Help a Reader: House Trouble

Here's a question left recently by a reader:

My husband and I have retired in the last year. We have built a new house and have a large mortgage. Needless to say, our old financial advisor did not advise about saving for the house and we started building when the "recession" hit. We lost $60,000 in our investments and we had planned to put $100,000 down and do most of the work ourselves. We did a lot of the work ourselves, but we had to hire a contractor or we couldn't get a loan to finish the house.

Our current financial advisor has most of our money tied up in annuities.

How can we get our house paid off early? We have a 30 year mortgage. And are annuities the right place for our money?

Details are kinda sketchy and the ones that do exist don't sound good. Got any suggestions for her other than "cut spending" and put that towards the debt?

Comments

[Mr. GoTo]

Sell the house and buy something with cash or rent. Carrying a big mortgage into retirement is a mistake.

Fire your "financial advisor." He/she is nothing but an annuity salesperson making big commissions at your expense. Hire a fee-only planner for some objective advice.

[Matt]

I second mr. goTo. Your adviser ripped you off big time.

[JeffinwesternWA]

Annuities are "right" for PART of your money, typically "around" 25%-33% + or - depending on govt/corporate pensions, SS and your equity investments and balance/life expectency, (I sold myself one- a VA at age 47~ for abour 25% of my net worth/all my tax deferred money with a living income [7% w/d rate] guarantee for the later years)...sounds like YOU are mostly at fault for too big/expensive of a house going into retirement and wanting a certain "monthly/annual" income in which case you were sold annuities to meet the need. $60K~ loss means depending on "mix" you had $150K-$300K~ total invested. $100K "down" would be a lot especially if total house cost over $250K. House sounds WAY too big, especially when you count taxes, maintenance, etc., that homes have...Advisor is at fault for not telling you your spending plan was probably too big and rates of return he used were too large/inflation too low, puttin over 50% of liquid net worth is unethical at most firms w/o exceptional due dillegence, you may want to hire a lawyer for 3-6~ hours to investigate...As an Planner/Advisor/Registered Principal for 15 + years myself and I RETIRED at age 47, I'd advice you to hire a fee only planner, a CPA and get a thorough relook at your situ. In addition: a budget, very unfortunate in retirement when a SPENDING PLAN is desired instead needs to be incorporated into your lifestyle, start now, what can you cut? Second car, cable TV, extra/cell telephone, insurance deductibles, entertainment/travel, heat/A/C costs, club memberships, etc., should ALL be on the table for review. Plan on much lower costs of home w/o remodeling as planned, the $100K is probably needed elsewhere for you, perhaps for 10-20% you can do whats needed for teh home? I'd bet $ to donut, the advisor only tried to get YOU what you wanted but, didn't exercise dilligence in saying "no" and reducing those gaols to be realistic w/ proper consevative assumptions(?) G' Luck....part-time work perhaps?

[Jim]

We need more data.

What is the total cost of the house?
What is their monthly income?
What is their total investment balance and is it in IRA/401k or not?
What kind of annuity are they in? Fixed, deferred, variable?

I'd guess that their money is in variable annuities with high fees and a fat comission which isn't doing them any good. If thats the case then fire that advisor.

If they can make the house payment and have enough money left over to live off then they could simply keep the loan. But I doubt thats the situation. They are probably having trouble paying the mortgage and thus asking us how to pay it off.

[Stephen]

There's not nearly enough data (as others pointed out) to actually answer the questions.

Theoretically, annuities aren't a bad investment vehicle when one is *in* retirement -- not a complete solution either, but certainly not as bad as they are for those trying to build wealth (as opposed to trying to maintain against inflation & provide a stream of steady income to live off of -- the typical goal when in retirement).

Before you get too upset or worried about having been taken for a run, do as the others have been suggesting and find a fee-only advisor and spend a few hours going over your financial situation (investments, spending, house, etc) with him/her.

It's unlikely that you'd have a case against your current financial advisor, even if the annuities turn out to be not quite what you expected. Focus on finding and meeting with a new, fee-only advisor.

[dogatemyfinances]

Annuities are very good, excellent in fact, for the guy who sold them to you and took the commissions.

[Kirk Kinder]

This was clearly a bad decision to build the home, and it looks as if your "advisor" did nothing to help you. But, I am sure he appreciates the 8% commission he made.

I fear selling the home may be the best option. You can drag this out for a while, but eventually you will probably be forced to sell it anyway.

I would look to see what your tax basis is on the annuities and if there are any surrender charges. If it isn't a big taxable event or surrender charges, I would remove the money from the annuities and find another advisor.

[lurker carl]

Go back to work!

[MC]

Yes, if you're in good health, both of you should go back to work for 5 yrs and focus on paying down your mortgage. Oh, and lose the financial advisor.

[Jamie Stenger]

Before firing the advisor, did he know you planned to build a home? He can only advise well when he has information. But, I agree with other posters, he sounds more like an insurance/annuities salesman than an advisor. That doesn't mean you should break all those annuity contracts either. There will be lots of fees and losses for doing so. There is a 10% withdrawal corridor you could look into. Why in the world would you want to build a home in retirement that you couldn't pay for out of pocket. A new mortgage in retirement? Wow. Sell the house.

[theCase]

Not sure what your age is (or many other important details), but you're retired and the bank gave you a 30 year mortgage??? I don't understand why you OR the bank thought this was a good idea....

[Apex]

Everyone's advice is correct. Unfortunately 3 bad decisions were made here and all of them have had consequences.

Building a big house with a mortgage entering retirement was a bad decision.

Planning to use money that was in the stock market for a down payment in a short period of time and not taking it out of the market to preserve it was a bad decision.

Putting nearly all your assets into annuities was a bad decision.

Two of these bad decisions they made themselves, one their advisor had them make (and didn't help them make the other two better). He probably just wanted them to feel good like they could have what they wanted as long as they put the money in his annuities.

Unfortunately this question is asking for some kind of magical fix for 3 really bad decisions. Those decisions have been made and the consequences are now fixed in stone. There is no magical way out of this that allows them to pay down the debt early. The only solutions are to get more income or get less expenses (i.e. - sell the house, or get a job as others have said).

Thats the cold hard truth which can be hard to accept, but thats what it is.

And yes the financial advisor is either a crook or incompetent. Both good reasons to fire him.

You know FMF, it occurs to me that so many times when you get a reader question on here it as after they have made some really poor decisions and are looking for a way out. It might be nice for you to offer a way for people to post things they are thinking about doing and get advice on what they should do to help them before they have solidified their situation with poor decisions. Not sure how you would do it but it seems like many people don't know where to go for good advice and rely on their advisor which is a bit of a crap shoot for them as they don't have the skills to know if their advisor is giving them good advice or not.

[Old Limey]

What were you thinking? You don't retire with a large mortgage unless you have a high enough cash flow in retirement to be able to afford it.

This gets back to my long time peeve with the educational system. Why isn't a class on "Personal Finance" mandatory for all high school graduating seniors. There are so many people these days that are totally incompetent at managing their own money, and that includes credit cards, taxes, their bills, their bank accounts, and most of all their savings and investments.

We have been retired now for 16 years, have zero debt, two pensions, two social security checks and $260,000 of tax free and tax deferred income every year from CDs and municipal bonds. I also do my own taxes and make all of our own investment decisions. We came to this great country in November 1956 with $400 between us, raised three kids, and have enjoyed the American Dream to its fullest. Our highest combined income, when we retired was $90,000/year.

The secret is having a good education (mine was an MS in engineering), a good marriage, and then SAVING, FRUGALITY, and SUCCESSFUL INVESTING (helped along by the unanticipated DOT.COM bubble in the market).

It looks to me like the only way you can get your house paid off is to win the lottery or go back to work. Good Luck!

[FMF]

Apex --

I probably need to write a "how to write a 'help the reader' question" and put it on the site somewhere. I'll add it to my (ever-growing and quite long already) list. :-)

[Robert W]

Wow an open '?' can open a big can of worms.
1. 'Retired' means? you're going to sit around or find a income producing 'job' u love?
2. 30 yr mortgage at 40 is different than at 65.
one means your are 'renting' from the bank, the other means u have a real chance at 'paying it Off'.
3. Find out in your local area authorties what is required for an "Occupancy Permit" then complete the house to that point with 'contactor'. AT "OP" the bank will get u a standard mortgage, u can fire contactor and do the rest of the work yourself - do your paper work correctly with contactor b4 releasing them.
4. As for your 'dream' house, get practical on finnishing it off. Granite counters are nice but expensive or u could be traveling. Top of line faucets really don't matter as long as cold comes from cold faucet. Many 'top line' items are just junk when you want to sell.

University of Hard Knocks taught us not to buy into
Home Magazine HYPE

[frugally retired]

It's time for a little common sense here. Why on earth would you need a financial advisor to tell you to save for a house? Maybe I'm missing something, but it seems to me you're way over your head in financial problems, particularly if you are looking to others to tell you to do such basic things as saving for a house. On the other hand, you have to deal with reality, so if you can't find some way to increase your income (e.g., return to work) and/or equity in the house, while also cutting expenses, etc, it seems like you'll have trouble paying it off early. As others have said, we just don't have enough information to give really good suggestions.

I took an early retirement at age 58, but had to pay for my health insurance until I became eligible for Medicare last fall. We own our home outright and two years ago we downsized (price wise) to a small acreage, raised 4 kids and sent them to college (with their help with jobs, etc), and never made more than $70,000 in a year. There is money in savings, CDs, etc., but we don't use it for living expenses of income. Our adjusted gross income now is right at $21,000 and we still manage to go south for 4 months in the winter. It's a frugal lifestyle and not for everyone, but we love it. We garden and freeze and can the produce, but still support our church and several charities. Obviously, this lifestyle would not be be for everyone, but it suits us just fine. And, by the way, I do have a fixed annuity, although I moved my funds into that account at retirement after I had accumulated as much as possible during my work years through my employment retirement plan. Building a new home at this point in our lives with any kind of mortgage would be insane.

Good luck to you as you try to sort this all out, but if you don't have the common sense it will take, try to find a smart, straight-talking and honest financial advisor who is worth the expense of having.