Reverse Mortgage Guide

Over at the Wall Street Journal, a retired reader asks if he should pay off his mortgage early. The answer omits the use of reverse mortgages.

Question: “I retired five years ago at age 55 with a pension and a 401(k) from which I took fixed withdrawals through age 59½. Then, I rolled over the 401(k) to a low-risk annuity with a $200,000 balance. I have $50,000 left to pay on my mortgage (five years left on a 10-year loan with a 5.375% interest rate). With most of the interest paid on this loan, I’m wondering if it would be better to pay off the balance with an annuity withdrawal or continue to make monthly payments. I realize I would have to pay taxes on the annuity withdrawal, but I could use the extra $1,000 a month now rather than in five years.”

The answer, says the Journal, is to get more annuities.

“Looking at the numbers rather than the feelings involved, three certified financial planners we consulted all had the same advice: In most cases, your best bet would be using the annuity to fund your monthly mortgage payments. That way, you don’t have to take the $1,000 from your regular income; at the same time, you can preserve the bulk of the annuity and give it a chance to continue to grow tax-deferred.”

The Journal, to it’s credit, then goes on to mention the little matter of early withdrawal fees.

“However, you have to watch out for surrender charges, which are penalties charged on some annuities for early or large withdrawals. You’ll have to check your specific contract, but many annuities allow at least $10,000 a year in withdrawals without a surrender charge, which means you could make at least 10 payments a year that way.”

One other point made by the paper concerns taxes:

“Again, because of potential surrender charges, withdrawing $50,000 all at once might be tougher. Even if you aren’t slapped with a surrender charge, adding $50,000 to your income in one year might bump you into a higher tax bracket, says Gary Cotter, a planner in Sun City Center, Fla. Assuming that your annuity is tax-deferred, you actually would have to withdraw more money than that — probably at least $65,000 — to pay the taxes due on $50,000, he adds.”

Huh? Does this make sense to anyone? It’s great for the folks who sell annuities, but it is also great for the retiree?

The reader has a 5.375% interest rate. After taxes, his real rate is less than 4 percent. So why do anything? Why pay any fees? Why pay additional taxes? Why not just pay off the remaining balance of the loan over the next five years? Why not take the money that would go to annuity charges and commissions and prepay the some of the $50,000 mortgage? There’s no tax on a prepayment and no tax on savings — the money you don’t pay when the loan is paid off.

What do you think? Has the Journal made a simple matter ridiculously complex and expensive?

Your thoughts are welcome.

For the complete story, see: Should Retirees Pay Off Their Mortgage Early?

This entry was posted on Monday, January 21st, 2008 at 1:23 pm and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.