Mortgages, retirees make poor combination

Q. My parents are looking for a house in the Dallas-Fort Worth area. They are retired. They are trying to decide if they should pay cash for the house. They have close to $620,000 in savings (CDs, 401(k)s, IRAs) and are looking for a $200,000 house. They also have about $1,300 in Social Security income each month. Mom is 69; Dad is 73. Their combined monthly expenses are less than $1,900 (they currently have no house payment). They prefer CDs and FDIC-insured accounts over bonds and stocks, but they are slowly warming up to the idea of a low-cost balanced fund. Does it make sense to pay cash for the house, or to finance it? - A.H., Dallas

A. The basic idea is a good one - move to be near adult children and move to a city that attracts a surprising number of retirees.

But given their caution and age, I wondered: What income could your parents get from an inflation-adjusted joint life annuity, assuming a 75 percent benefit for the survivor? Answer: $2,354 a month on a $420,000 commitment. (The figure comes from the Vanguard Web site, where such life annuities are offered.) Add their Social Security benefits of $1,300 a month and they would easily have enough to cover their living expenses and the operating expenses of a $200,000 house. Putting all their money into a life annuity, however, wouldn't be prudent. A better option would be to pay cash for the house. Then put about $240,000 into an inflation- adjusted joint life annuity that would provide about $1,300 a month. And, finally, invest the remaining $180,000 in a low-cost balanced fund such as Vanguard Wellesley Admiral shares (current yield 4.3 percent) or Vanguard Wellington Admiral shares. They would have basic expenses covered by Social Security and annuity income, and a reserve fund to add a bit more.

scott@scottburns.com