Reader question: I would like to ask your advice about what you recommend I do with some cash I have been holding onto. I have $150,000 in the bank in a money market bank account. I have a good bit in two separate 401k’s – one about $220,000 and the other $250,000, with about $350,000 of the total in stocks. I’ve held onto the cash thinking we buy houses for about $320,000 and add the $150,000 to it for a newer house or a lake house but am not finding anything. I am 56 and still working and have no plans to retire until about 64. My husband will have about $225,000 at retirement. I would want the cash available if I want it but know it could be earning some money. What do you think? C.S.
Answer: If my math is correct, your net worth is about $1 million so you’ve done a good job of accumulating assets and I would expect your net worth to continue to grow over the next several years until you retire. You’ll want to be careful to avoid becoming ‘land rich and cash poor’ by having too much money in real estate that cannot easily produce cash flow for you during your retirement years. When you added, “…I would want the cash available…” in your question you automatically limited your investment options to ‘poor and bad’! In the current interest rate environment we now find ourselves, there are no safe options for getting a decent rate of return. Most money market accounts are paying a fraction of one percent. A five year CD is paying, in most cases, well under two percent. The ten year Treasury bond is paying only about 2.5%, so there’s simply not much opportunity for investors who need quick access to their money. My recommendation is to have your financial advisor run a detailed retirement analysis to determine how much capital you need at retirement in order to produce adequate cash flow. You may very well find out that you’ll need a portion or all of your $150,000 cash for long-term investments. If this is the case, you might consider investing a portion of it in dividend-paying blue chip stocks. Currently, it’s pretty easy to put together a basket of these stocks with an aggregate dividend yield of more than three percent. So on a relative basis, you’re being well paid while you wait for stocks prices to rise. As you might have noticed, stock prices have risen sharply over the past several months and a lot of people are concerned that they’ve missed out on the party. However, stocks would need to rise more than seven percent to reach historical stock price averages so I believe they still represent a good opportunity over the next three to five years.
Reader question: I am 70 and my wife is 63, both retired. Tradition says we should be buying a smaller house with less money. However, we want to buy a new, more expensive house of about the same space. The house we want is priced at $425,000 and we think ours will sell for about $350,000 but it also has a $70,000 mortgage. We have about $1 million in investments, mostly in IRAs. Are we crazy to consider this? Is paying the difference in cash (pay off the $70,000 mortgage plus the additional $75,000 in equity) a wise option? And is there anyone who will give two retired people a new mortgage if we go that route? Many thanks. S.G.
Answer: Let me answer your last question first. A lot of people think that if you don’t have a job, you can’t qualify for a mortgage. According to National Bank of Commerce mortgage banker, Matt Bearden, “Conventional underwriting guidelines now always require the borrower to qualify within certain monthly debt/income ratios. Usually no more than 45% of gross monthly income can be used towards credit debt obligations. However, any income with a minimum three years continuance is acceptable: Social Security Income, pension, annuity, etc. Lenders will also count dividend and interest income averaged over the last two years as long as the asset is still available. We can sometimes count distribution income if the borrower has received it consistently for the past two years.”
When it comes to raising the $145,000 to pay off your mortgage and raise equity, you should consider several key points. If, in order to raise this money, you must tap your qualified retirement accounts, this is not a good idea because of the income tax consequences. You’ll also want to do some calculations to make certain that investing this much money in your home won’t leave you with too little money invested for retirement income. You could consider taking out a mortgage and figuring the payments into your retirement planning or you might consider a reverse mortgage where you’d have no payments at all. Current mortgage rates remain very favorable.
Next week: “Are Bonds Too Risky Now?” With the city of Detroit having filed the largest municipal bankruptcy in U.S. history, everybody is suddenly worried about bonds. I’ll discuss the current state of the bond market and what you, as an investor, should be doing right now.