Scott Burns: You can reduce investment anxiety but can't eliminate it
If you really want to sleep at night, paying off the mortgage would be a good thing to do. It will decrease your need for income.
Q: My husband and I are both retired, ages 65 and 70, respectively. Two bear markets have hit us hard — 2000 and 2008.
Our financial assets are down to about $1.4 million (two IRAs, two Roth IRAs and a joint account). We are getting nervous about staying in the market.
We have a mix of short-term bonds and stocks in companies with good dividends.
But we are thinking of selling at least a million.
The problem is we don't know where to invest if we decide to sell.
We receive $2,769 a month from Social Security (taken at age 62), but no pensions.
We owe about $98,000 on our mortgage (we refinanced last year at 4.5 percent and pay an extra $100 toward the principal each month).
My husband does not want to pay it off.
We have no debt other than the mortgage.
We feel that we should no longer be taking the risks we are taking now with the stock market.
What do you suggest?
A: Having a mortgage balance is a reasonable risk proposition for a couple with your financial assets — the mortgage is small compared to your net worth.
The mortgage may also be a good hedge against inflation since you are likely to be paying back dollars that are worth less in the future.
If that is the argument for the mortgage, then I don't understand why you would be paying an extra $100 a month to lose your inflation hedge sooner.
On the other hand, the need to make the mortgage payment puts pressure on your portfolio assets to produce income.
So if you really want to sleep at night, paying off the mortgage would be a good thing to do.
It will decrease your need for income.
Now let's think constructively about your $1.4 million in financial assets.
If you withdraw at a 4 percent annual rate, that would be an annual withdrawal of $56,000.
If you kept $560,000 in a 10-year ladder of CDs and CD-like annuities, you would not have to touch the $740,000 remaining (after paying off the mortgage) for 10 years.
In addition, while you would be spending $56,000 from a matured CD each year, your actual interest income and dividends would be added back to the portfolio.
The investment income would be less than you withdrew, but your rate of loss would likely be relatively small.
You could also increase the ladder to $840,000, enough for 15 years of income coverage.
During that 15-year period you have a 45 percent chance of dying.
It's kind of tough to think this way, but the mortality tables suggest you've got a nearly 50 percent chance of having transcended any concern for money.
Can you avoid anxiety?
But you can reduce it.