. People are living longer and it’s no secret that Social Security is nearly impossible to live on as a primary source of income. The GAO interviewed financial experts who recommend that in order for retirees to cover the expenses they may encounter further down the line, they should delay Social Security benefits, work as long as possible to continue to save and to systematically draw down their savings to purchase an annuity.
