Q: I am 62 and live on a modest retirement income. My only investment is a $50,000 CD that will mature in July. I have a 6.25 percent mortgage of $98,000. It is a 30-year term, of which I have 27 years left. I have been paying so that it should be paid off within 15 years. When I die, I wish to leave my son this property, debt-free. When the CD matures, should I put the money toward my mortgage or reinvest it?
A: If you use that CD to pay down your mortgage, then you'll have no cash cushion for emergencies, warns Jeffrey B. Broadhurst, a certified financial planner in Lansdale, Pa. Do not be mortgage-averse, he says. A home loan can be a good thing because of its tax-deduction feature.
Your 6.25 percent rate is fairly low and with the tax deduction, it's probably only costing you 5.3 percent, after tax. That's cheap money, says Mr. Broadhurst, so he advises against paying down your mortgage.
He doesn't recommend making accelerated mortgage payments, either. Doing that will tie up all your money in an asset that it is not income-producing. Put the excess amount that you pay toward your mortgage into a risk-appropriate, globally diversified, tax-efficient portfolio of low-cost index funds. The portfolio should have a large percentage allocated to high-quality, short-dated bond index funds. These will produce some income for you, he says.
Leaving the debt-free home to your son is an admirable goal. But Broadhurst believes that your first priority should be your safe and comfortable retirement. If your son happens to inherit a home that has a mortgage, it will still be a boon to him because the value of the home will probably exceed the mortgage, and he can sell it to reap the difference.
By forgoing the accelerated mortgage pay down, he will also likely benefit more because with your new strategy of investing in a globally diversified portfolio of index funds, he has not had to support you. You have been able to do that yourself.
Q: My husband and I have joint checking and saving accounts. My local bank does not allow contingency beneficiaries. What if my husband and I die at exactly the same time? I want this money to go directly to my children and not through probate.
A: Your joint accounts are legally viewed as being titled to one person. This means that if either of you should die, the funds will automatically pass to the surviving spouse, says Joseph S. Arnold, of Cleveland-based Dawson Wealth Management. Naming your children as equal primary beneficiaries will allow the assets to pass to each without going through probate, should both of you die at the same time. Contingency beneficiaries are therefore unnecessary, he says. It is important to note, though, that depending upon the size of your estate and the state in which you live, the funds may be subject to estate tax.
You might also want to consider a trust, says Mr. Arnold. Many special needs can be addressed by setting up a trust, including protecting real estate, ensuring privacy, and setting conditions on your money while you are alive. They also can lessen the tax burden on your estate.
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