Q. We are retired 70 year olds with annual income of $70,000. We have a $140,000 mortgage (7.375 percent interest) with 9 years remaining on our $250,000 house. We recently sold some property. This diminishes our annual income by $25,000 but leaves us with $250,000 to invest after capital gains tax. Given the present market, is it advisable for us to pay off the mortgage and invest the remainder or should we invest the entire sum (and, if so, how?) and continue to itemize deductions?

---A.B., by e-mail from Fargo, ND


A. If you have a principal balance of $140,000 and the mortgage will be paid off in 9 years your monthly payment is nearly $1,800 a month. That's only $300 a month less than the amount you need to completely offset your income loss. The simple, prudent path is to pay off the mortgage. This will reduce your savings rate (the principal being paid off in the mortgage payments) but it will solve your cash flow problem quickly and without any investment machinations. In addition, you'll still have $110,000 to invest.

Are there any circumstances where I would recommend that you NOT pay off the mortgage?

Yes. If you have substantial financial assets and make regular charitable gifts, you might consider using the mortgage to add a bit of leverage to your portfolio while providing a base for itemized deductions. Most people, however, don't have substantial assets and are better off having no debt when they are retired.


Q.   I have a dilemma. My little budget shows a cost of living increase each year over the last 5 years of about 8 to 10 percent a year. No, I did not buy a new house or new car and I haven't changed anything in my over-all budget during this time. The government says that the inflation rate is at a steady 3 percent. If what I see in my budget is true--- cost of living rising at 10 percent--- I'll be out of money way before I go to the big money bank in the sky. Would you please check your family budget and tell me what the actual cost of living percentage is?

---E.P., by e-mail from Dallas


A. I've got Quicken records that go back over ten years so I can actually do that--- check my own budget for inflation.   It wouldn't do you much good, however, since all of us have different spending patterns and some are more susceptible to rising prices than others. Many people can claim minor inflation because they have significant fixed costs built into their budgets--- home mortgage payments, car payments, etc. Others achieve stability by changing their shopping habits to combat price hikes, witness the growth of Wal-Mart and Target relative to conventional department stores.

Elderly people, however, seldom have fixed loan payments that work to dilute inflation. Worse, things like prescription costs, insurance premiums for home and car, and energy costs often loom large in their budgets. As a result, older people face a 'personal inflation rate' that is higher than the increase in the Consumer Price Index.

You can read an interesting paper on the Bureau of Labor Statistics website on why individual experiences don't match the CPI at: http://www.bls.gov/cpi/cpifact5.htm


Q. I have the opportunity to buy company stock at a 15 percent discount. I've held onto the stock several times and I have also done a "quick sale" at the end of the six-month accumulating period. Because of the tax consequences of the "quick sale" I'm unsure if this is such a good deal. Would I be better off dollar cost averaging that 10 percent of my income each pay period in an index fund?

---J.W., by e-mail from Minneapolis


A. It's hard to lose money when you buy at a 15 percent discount and sell 6 months later. If you pay taxes at a 33 percent rate you'll still net 10 percent every 6 months. That annualizes to an after-tax return of a bit more than 20 percent, provided the stock doesn't move up or down. Unless you have great misgivings about the future of your company versus the rest of the economy, participating in discount stock plans is a good thing to do.

The second question is how long you want to do it and how much of your net worth should be in your company stock. My answer: limit it to 10 to 20 percent of your financial assets. When your accumulation exceeds that amount, sell shares and reinvest the after-tax proceeds in an index fund so you have broad diversification.