Credit card debt can make part of savings an illusion

Q: I am often astounded and frustrated by the wealth that others have. My husband and I are both 61. Our combined income is $58,000. Our $225,000 house is paid for. Our children have been educated. They live successfully and independently.

We have $325,000 in an annuity and $120,000 in other investments. He will receive Social Security; I will have a public pension. I plan to work as long as they will have me.

We paid for major repairs to our home several years ago through a home-equity loan. We still owe $10,000 on that, and have (gulp) $33,000 in credit card debt. I have reduced interest rates to the lowest amount and work on paying off the highest-interest-rate card first. I also pay above the minimum on the others. Our credit rating is good. We live frugally. I cut everywhere I can. He has a new car. Mine will need to be replaced within two years.

One of my sons got in a financial bind when his salary unexpectedly dropped. He was paying extremely high interest rates. So we loaned him money through our line of credit. He pays his portion of the loan by direct deposit from his paychecks, plus he has extra deposited as a savings for himself (my prerequisite for the loan to him). I know you'll tell me we shouldn't have done that, and used that line of credit to pay down our own debt. But it was getting extremely stressful for him.

My husband wants me to withdraw savings to pay off our debt, which makes sense. But I fear we won't be able to rebuild our savings before I retire. I feel better knowing it's there. I believe we'll be able to pay off our debt in three to four years. Your suggestion? - N.S., by email

A: First, I hope you and your husband appreciate what you have achieved. Although your income is right in the middle, your savings and home equity put you in the top 25 percent for people in their 60s. While you may regularly see much larger figures in this column, you've been more successful at saving than most people.

Rather than second-guess what's already done - borrowing to lend to your son - let's deal with the mechanics of improving your situation. Keeping the debt on credit cards is the least efficient option you have. The interest rate you pay will be higher and the interest isn't tax-deductible.

If the line of credit can be enlarged, borrow more and pay off the credit cards. Then pick a time period in which you think you can pay off the new debt. The other alternative is to take the money from savings and 'pay yourself back' from the monthly payments to the credit cards that you will no longer be making.

I know it's painful to reduce savings to pay off debt, but the reality is that you don't really have that money. When the debt is paid off from savings, your net worth will be identical to what it is now.

Q: I have a problem trying to determine what our "portfolio" is. My wife and I have pensions and Social Security. We also have savings, which I have always thought of as our portfolio. But it seems the other two sources should be in the total pot. How should we value those? Am I even asking the right question? - R.T., Austin, Texas

A: The difference between Social Security or a pension and investments is that investments are an actual asset. Social Security checks and pension deposits are just income rights. You are entitled to a monthly income for as long as you live. Income rights are important to our society: They make the distribution of wealth far less harsh than it would be if only the distribution of financial assets and real estate is considered.

The value of Social Security benefits or a pension can be estimated by doing an analysis of how much you would have to spend in a lump sum to buy a life annuity and obtain the same income. Researchers have found that the value of Social Security exceeds all other kinds of wealth for 90 percent of all Americans.

Your Social Security and pension income rights, priced as life annuities, would probably calculate to the financial equivalent of about $1.25 million to $1.5 million. The most useful way to think about the value of your income rights is to know that the greater your income rights wealth, the less you need to worry about the ups and downs of your financial assets. This is particularly true if your income rights are greater than your basic annual spending.

• Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser.