Dear Helaine: My financial life feels extremely unbalanced, and I don’t know where to begin to fix it. Thanks to a divorce settlement many years ago, I bought a house in a popular summer community. It’s now worth $2 million, and I own it free and clear. My finances worked as long as my ex paid child support, but our daughter aged out of it, and I am slowly sinking in a very expensive boat.
I have $30,000 in debt, and I haven’t filed taxes in a few years. I work for myself, and while I earn enough to get by and maintain the home, I have no retirement accounts, no health insurance, and no ability to get a mortgage so I can take money out of the home. The older I get, the more challenging this all starts to feel.
I met a couple of older gentlemen, clearly successful and now retired, through a local program to help small business owners. Both suggested I sell the house, use about $1 million to buy a new, less-expensive one somewhere nearby where I can rent rooms out via Airbnb, and put $500,000 in an annuity for a guaranteed income. Everyone I ask hates the annuity idea, but how else can I stabilize my income? -- House Rich and Cash Poor
Dear House Rich and Cash Poor: There is only one way to move forward. That’s one step at a time. So where to begin?
You are going to have a very hard time getting your financial life organized as long as those taxes aren’t filed, so I would suggest calling an accountant as soon as you read this note and getting on the process of filing the taxes. The IRS will likely work out a payment plan with you, so you won’t need to come up with a lump sum for all the back taxes and penalties at once.
Second, you need to hope your health remains good and you suffer no accidents till the next Affordable Care Act insurance open enrollment period. As it stands right now, if something goes wrong, you could owe a lot of money to various hospitals and doctors.
As for the home -- where the tax money will come from and likely your retirement savings, too -- sell it. Don’t buy another large house. Purchase a small condo that you can afford and invest the difference. Airbnb is not a guaranteed income stream.
Next, all your friends are right: Don’t listen to random men who give you investment advice. An annuity is an extremely complicated, high-cost investment, one that locks up your money for a long period of time (sometimes permanently). The reason it gets pitched is because the people selling annuities make major commission money peddling them.
When you are ready, sit down with a financial adviser working to the fiduciary standard and come up with a plan. And while you are doing all this, work out how much you need to live on and not run up debt.
I know this is all tough, but it will get easier as you go on. The paralysis is part of the financial problem. As you push back on it, the pressure on you should release.
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