Reader Asks: We Have $1,057,213 At Our Credit Union. Anything Wrong With That?
A case study in how two retirees can improve their lot in life by rethinking their savings.
“My wife and I are 61 years old and retired. We live on a modest pension from my former employer, distributions from a 401(k) with $177,000 and distributions from inherited accounts (IRA, Roth IRA, annuity). We also have $1,057,213 in accounts at our credit union. Our taxable income is approximately $40,000.
“I plan on taking Social Security at 67 (assuming it still exists), $42,000 a year. I know you are asking, why do we have so much money in basically no-yield accounts? My wife is a zero-risk person and I gave up the fight.
“We have a home with a $225,000 mortgage. Would it be better to pay off the 3.25% mortgage or just continue to make payments? We have a little less than 25 years left on it. My wife and I have opposite opinions.”
Louis, South Dakota
You asked specifically about paying off the mortgage. But the rest of your letter reads like a cry for help.
The big puzzle, of which the mortgage is just a piece, is this: how best to finance a retirement from savings and other resources. There are four questions to be answered.
(1) When should we claim Social Security?
(2) Should we pay off the mortgage?
(3) Which account should we draw on first?
(4) Is our money safe?
Here are my answers:
(1) When is best to claim Social Security benefits?
This rule of thumb works for most couples: The higher earner should start at 70, the lower earner earlier.
I’ll suppose for now Louis is the higher earner. You can boost your benefit 24% by waiting three years. What you are in effect doing is buying, at a low cost, a lifetime, inflation-adjusted annuity with a generous survivor benefit.
At some earlier point, your wife should start collecting on her own earnings record. If that record is meager, she can switch to a spousal benefit as soon as you start your benefits in 2031. The spousal benefit is 50% of whatever the primary earner would have had at 67.
The reason for this bifurcated strategy is that the high amount (from the primary earner) will be collected for as long as either one of you is alive, while the low amount will be collected for a much shorter time.
Let’s say your age-67 entitlement is $3,500 a month. By waiting you kick this up to $4,340. As soon as you start collecting in 2031, your wife has the option to switch from her own benefit to a $1,750 spousal benefit (she can’t collect both).
If you get caught in a snowdrift at age 75, she’ll drop whatever benefit she is then collecting and switch to a $4,340 survivor benefit. All these amounts get adjusted for inflation.
You can get a more precise answer to the timing decision by buying one of those Social Security maximizer programs.
(2) Should retirees pay off a mortgage?
When you pay off this particular mortgage, you are in effect getting a guaranteed 3.25% return on your money. You can’t get a guaranteed return like that anywhere else. A 20-year Treasury bond pays only 2.5%. Paying off a mortgage is often an excellent investment move.
On the other hand, not paying off the mortgage gives you some financial flexibility. A case can be made for retaining the mortgage and using $225,000 of cash to buy that lower-yielding Treasury. You’d in effect be paying a 0.75% annual fee for a standby line of credit. If you get into a bind, you could quickly raise cash by selling the bond.
I don’t know which of you is on which side of the debate over burning the mortgage. Either way, when the mortgage matter comes up, say to your wife, “You’re right, honey!” Reason: You need to earn some brownie points. She’s going to hate my answer to the fourth question.
(3) From which account should you draw spending money right now?
This is an easy one. Roll your 401(k) into an IRA and don’t draw from it until you have to. That would be in the calendar year when you turn 72. Take only the legally required minimum from the inherited IRAs.
If you expect your tax bracket to go up when you start collecting Social Security, do some Roth conversions of the IRA, a little at a time, between now and then.
Use money outside the IRAs to cover living expenses as well as any taxes due on any Rothifying.
(4) Is your money safe in the credit union?
If this institution goes bust, you’ll be out any amount above $250,000 per insured depositor. You can manipulate this ceiling by having three kinds of depositors (you solely, your wife solely, and the two of you in joint ownership), but even this gimmick doesn’t fully protect $1 million.
Having an uninsured credit union deposit is like owning a junk bond, except that instead of getting a high junk-bond yield you get a crummy bank yield. It’s foolhardy.
No, don’t carve your money into pieces and take it to multiple credit unions or banks. There’s another risk here, and deposit insurance doesn’t cover it. It’s inflation.
Let’s be optimistic and assume that the 7.9% recent rate for CPI inflation gets cut in half. Then in 30 years whatever you’re buying now (heating oil, dental visits, food) will have tripled in price. The purchasing power of money you leave in the bank will be destroyed.
Ordinarily I’d tell a retiree with $1 million to spread it around, putting some in a lifetime fixed annuity, some in a stock index fund, some in an ordinary bond fund and some in a fund that owns Treasury Inflation Protected Securities. If that mix is too risky for your partner, invest the whole wad in TIPS.
TIPS are the only investment that has no default or inflation risk. Buy 30 bonds, each for $30,000, with maturities spread over the 30 years beginning in 2024. Because real yields are negative, this will cost you more than $900,000. By using up most of the capital now perilously perched at the credit union, it will land you in a safer spot.
Do you have a personal finance puzzle that might be worth a look? It could involve, for example, pension lump sums, estate planning, employee options or annuities. Send a description to williambaldwinfinance—at—gmail—dot—com. Put “Query” in the subject field. Include a first name and a state of residence. Include enough detail to generate a useful analysis.
Letters will be edited for clarity and brevity; only some will be selected; the answers are intended to be educational and not a substitute for professional advice.
More in the Reader Asks series:
What’s The Risk I Will Be Double-Crossed If I Delay Social Security?
Should I Pay Off My Mortgage?
Directory of Reader Ask columns