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We are retired, I'm 62 and my husband is 58. We have $150,000 in savings, a 401K at $105,000 and another 401K of $75,000. The home mortgage has a balance of $160,000 with 18 years left on a 20 year mortgage at 3.85%.
Should we invest in annuity or pay off the mortgage? The annuity has a 5% guaranteed with 3% fee. I have ss 1525.00 and pension 1275.00 he has 2300.00 pension. We live in New York. Should I use my 401. $105000 monthly or use cash saving till I reach 65. Thank You
You can't pay your bills with equity in your house. Assuming you paid off the mortgage, where would the money come from that you plan to live off of?
If that is your whole retirement savings I'd say do neither. Maybe an annuity (not variable) for SOME of the money, keep the rest invested in conservative investments some of it in cash for emergencies.
There is no formula to answer the question. You have to balance return on investment with risk. There's also the question of whether you have any children or other heirs that you would like to leave money to.
The mortgage is presumably a guaranteed thing: you know exactly how much the payments will be for the rest of the loan.
I think most annuities have a fixed rate of return, but they terminate when you both die. There are annuities with a variable return, but usually with a guaranteed minimum.
So if you got an annuity with a fixed 3.85% return, and you lived exactly 18 more years, then (ignoring tax implications), there'd be no practical difference between the two choices. If you lived longer than 18 years, the annuity would be better. If less, paying off the mortgage would be better.
Another option to consider is doing neither, but keeping the money in the 401k or some other investment. This will usually give better than 3.85% return, and the principal will be available to leave to your heirs. The big drawback to this is risk: investments in the stock market and the like usually do better than 3 or 4%, but not always, and sometimes they lose money.
Earlier I said "ignoring tax implications". Of course that can be a significant factor. Mortgages get special tax treatment, so the effective interest rate on a mortgage is less than the nominal rate. 401ks also get special tax treatment. So this complicates up calculations trying to compare. I can't give definitive numbers without knowing the returns you might get on an annuity and your tax situation.
I am in the process of writing an article about how to maximize one's Social Security benefits, or at least, how to start the analysis.
This chart, from my friends at the Social Security office shows the advantage of waiting to take your benefit. In your case, you are getting $1525 at age 62. Now, if you wait 4 years, the benefit jumps to $2033 or $508/mo more. You would get no benefit for 4 years and draw down savings by $73,200, but would get $6,096/yr more from 64 on. Put it off until 70, and you'd have $2684/mo.
At some point, your husband should apply for a spousal benefit (age 66 for him is what I suggest) and collect that for 4 years before moving to his own benefit if it's higher than that.
Keep in mind, your generous pensions are likely to push you into having your social security benefit taxed, and my plan, above will give you time to draw down the 401(k) to help avoid or at least reduce this.
