More Q & A

From the Sunday Star Tribune:

Q: You discussed single premium immediate annuities. How do they compare
with charitable annuities that pay interest increasing with age and have tax advantages? Paul

A: Last week, I did go into the reasons why many retirees should at least consider adding single premium immediate annuities to their portfolio. While certainly not for everyone, an immediate annuity can bring financial security to monthly cash flows.

The same goes for charitable gift annuities. Indeed, a charitable gift annuity is a three-for-one investment: You support a charity. You get some nice tax breaks. And you can set up a steady stream of income for life.

That said, there are many financial and emotional factors to consider before buying a charitable gift annuity and similar financial arrangements (such as a charitable remainder trust and a charitable lead trust). Top of the list are the many estate planning issues to think through, from the financial to the emotional. It’s also important to realize that the decision is irrevocable. You can't wake up one morning and say to yourself, oops, I made a mistake. That's why in most cases sensible philanthropic financial planning requires professional guidance.

Still, the time spent researching the product and seeking out professional advice can be worth it. The idea of a gift charitable gift annuity in the U.S. dates back to 1843 when a Boston merchant donated money to the American Bible Society in exchange for a flow of income. The concept has since evolved into the booming planned giving business as the economy has become vastly wealthier and charitable giving ingrained in society.

In essence, you make a charitable gift of cash, stocks, or other property and you get a tax deduction for your contribution. You get in return a fixed lifetime payout from an annuity. The charity keeps the remaining principal when you die. With the annuity, the two main choices are immediate (receive payments right away) and deferred (payments kick in at a specified future date). What most charities will pay comes from standard rates published by the American Council on Gift Annuities. How much you’ll receive is a factor of how much you invest, your age at the time of purchase, and whether the payments go to you alone or to you and your spouse (or another annuitant). For example, if you go to the gift annuity website at Abbott Northwestern Hospital Foundation you'll see that at age 65 the annuity will pay 6% a year on one life and 5.7% for two lives (ages 65 and 67). The comparable figures for an 85 year old are 9.5% and 8.1% (ages 85 and 87), respectively. Since the annuity pays a return on both principal and interest, only part of the income is taxable.

You can learn more about gift annuities and other comparable planned giving choices at the American Council on Gift Annuities website (www.acga-web.org). Most large charitable organizations, such as the American Cancer Society (www.cancergiving.org) Abbott Northwestern (www.abbottnorthwestern.com) and the University of Minnesota (www. http://www.giving.umn.edu/), and Minnesota Public Radio (www.mpr.org: full disclosure, I work at MPR), offer good planned giving primers on their websites.

Q: My husband and I are young and in college...in debt up to our ears. We are pursuing several majors between the two of us, and by the time we finish in three or four years, will have about $100,000 of student loan debt. A year from now, our non-student loan debt will be paid off, freeing up about $1000 a month. With these funds, would it be best to start paying off our student loans or to start saving for a house?... Ariane

A: Wow. My immediate reaction is that you and your husband are industrious and well-educated and your financial prospects will burn bright once you enter the job market. Your college degrees are going to pay off. It's a safe bet that both of you will good careers. For now, I would set aside the question about saving for a down payment on a home for now. There's a season for everything, and a place to own may be a bit down the road. First, let's get through college and make the transition to the job and career market.

With that in mind, I wouldn't turn my finances into an either/or question. It's great that the only debt you'll have is student loans. I wouldn’t use your extra cash flow to start paying down those loans but to limit how much you two need to borrow to finish your education. I would also take some of that cash and build up savings.

The reason for the savings cushion in your circumstances is twofold: First, the transition from college to job can be expensive and, second, to give the two of you maximum flexibility when it comes to considering what job to take. For instance, career opportunities might lead you to consider moving to another city or state. That's not cheap. The job you get might require that you own a car (or turn in that beater that works around college) or acquire a new wardrobe. With savings both of you will have the financial resources to make the right decision. And once you graduate you'll start repaying those student loans.

I would then let everything shake out for awhile. Take the time to figure out what your cash flow is going to be and get a sense of where your careers are going. Once you have a handle on what your jobs pay, what are your promotion prospects, and how your monthly living expenses add up, you can then start deciding how aggressively to pay down those student loans. You'll also discover that a two-income couple with no debt other than student loans will qualify for a good mortgage surprisingly quickly. Good luck.