Q. I am hoping for a quick reality check on the status of my retirement savings. I am single, 64, with no children. I own my home outright and it is assessed at $475,000. I have no loan liabilities. My two IRAs totaled $265,500 at the end of 2011 (246,593 in regular, $18,910 in Roth). I have another rainy day brokerage account valued at $101,100, a life insurance policy worth $4,000 and $2,500 in a work-related retirement fund.
I have Social Security income of $1,400 and rental property income of $750 per month. I net roughly $15,000 per year from real estate sales. Last year’s expenditures totaled $36,000, so I anticipate working until I can no longer walk, talk or think. —L.B., by email
A. Maybe not. It could be said that you are working to support your house. At a value of $475,000 it is worth far more than the roughly $370,000 you have in financial assets. It probably costs you more than $15,000 a year to support. That reality also makes your house a very big lever on your retirement choices, particularly if you are willing to move to an area where home and condo prices have collapsed, such as Florida or do a significant down-sizing.
Here's an example. If you sold your house, netted $450,000, and bought a $150,000 condo you would still be living mortgage free— but you would have nearly doubled your investment assets, making it much easier for you to decide whether or not you wish to continue working.
The big decision here is about how you want to spend your time. Do you want to work to support a very nice home? Or would you rather have a less nice home and the time and money to do what you want? To put it another way, what has your house done for you lately?
Q. I am a 62-year-old woman, widowed since March of this year. I have some questions regarding my late husband’s two 401(k) plans, totaling about $300,000. I am currently drawing his Social Security. I also have income from his pension plan. I have no mortgage or other debt. A financial planner I have been talking to has recommended putting the 401(k)s, which fluctuate up and down with the market, into an EIA, an equity-indexed annuity. Please give me your thoughts on an EIA and whether this might be an appropriate option for me to consider. —N.C., by email
Q. Equity-Indexed annuities can reduce your anxiety over big market fluctuations because they guarantee no losses in any year. This is done by limiting your return to a portion of the change in value of the equity index and by excluding the dividend yield. As a consequence, you miss the big drops— but you also lose much of the gain in bull markets. In addition, you are subject to major cost penalties if you decide to sell your investment early, so you lose a good deal of financial freedom. If your financial planner is suggesting that you will get equity-like returns with much less risk, he is misrepresenting the product and its potential return. He may also be understating the complexities and limitations of the product.
Relative to most people you already have a great deal of stability in your financial life. You have Social Security. You have a pension. You own your home. And you are debt free. This means you can afford to take some amount of risk in your other assets— your two inherited 401(k) plans. If you move to an IRA rollover account you can consolidate two accounts into one and simplify your life. You could also invest in a low-cost balanced fund that will allow you to redeem shares at any time with no penalties. This would give you flexibility.
If you haven't been presented with this alternative, the probable reason is that your "financial planner" is really a product salesperson who gets 100 percent of his or her income from sales commissions, often for only one kind of product. This is a heavily sold product because it has attractive commissions, not because it is a universal investment solution. FINRA, the Financial Industry Regulatory Authority, has issued an investor alert, which you can read at this link: http://assetbuilder.com/MTACGK.