Help Me Retire: I’m 71 and can’t decide if I should pay off my mortgage or get a joint annuity that’s cheaper — what should I do?

This is my second marriage and I am the sole owner of the property. I have arranged to leave my wife (who is five years younger than I am) a life tenancy should I pre-decease her, at which point the house would go to my two children. A joint annuity would guarantee her the ability to stay in the house and only pay taxes, insurance and maintenance.   

Of course no one can predict the future, but we currently have no plans or desire to move elsewhere. Should I sign the check?

See: We have $3 million in real estate, which brings in $70,000 a year. Could I make the same income investing in stocks and bonds? 

Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com

Dear Reader, 

Annuities have gotten a bad rap in the past, as they can be expensive and some unscrupulous salespeople push annuities to make a sale — even if it’s not in the individual’s best interest. Annuities are not all bad, however, you just need to find the one that is right for you.

Before you sign, understand that anything can change (like interest rates tied to an annuity), you could be subject to fees, and you have to be very clear about all of the conditions before you proceed. This is especially true if you’re committing a big chunk of money upfront. 

Also, check the rating on the insurance company selling the product. Standard & Poor , Moody’s
MCO,
-0.59%
and AM Best all rate the financial wellbeing of insurance firms. 

There are many types of joint annuities, including variable products that are invested in stocks and bonds, or fixed annuities, which are similar to CDs because they’re based on an interest rate, said Nicholas Bunio, a certified financial planner at Retirement Wealth Advisors.

Don’t miss: How can I tell if an annuity is a good deal?

Variable annuities are riskier products, because they’re directly tied to the market, whereas fixed annuities would likely be more conservative; even if they’re tied to a stock-market index, they have “principal protection,” Bunio said.

A single-premium annuity is simply a type of product that uses one single payment to create a steady income stream, be it now or later. A joint annuity, as you could imagine from the name, means it is for two or more people. It works best for spouses who want money to last after one of the owners dies, as you have already learned. 

But to replace a mortgage payoff with that sort of product isn’t so clear cut. You need to first understand every aspect of the product you’re considering — pore over the contract, and understand the implications of absolutely everything.

Ask about the fees, risk protection, if anything about the product is subject to change. What happens if one spouse dies? Ask the person selling you the product why a certain annuity may be preferable, and what alternatives there are to consider. 

Circle back on your personal finances

Then do a check-up of your personal finances. You mentioned you’ve been saving up to pay off this mortgage, which is fantastic, but you also said the mortgage rate is 2.25% and you have 27 years left on it.

What is driving your desire to pay it off so soon? If you can’t sleep at night because you feel like this debt is too much to handle, then I understand the rush, but if it’s just to check this off your list, press the brakes for a moment and look at the big picture. 

You need money for retirement. You can borrow for a home or an education, but not for retirement. How do your assets stack up for your goals the rest of your lifetime? And how do they compare when calculating all the expenses you’ll have during this time, including taxes, groceries, utilities, entertainment, healthcare and so on?

Is your current mortgage payment a huge chunk of your monthly income, because if it is, then paying it off would free up some money for you to spend — but if it dips into the total pool of assets you expect to live off, how necessary is it to do right now?

“Most people who need a joint-income annuity probably need it as soon as possible, and it is better to plan how much income you need in retirement than simply paying off debt,” Bunio said. “Everyone is different.” 

An emergency fund is also a necessity, and should be in liquid assets you can easily tap into should something unexpected happen. This allows you to keep whatever retirement money you have invested for the future, and also keep your stress at bay during an emergency situation. 

Also see: My husband says we’ll be ‘homeless’ if we keep renting. We’re 68 and 74 — do we buy a home instead?

For those unaware, a life tenancy basically states someone could live in a property for their remaining lifetime and, upon that person’s death, the property will transfer to someone else (in this case, the letter writer’s children). You mentioned this joint annuity would help her pay the bills after you’re gone. What else will she have? 

When one spouse dies, so does that person’s Social Security checks, Bunio added. Before you sign anything, talk to your wife about her goals and expectations should you predecease her.

Even with this particular annuity, what else does she have to rely on, or what would she need? Be generous when estimating costs, since inflation (as we’ve seen) is no joke. And don’t forget to also account for the unexpected for her, too. 

Another uncomfortable, but not unwise, question: How likely is it that this joint annuity could run out before she dies? That’s something to ask the institution selling the annuity.

Have a financial plan for you and your wife in place, even if it is subject to change, because life is nothing if not unpredictable.

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Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com