Q. I am 55 years old and about to come into a large sum of money— millions perhaps. Having never been in this position before, I would like to know where can I invest my money so it would be relatively safe, make money, and not be excessively taxed. —E.T., by email
A. It depends on what “relatively safe” means to you. For some people it means no exposure to loss. If that’s what relatively safe means to you, you’re out of luck in the current market. Yields on “safe” investments are extremely low and well below the rate of inflation. Today, for instance, if you invested $1 million in a 1 year Treasury obligation you’d enjoy a yield of 0.16 percent. So your interest income for the year would be $1,600. You could, of course, look on the bright side— with a personal exemption of $3,650 and a standard deduction of $5,700 (a total of $9,350), you could have $5,843,750 invested in one year U.S. Treasury obligations and not owe a cent in income taxes! What a deal.
In other words, if you want a meaningful return on your new found money, you’re going to have to take some risk. Even there, you’ll really need those possible millions to have some income. For example, if you invested $1 million in the Vanguard Balanced Index fund (Admiral shares), your annual dividend and interest income would run about $22,600 a year. This would provide you with some diversification and would be less risky than a fund that invested every dime in, say, domestic equities. The interest income on a balanced fund would be taxed at ordinary income tax rates, but the dividend income would be taxed at no more than 15 percent.
You can enjoy relatively low taxes if you can tolerate the risk of equity mutual funds because dividends and long term capital gains are both taxed at only 15 percent. You could also look for a fund that focused on relatively high yield stocks, such as the SPDR Dividend exchange traded fund (ticker: SDY). This fund currently yields about 2.87 percent a year so a $1 million investment would produce an annual income of about $28,700.
The bottom line here is that unless you live very modestly, you should carefully consider keeping your day job.
Q. I retired last year with a pension of $3,990 per month. My husband will retire in about 13 months with a similar pension. We own a house worth $400,000 with a mortgage of $238,000 at an interest rate of 4.75 percent. We've been sending about $200 extra each month with our payments to reduce the mortgage. We have enough in combined accounts (mostly IRAs) to pay off the mortgage.
Should we pay off the house when my husband retires - or continue to make payments? I am 59 and he is 60. —B.M., Salem, NC
A. If you empty your IRA nest egg accounts to get the cash to pay off your home mortgage two not very nice things will happen. First, the withdrawals will increase your taxable income. That will increase the taxes you’ll have to pay to raise the money to pay off the mortgage. Instead of paying income taxes on your last dollar of income at a 15 percent rate, the tax rate you pay on this money could be 25 percent. That makes paying off the mortgage— at least all at once— much less attractive.
Second, you’ll reduce the flexible resources you have coping with emergencies in a long retirement.
While everyone would like to retire debt-free, your combined retirement income of nearly $8,000 a month will easily support the monthly payment on a $238,000 mortgage. So having some debt should not be a problem. If you will also get Social Security benefits in addition to your pension income, the task of making payments on the mortgage will be that much easier.
Another way to look at your mortgage is as an inflation hedge. The payments won’t increase but the purchasing power of the money borrowed will decline year by year. Between tax savings from interest deductions and a current inflation rate of 4 percent, your mortgage represents “free” money— it’s net, after-tax cost to you is zip.