Q. In a recent column you advised a woman to pay off her mortgage. My math tells me I should, too. I have fixed annuities of $190,000 at 6 percent and a balance due on my condo of $13,500 at 7.25 percent. Monthly payments are $186.66. Right now I work about 5 hours a week and earn $2,700 a year. Im single and 71 years old. Social Security is $832 a month.

This morning, again, someone told me her financial advisor had recommended she take out a mortgage. She is selling her house and can pay cash for her townhouse. It seems as if most financial advisers recommend taking out mortgages. Why? Should I pay off my mortgage?

—M.M., Minnetonka, MN

A. I think most financial advisors would say, "It depends." But I can guarantee you that most financial salespeople are devout believers in mortgages.

For you, the case for paying off the mortgage is compelling. The annual cost of your $13,500 mortgage is $2,239.90 or the equivalent of 16.6 percent. This happens because your payments are a mixture of interest and principal repayment. To make that payment, you need to take taxable interest income from your annuity. This increases the amount you need to take from the annuity to $2,635, assuming you are in the 15 percent tax bracket. It takes the earnings from $43,920 of your annuity, at 6 percent, to generate that much income.

If you took $15,882 from your annuity you would have enough to pay off the mortgage and cover the Federal income taxes on the transaction. As a result, you would have the difference, $28,307 available to earn income for other purposes. At 6 percent thats $1,682 a year. Virtually all retired readers in low tax brackets with small remaining mortgages would benefit from paying them off. The ONLY caveat is that you shouldnt pay off the mortgage if it leaves you with no investments.

Q. My wife and I are 46 and 47, with aging parents that are retired. Both of my parents are alive and in good health. While my wifes father recently passed away, her mother is in good health. Both sets of parents have accumulated a substantial nest-egg via IRA, 401k, savings, pensions, and Social Security benefits.

Over the last year I have seen several articles dealing with proper methods to reduce estate, excise, income, and capital gains taxes as well as avoiding probate that would enable the aging parents to properly pass on their accumulated wealth with minimal tax consequence. Is there a way to diplomatically suggest to both sets of parents the procedures they should use to best reduce the tax consequences on their estates? In round numbers, I suspect that each set of parents will have in excess of $1 million that will have accumulated and be passed on during the course of the next 15 years.

—J.T., Burnsville, MN

A. The first thing you need to remember is that it is their money and they can do anything they want with it, including wasting it on an ungrateful Internal Revenue Service. Some people spend their last years preoccupied with how to leave their money. Others dont give it a thought and wont. You wont change that with, or without, diplomacy.

In addition, there isnt much that can be done, other than numerous $10,000 annual gifts, to reduce the estate tax on your mother-in-law. Her estate will have a $600,000 exemption. Period. In the case of your parents, however, a simple will and marital trust would give them, in effect, two $600,000 exemptions. This would effectively eliminate the Federal Estate Tax. If their current estate is $1 million, $400,000 could be exposed to estate taxes at a rate of 37 percent. In other words, a small amount of planning could save $148,000 in Federal estate taxes.

Not to mention improve the security of the surviving spouse.

Q. Could you answer the following questions about Social Security?

  • At age 65, what is the maximum you can earn before your Social Security payment is reduced?
  • Are payments from a private pension considered earnings?
  • Are withdrawals from a 401k account considered earnings?

—R.M., Carol Stream, IL

A. The annual earned income limit for social security benefits in 1997 is $13,500 if you re 65 to 69, $8,640 if you are 62 to 64. For people age 70 and over there is no limit. Neither private pension income nor qualified account withdrawals are considered earnings. Earned income for Social Security purposes is income derived from being part of the work force.

Questions about personal finance and investments may be sent to: Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas 75265; or faxed to (214)-977-8776; e-mail to scott@scottburns.com Check the website: "www.scottburns.com." Questions of general interest will be answered in future columns.