Q. I am a divorced and retired woman with a lifetime pension and Social Security income of $60,000 annually. I am 67. My home is valued at $140,000 and I have a mortgage balance just under $100,000. I have credit card debt of $25,000. But I have a savings account of an equal amount from a recent inheritance. My income meets my obligations easily, but the credit card debt is worrisome. Most of it was accrued during a period of unemployment, before I was eligible for Social Security. I would like to be debt-free and work toward that goal. But it is a slow process. I live a simple, comfortable life, am in relatively good health and could remain in my current home indefinitely.
I recently received an offer from my former employer to accept or decline a one-time lump sum payment in lieu of my pension. The amount offered is just under $500,000. On the one hand, I see an opportunity to take the offer, pay off the credit card debt and maybe the mortgage as well and still have a substantial amount to place in IRA accounts. Understanding that there would be significant tax obligations under this scenario for the one-time income the first year, I think I would be able to live a comfortable life for many years with no debt, no mortgage and small IRA withdrawals to supplement my Social Security income.
On the other hand, I know little about selecting an IRA, investments, advisors, etc. I am alone here and have no one I trust for counsel. Continuing the monthly pension payments is an option and one never knows how long they are going to live. I am terrified of making the wrong decision, maybe someday being destitute and alone. Or am I passing up an opportunity to be debt free? What is the best path? —I.H., Dallas, TX
A. I’m sure the cash offer is tempting, but it’s not a good idea. Although you haven’t provided figures that would make a comparison possible, you would be trading one uncertainty— paying off your debt and mortgage— for another— deciding how to invest the $400,000 that would remain.
For you to have the same spendable income (money left after debt service) that $400,000 would need to produce an annual amount equal to your pension for a year minus a year of mortgage payments. To get that amount out of $400,000 you’ll probably need to withdraw far more than the 4 percent that has been considered a “safe” amount for many years.
So let me make this suggestion. First, take $20,000 of the recent inheritance and pay off $20,000 of your $25,000 in credit card debt. Leave the remaining $5,000 of inheritance cash as a cash reserve. Commit to paying off the remaining $5,000 of credit card debt over the next 12 to 24 months. It will mean “finding” $200 to $300 a month for making the credit card payment. Don’t use your credit cards until the debt is paid off. This means nearly two years of watching the pennies, but with all the credit card debt paid off, the remaining burden of the mortgage will be small relative to your $5,000 monthly pension and Social Security income.
Yes, it would be nice not to have a mortgage, but turning a stable financing of your retirement upside down to do it would not be a good choice.
Q. A friend has invested in inverse ETFs, which sparked my interest in knowing more about them. Can you explain more and comment on whether you think they are good investments? —C.S., by email
A. An inverse ETF (exchange traded fund) is an investment vehicle that allows you to bet against a particular benchmark such as the S&P 500 Index. If normally structured, the inverse ETF will rise by 10 percent if the S&P 500 falls by 10 percent. One safety advantage of an inverse ETF is that if the market goes against you, the most you can lose is your original investment. In a regular short sale (a bet that a particular security will decline in value) your exposure to loss is unlimited since the stock (or index) could rise an indefinite amount.
Inverse ETFs and their related leveraged-inverse ETFs are speculative vehicles of little use to long-term investors. They are precisely the kind of thing that Vanguard founder John Bogle believes are dangerous because they encourage excessive trading.