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© St. Petersburg Times, published November 3, 2002
Some alternatives for retirees in need of income
Q. I am retired and depend on income from my investments to pay some of my living expenses. Earning 2 or 3 percent on a CD just won't cut it, but I cannot afford to lose any more in the stock market. What should I do?
A. This is far from an easy question. As the economy recovers, interest rates are likely to increase, which means this is not a good time to lock up all your money in long-term bonds or CDs. But when you need income, you cannot simply sit back and wait for rates to go up.
Investment newsletter writer Doug Fabian says that for many retirees the best alternative right now is to tap sources other than investment income to meet spending needs.
Among the possibilities he suggests: moving to a less expensive home or selling other real estate such as a second home or commercial property. He said selling investments in tax accounts is an alternative with tax advantages since you can offset gains and losses on your tax return. In addition, he said taking extra distributions from retirement accounts is preferable to chasing high returns at high risk.
"Don't be afraid to spend some of the principal in your tax-deferred accounts," he said.
If you still have a mortgage on your home, this might be a good time to pay it off, thereby reducing your need for income.
On the other hand, if you own your home free and clear or have a very large equity position, a reverse mortgage might benefit you, particularly if you are in your 70s or older. A reverse mortgage can be taken out as a lump sum, a line of credit or a monthly payment for life. The chief drawback is that fees are high, particularly if you might stay in the home only a few more years. And, of course, you are giving up your home equity.
More information is available from the National Reverse Mortgage Lenders Association at www.reversemortgage.org or by calling (202) 939-1760. AARP also offers a free booklet for consumers, Home Made Money, at www.aarp.org or by calling 1-800-424-3410.
You also might look at alternatives to the investments you normally have used. If you own any EE savings bonds, this might be a good time to trade them for HH bonds, which currently pay 4 percent interest and allow you to continue tax deferral of the interest earnings on your EE bonds. The 4 percent rate is guaranteed for 10 years, but the bonds can be cashed any time after six months.
To be eligible for exchange, EE bonds must be at least 6 months old but cannot be more than one year past their final maturity date. New EE bonds pay a variable rate of interest, currently 3.96 percent.
Q. I read your column regularly. Some time you should write an article about all women should know about money. It is a big problem in some homes.
A. I certainly agree that all women should know about money. However, all that they should know is more than I can fit into a column.
Women of all ages, both single and married, need to learn about money. Unfortunately, many married women leave all the details to their spouses. When the women outlive the men, as they often do, the financial responsibility falls in the widows' laps at a time of great emotional distress.
Both partners in any relationship should have a basic understanding of their financial situation and know where to find their records and important documents.
In addition, both partners need to understand the basics of personal finance and investing. For those who don't know where to start, I suggest author Eric Tyson's For Dummies books, which include titles covering personal finance, investing, mutual funds, home buying and selling, mortgages, taxes and retirement planning. Start with the one that covers the topic you are most interested in learning about.
Check the savings bond Web site (www.savingsbonds.gov) for more information, including a savings bond earnings report, which will tell you what rate of interest your bonds are earning now.
-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.