Q: I am 61 years old and have about $500 a month to use either in funding my Roth IRA or paying down my mortgage. Currently, my mortgage is for 15 years at 5.81 percent. I plan on retiring in June 2009. Which should I do?
A: Hands down, fund your Roth IRA.
Here's why: The interest rate on your loan is so cheap, so it isn't costing much to borrow the cash. You already have a 15-year mortgage, and while you haven't told me how soon you will pay off this loan, you're already paying down the principal pretty quickly.
I do understand your interest in helping yourself cash-flow wise, but you're talking about putting maybe $6,000 toward the principal of your loan over the next year until you retire. I suppose if you need only $6,000 to pay off your loan entirely, then it might be worth it.
However, given where the stock market is at the moment, you might have a greater opportunity to do better by investing in a low-cost, well-diversified mutual fund than by paying down your mortgage. When you pay down your mortgage, every dollar you prepay effectively earns you your net rate of interest. If you itemize on your federal income taxes, your net interest rate is below 5 percent. That's excellent.
The likelihood that you can earn at least 5 percent on your cash is pretty good, which is why investing the same $6,000 in a Roth IRA, where your earnings are tax-free forever, might be a better deal.
Because you're at least 50 years old, you're allowed to put away $6,000 in a Roth IRA this year and next, provided you earn at least that amount. I'd make the most of it, and try to put away the maximum. When you retire, a Roth IRA will give you additional flexibility.
Q: I read your recent article, "Think like a buyer to get home sold," with interest. We are selling our house and have a similar but slightly different room arrangement and would love your advice.
We have a formal living room, which is fairly open to what was a formal dining room. It was connected with a pass-through to a kitchen, which is 24 feet by 12 feet, with a breakfast area at the end. My husband has opened up the kitchen with a 4-foot-wide doorway and much bigger pass-through to the dining room and wants to decorate it as a family room.
I think that would look too informal next to the living room, plus it would cost us money to refurnish it. I think it should be left as a dining room (we have lovely furniture) and the new owner can change the use of the room if she wants.
What do you think?
A: It's tough to tell you exactly what to do when I haven't seen your house and walked through it.
When you're selling in a difficult market, it's really important to think about what will create the most potential in the mind of a buyer -- not what is easiest and cheapest for you. That said, you should balance what you have (i.e. your lovely dining room furniture) with how a buyer might perceive the layout of your first floor.
Try to imagine how the room would look furnished as a family room. Would your husband's plan eliminate a dining room entirely or would he then turn your living room into a formal dining room?
I think it's a lot easier for buyers to see a dining room, family room and eat-in kitchen and recognize a floor plan they can live with than seeing a kitchen, family room and living room. If I saw that, I'd wonder where I was going to seat my family for Thanksgiving dinner.
You and your husband should ask your real estate agent to come over and spend an hour or so discussing a variety of plans. If you don't have a real estate agent, you should probably talk to one or a couple of them. Some real estate agents are excellent at giving you insight into what might look best to buyers and tell you to do something or not do something. You might even want to move around some furniture to help you see the room with new eyes.
When you have enough input, you can decide how to decorate the rooms. The idea is that your decorating should enhance the potential buyer's view of your home and not diminish your ability to sell the home.
The answer might be to turn your dining room into a family room and your living room into the dining room. Or, the answer might be to show off a lovely, finished house with beautiful furniture and let the buyer speculate as to what could be done going forward.
I would only add that you shouldn't be afraid to think outside the box. In a tough market, sometimes that helps.
To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.
***
What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.
