Ask Liz Weston

Q: I recently attended an “elder planning” workshop. The presenter said my husband and I should sell our bank stock (worth $95,000) and buy an annuity that’s invested in the Standard & Poor 500 index. Does this sound like a good idea, or is it something to leave alone? We are in our 80s. The presenter is getting antsy and wants us to meet with him to take the annuity.

A: Of course he’s getting antsy. He’s imagining the fat commission he’ll be paid for talking you into what may well be an unsuitable investment.

Variable annuities, which combine mutual-fund-type investments with an insurance wrapper, often aren’t a good fit for elderly investors. You may be in too low a tax bracket to benefit much from the investment’s tax-deferral feature, and heavy surrender charges could take a big bite out of your savings if you needed to access your money in the next several years.

What’s more, selling your stock could set you up for a big fat tax bill, particularly if your shares have grown substantially in value over time.

A final problem with variable annuities: They aren’t given what’s known in tax circles as a “step up in basis.” Your stock would be revalued on your death so that your heirs wouldn’t owe any income or capital gains taxes if they sold the shares immediately. Withdrawals from variable annuities, by contrast, incur income tax.

Unfortunately, these downsides may not have been explained to you. The salespeople who promote variable annuities sometimes neglect to adequately illustrate their disadvantages, which is one of the reasons regulators have gone after insurance companies and agents in recent years for selling unsuitable variable annuities to elderly investors.

Bank of America, for example, just announced a settlement with Massachusetts state regulators that would allow customers who were at least 78 when they bought their annuities in 2003 and 2004 to liquidate them without having to pay surrender charges.

Now, it’s entirely possible that you might be better off in an index fund or even a certificate of deposit than having so much money wrapped up in a single stock. But you’ll want to discuss that issue with someone more objective than an annuity salesperson, such as a fee-only financial planner.

A: The fees that come with reverse mortgages can be steep compared with a conventional mortgage, which is why it may not be the best option for many borrowers.

That’s one reason borrowers applying for a federally insured reverse mortgage must undergo special counseling to help determine whether these loans are the best choice. You can call the Department of Housing and Urban Development at (800) 569-4287 for a referral to a HUD-approved housing counseling agency.

Origination and servicing fees can vary substantially from lender to lender. That is why it’s important to shop around to get the best deal.

The earlier column mentioned the AARP booklet “Home Made Money,” which you can download from its website (www.aarp.org) or order by calling (800) 209-8085. If you have any questions after reading the booklet, you can call the same number to be directed to the AARP Foundation’s Reverse Mortgage Education Project.

You might also check out the website maintained by National Center for Home Equity Conversion, an independent, not-for-profit organization that provides consumer information at http://www.reverse.org .

Reverse mortgages can be a prudent option for elderly homeowners who want to remain in their homes, but you’re right that they should understand the costs before they proceed.

 

 

A: The fees that come with reverse mortgages can be steep compared with a conventional mortgage, which is why it may not be the best option for many borrowers.

 

That’s one reason borrowers applying for a federally insured reverse mortgage must undergo special counseling to help determine whether these loans are the best choice. You can call the Department of Housing and Urban Development at (800) 569-4287 for a referral to a HUD-approved housing counseling agency.

 

Origination and servicing fees can vary substantially from lender to lender. That is why it’s important to shop around to get the best deal.

 

The earlier column mentioned the AARP booklet “Home Made Money,” which you can download from its website (www.aarp.org) or order by calling (800) 209-8085. If you have any questions after reading the booklet, you can call the same number to be directed to the AARP Foundation’s Reverse Mortgage Education Project.

 

You might also check out the website maintained by National Center for Home Equity Conversion, an independent, not-for-profit organization that provides consumer information at http://www.reverse.org .

 

Reverse mortgages can be a prudent option for elderly homeowners who want to remain in their homes, but you’re right that they should understand the costs before they proceed.

 

 

A: To get the best rates and terms on credit cards, you’ll need credit scores of 720 or above. You won’t get there if you continue to make late payments because the credit-scoring formulas treat overdue or missing payments as a sign that you’re about to default on your debts.

 

You need to set up some kind of automatic payment system so that your bills are covered, no matter what. Fortunately, you have a couple of good options.

 

Many utilities, lenders and credit card companies will happily set up automatic debit arrangements so that your payments are taken automatically from your checking account each month. (If you don’t want to pay your entire balance on a credit card, you can arrange for the minimum payment or some other set amount to be taken out each month.) You’d be smart to sign up for overdraft protection for your checking account, just in case one of your payments goes through when you don’t have sufficient cash to cover it.

 

You also could set up recurring payments using an online bill-payment system. This works well when your payment is the same amount each month; if the amounts vary, you’ll need to set up some kind of reminder system so you don’t blow the deadlines. Many online bill-pay systems have such reminders, or you can use one of the many free e-mail reminder services available on the Web.

 

You’ll also help your score if you pay off those credit card balances and use less than 30% of your credit limits on any card. This can be tough if you have a high balance, but it’s the smartest approach to take — for your credit score and your overall financial situation.

 

Combine these steps with on-time payments, and you should notice a positive change in your score within a few months.

 

 

A: There’s at least one kind of loan where your mother’s age will actually help her get more money than she might otherwise: a reverse mortgage.

 

Reverse mortgages allow older people to borrow against the equity in their homes and receive either a lump sum or a monthly check. The older you are, the larger the amount you can typically receive. If your mother’s home is worth $200,000, for example, she could boost her monthly income by $699 to $777 with a reverse mortgage. If she were 10 years younger, the amount she would get could be as low as $319 a month.

 

These payments would continue until she dies, sells the home or permanently moves out, at which point the loan must be repaid. Typically, the repayment comes from the proceeds of selling the house; any remaining equity in the home would go to her heirs.

 

AARP has a free booklet about reverse mortgages called “Home Made Money” that you can download from its Web site (www.aarp.org) or order by calling (800) 209-8085. You might also check out Tom Kelly’s book, “The New Reverse Mortgage Formula” (2005, Wiley Publishing) for help in evaluating the various reverse mortgage products.

 

 

A: Using credit cards to pay for necessities is an unmistakable sign that you’re in over your head. But so was the fact that you used your home equity to pay off credit card bills.

 

You probably had the illusion that you were “doing something” about your debt, when actually you just moved it from one bucket (the credit cards) to another (your home). The loans didn’t solve your real problem, which is overspending, so you just ended up wracking up more debt and frittering away a major source of wealth in the process.

 

Keeping plastic available “for emergencies” isn’t a solution either, since it’s too easy to use the card rather than figure out an alternative. You don’t need to close the account, but until you get your spending under control you should make the card difficult to use–either by cutting it up or freezing it in a block of ice in the refrigerator.

 

You’ll find plenty of books in your local library on ways to save money, and the Internet is full of Web sites devoted to frugality. But once you’ve identified the easy places to cut back–eating out less, making more meals from scratch, buying fewer clothes, canceling subscriptions for magazines you don’t read–you need to take a hard look at your supposedly “fixed” expenses.

 

For example, many people find their budgets are perpetually unbalanced because they’re trying to hang on to a home that’s really not affordable. In addition, you may discover you’re simply not earning enough to maintain the lifestyle you want. That means you’ll either need to cut back more, or look for a better-paying job.

 

Living within your means isn’t necessarily easy, but ultimately it’s a much better–and cheaper–way to live than being perpetually in debt to credit card companies.