What are the best investments for retirees? In this housing market, would it be wise to take a reverse mortgage, equity loan or some other type of loan? TODAY financial editor Jean Chatzky and CNBC’s Carmen Wong Ulrich offer advice on these issues, plus wise words about investing and paying down debt.
Q: My wife and I are currently self-employed and we are extremely concerned about our retirement portfolio. We have always contributed the maximum amount to our 401(k) programs, only to be disappointed about where we stand today. I am considering, in lieu of my portion of the 401(k), purchasing an equity indexed universal life insurance policy. My question to you is, what do you think about that type of investment for retirement, and do you think it’s a good investment at all for additional savings? — John, Denver, Colo.
Jean Chatzky: I hate to throw a wrench in your plan, but I don’t think this is a good strategy. Let’s look at the facts: You (and your wife) have a choice of investing tax deferred in a 401(k). If you have additional money to save for retirement, you can invest in an IRA or Roth IRA and get additional tax benefits, including a possible tax deduction. With life insurance, it would be tax deferred, but there is no deduction up front. With the 401(k), you can buy a range of investments to meet your needs, including low-load products that will cost you very little. With most life insurance, you’ll pay high fees and commissions. Add that to the fact that Equity Indexed Universal Life is extremely complicated, and you might be getting yourself in trouble.
Here’s what I’d say: If you can get a contract for this policy, read it over, and if you fully understand exactly what you’re buying and the fees that are associated with it, this might be a viable option. For most people, though, that wouldn’t be the case. These policies in general are not transparent when it comes to expenses. Sure, an interest rate of 1% is guaranteed, but that doesn’t mean your money is going to grow at at least that rate. The fees you’re charged will take away from that 1 percent — in fact, in most cases you’d be in the hole at that level after you factor in charges, which are based on account value but are almost always more than 1%. If I were you, I’d continue investing in that 401(k) for retirement, and review your asset allocation to be sure you’re comfortable with the amount of risk you’re taking on.
I am a single mom and I'll have two kids in college next year. I need to sell my four-bedroom home and find a much less expensive home or rental. If I am able to sell, I will likely get about $100,000 in profit. I thought I would reinvest, but I am unhappy about my options to buy. What would be the smartest thing to do with the money if I end up renting for a while? — Lisa, Houston, Texas
Jean Chatzky: First of all, let me congratulate you on being willing to do what so many people are unwilling to do — make a hard choice. I am sure you don’t want to sell your four-bedroom home and move to something smaller. Very few people do. And yet, you’re being realistic. And you know what? It will put you in a much better, much more stable position for the future. And I am sure it will make you feel better, safer, and a better parent to your children. And it should. My thoughts about where you should put the money depend on when you think you will be using it to buy something else. If it’s within the next five years, I would not recommend you putting it anywhere you could lose part of your nest egg. That means no stocks. And no risky bonds. I’d suggest a money market account, in a bank, with a decent rate of interest or a CD. You can find both at bankrate.com.
If you’re looking at a longer time horizon, you can think about investing it for your own retirement or longer-term future. That means you can put it into a risk-adjusted portfolio appropriate for both your age and your tolerance. With two kids in college, you’re probably in your 40s, maybe early 50s. That argues for no more than 50 percent in a diversified stock portfolio.
Finally, I want to point out a couple of things about financial aid. If you’re receiving it for your kids — and intend to apply for more — it’s important to understand how the financial aid formulas work. They don’t take into account assets in two places: your primary residence and your retirement accounts. I wouldn’t want the sale of this home to sabotage your ability to get financial aid when you need it most. It’s worth a trip to finaid.com to be sure.
Q: Given the state of our economy, what do you believe is the smartest investment to make at this time? I had originally planned on taking a $15,000 gift and investing it in a money market fund, but I read somewhere that they aren’t always federally insured, and so now I’m just not sure. Can you tell me what you think? — Diana, Irvine, Calif.
Jean Chatzky: Based on the way you phrased your question, you’re not looking to take a risk — which is inherent in investing rather than in saving. You’re looking for “federal insurance.” FDIC insurance is something that you get in money market accounts at banks, not money market funds, which are sold by brokerage firms. Those have insurance from the SIPC, in many cases. But if what you want is FDIC protection, you should be looking for a money market account or a CD. These will provide you protection this year for up to $250,000 per account holder. At the end of the year, that protection is scheduled to revert to $100,000 — whether or not the $250,000 level is extended we don’t know right now.
As far as taking more risk with the money and investing it in mutual funds or stocks or bonds, the amount of risk is truly contingent on how and when you need to use that money and whether you could stand to lose any of it in anticipation of future growth.
Q: I have over $100,000 in student loans both federal and private (but the majority of the loans are private). I would like to consolidate but because of the economy banks like Sallie Mae and CitiBank are not consolidating. Do you have any advice? — Joanna, Philadelphia, Pa.
Carmen Wong Ulrich: You definitely should look to consolidate those private loans so you can lock in a low fixed-interest rate. Sallie Mae did shut down their consolidation arm last year, which makes it much more difficult, though not impossible. If you have great credit and good income, you may be able to land a loan and a good low rate with an online bank like FirstAgain.com, who offer very competitive rates but only to those with a great credit history. Look to community banks in your area. Community bank leaders are telling us that they’d love to give loans, they just need more people to ask for them, so pay an old-fashioned visit to a couple of community banks to see if you’d be eligible to consolidate at least the larger, more expensive private loans.
Q: Hi, we've been partly funding my mother's rent in a close-by senior apartment with her dwindling savings while waiting for her home to sell back down south. It isn't moving in this market and we are not allowed to rent her home. Would it be wise to take a reverse mortgage, equity loan or some other type loan until it sells? — Bonnie, Brighton, N.Y.
Carmen Wong Ulrich: Stay away from reverse mortgages unless you need it as a last resort. Reverse mortgages work by basically taking out the equity in your home — selling back what you own in the home — however, reverse mortgages in particular are packed with fees that can lose you up to 20 percent of your equity. If you’re really feeling hardship, take out a HELOC, home equity line of credit, instead. It can be a tax deduction for her as well and all you pay is the interest and maybe small administration fees. However, HELOC rates are adjustable and rates will go up eventually, so be mindful of that and keep a cushion to protect you from a ballooning monthly bill.
Q: My husband and I are young and hoping to start a family soon. We currently rent a small apartment. I just graduated from college and work daily as a substitute teacher. My husband is a student and has a stable, full-time job. Next year our income will be roughly $53,000. As we dream of buying our own house, we are wondering where we should start looking for loans? — Courtney, Wisconsin
Carmen Wong Ulrich: Before you look for loans, make sure of a couple of things: that you have at least six months' worth of living expenses saved up as an emergency cushion, in cash. Make sure that high-interest credit card debt is paid off and your credit (both of you) is in very good shape — that saves you in interest when you get a mortgage and that you have the biggest down payment that you can possibly put away, separate from your emergency fund. Those are the three C’s: credit (good), collateral (down payment) and capacity (steady income) — all C’s you must have before a lender will even look at you today.
If you have only 10 percent for a down payment, at a minimum, and you’re looking at a non-Jumbo loan, and possibly an FHA loan (Federal Housing Authority) — head to FHA.gov for more info. Remember, the less money you put down, the bigger the risk of not having equity if the housing market continues to go under, so you MUST make the commitment to stay put for at least five years.