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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 are already taking your SS benefit? – JoeTaxpayer Jul 27 '15 at 18:16
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    I hope you are not talking about a variable annuity! OMG NO! The variable annuities is more for the sales persons retirement not yours! Please start listening to clark howard's podcast or call his crew immediately. Variable annuities are garbage. They have huge expenses; big fees if you try to bag out before a certain point; and massive tax problems compared to other ways you can invest. But that’s what you’ll probably be steered to by a commissioned insurance salesperson. – Mark Monforti Jul 28 '15 at 15:13
  • +1 for "no VA". I hope she sees my suggestion to suspend SS benefits and in effect buy an inflation adjusted 8% yield annuity from uncle sam. – JoeTaxpayer Jul 28 '15 at 16:03
  • If you delay SS benefits, I'd do an analysis to see what bracket 401(k) withdrawals put you into, and probably go with that. It's not all-or-none, use 401(k) to stay in 15% bracket. If you'd go over, use cash account. If under, convert some to Roth. You can tinker a bit to file a tax return at exactly the 15/25% line. It's a beautiful thing. – JoeTaxpayer Jul 28 '15 at 21:56
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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.

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    does that mean you are getting 2%? That is awful. If you want an annuity check here. Please Please Please do not let a saleperson sell you a variable annuity! They are not fiduciaries. – Mark Monforti Jul 28 '15 at 15:24
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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.

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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.

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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.

  • Unless you have a condition that might shorten your life you need to wait as long as possible to take your benefits. I think the current calculation states that you will be getting 8% more back per year. guaranteed. Once you reach the age of 62 your life expectancy is 82ish. Would you rather live lean in your 60's or run out of money in your 90's? – Mark Monforti Jul 28 '15 at 15:26
  • @MarkMonforti - I think that's what I said. In effect, the spending of $73K letting SS grow $6K looks like an 8% return, i.e. an annuity purchased with $73K. And that benefit isn't fixed, it's COLA'd each year. – JoeTaxpayer Jul 28 '15 at 15:38

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