Q. We may be coming into about $100,000 this December. We have a $250,000 adjustable mortgage at 4.75 percent that is just a year old. The interest rate won’t increase for two more 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 6 years all the kids will be out of the house and off to college. We have pre-paid college plans for them. That is when we plan to downsize.
What would be the smartest thing to do with this $100,000? Should we apply it to our mortgage? Should we invest some in the stock market? Should we go with bonds? Or should we buy a rental property that needs some TLC? ---P.P., by email from St. Petersburg, FL
A. The biggest asset you and your husband have is yourselves. I suggest you use this $100,000 as working capital for "US2, Inc." The second most important resource you can have 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.
Here's an example. If you paid your mortgage down by $100,000, you would save $4,750 in each of the next few years. But during that time you may find a home/rental property opportunity where having cash will allow you to buy $100,000 of home for $50,000. This may happen simply because you have cash, and others don't.
Q. 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 currently in has the following features: 6 percent interest rate the first year, 4 percent rate the second and third year, and 3 percent rate (or higher) the fourth through seventh years. I can withdraw up to 10 percent annually with no penalty, and certain medical conditions allow the penalty to be waived.
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. To me, this beats a traditional CD hands down. What do you think? ---B. W., by email from Dallas
A. We've all got a problem when it comes to investing for interest income. Traditional safe havens such as U.S. Treasury obligations offer dismally 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 1-year maturity were yielding less than 0.5 percent, 3-year maturities were yielding 1.79 percent, and 5-year maturities were yielding 2.76 percent, according to www.bloomberg.com
Shopping for CDs in that maturity range will bring a substantially higher yield, particularly at 1-year maturities. Recently, 1-year CDs were bringing as much as 2 percent, 3-year CDs yielding as much as 2.8 percent, and 5-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, or slightly more, on 3 and 5 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 than your current tax rate. You can shop for CD-like annuities at www.annuityadvantage.com. The site has a search tool that allows you to search by state, maturity, company credit quality, and amount of your deposit. When you compare CD-like annuity contracts with actual CDs, it's pretty much a push if the insurance company has a top credit rating.