Ask Liz Weston

Q: My company’s traditional pension plan was one of the reasons I took a job there. I like the idea of having a guaranteed paycheck in retirement, regardless of how the markets are doing or how much I’ve managed to put aside.

But now our company is being put on the block, and none of the potential buyers seems to have a traditional pension plan. Should I and my co-workers be worried?

A: In a word, yes. Few corporations that don’t already offer pensions want to take on the hassles and expense of funding them.

A traditional pension promises a set payment to retired workers for as long as they live. These plans are costly, and companies are increasingly phasing them out or, in some cases, switching to cash-balance plans that are somewhat akin to 401(k) retirement accounts.

The buyer of your company could take one of several courses. The first is to “freeze” the pension, which means you wouldn’t lose the benefits you’ve accrued but you wouldn’t earn any more. The company would continue to administer the plan and arrange for you to get your retirement payment.

If the company decides to institute a cash-balance plan, the value of your pension holdings would be transferred into the plan, but the rate at which you accrue future benefits could change.

More radically, the buyer might simply terminate the plan and either buy you an annuity that represents the benefits you’ve accrued or simply pay those benefits to you in a lump sum.

If the plan doesn’t have enough money to pay promised benefits, the buyer could turn it over to the Pension Benefit Guaranty Corp., the quasi- government agency that runs failed plans. Again, you wouldn’t accrue new benefits, and it’s possible you could lose some if you’re a highly paid worker close to retirement.

The PBGC caps benefits at $29,649 annually if you retire at 60 or $45,614 if you retire at 65.

Your chances of persuading a buyer to continue the plan may be low, but you can try making the argument that pensions attract smart, older workers who understand their value, said pension expert Steve Vernon, author of “Live Long and Prosper: Invest in Your Happiness, Health and Wealth for Retirement and Beyond.”

You’d be smart, though, to step up your efforts to save on your own. As rapidly as traditional pensions are disappearing, it makes sense for almost every worker to have at least something put aside for his or her own retirement.

Q: On the back of the credit card, what is the purpose of the three numbers that follow the account number? Why do some merchants require these numbers to make purchases over the Internet?

Q: I am a 23-year-old who recently received a $20,000 gift from my parents for a future home down payment. I won’t be ready to buy for about five years, and in the meantime I would like to put the money in a low-risk, high-liquidity investment.

I’m learning toward investing in an index mutual fund tied to the Standard & Poor’s 500 benchmark of large-company stocks. Is this the best use of my money given my intentions?

A: It’s almost refreshing to hear someone refer to stocks as a “low-risk” investment, reminiscent as it is of the go-go market of the late 1990s. Ah, those were the days.

But reality hasn’t changed: Stocks and stock mutual funds weren’t low-risk then, and they aren’t low-risk now. They’re no place to put money you’re going to need in the next 10 years.

Put the cash in a money market or a “laddered” portfolio of certificates of deposit (where the money is divided among CDs that mature at different times).

Then sate your desire to get into the market by contributing as much as you can to your workplace 401(k) and a Roth IRA. Invest that money in mutual funds indexed to the S&P 500, with perhaps a little bond and cash exposure on the side.

You’ll have plenty of time to ride out the ups and downs of the market over the next 40 years until you retire.

Q: I was confused about a statement you made regarding penalties on withdrawals from 529 college savings plans. You mentioned a 10% penalty on withdrawals that aren’t used for qualified education expenses but didn’t say whether the penalty applies to the entire withdrawal or just the earnings.

If it’s just the earnings, why should I care about the penalty? Even if I don’t use the money for education, I’d still be ahead because the money had a chance to grow tax-deferred.

A: That would be a heck of a loophole, wouldn’t it? But, alas, it doesn’t exist.

It’s true that only the earnings in your 529 are subject to the penalty, not your original contributions. But you’ll also have to pay regular income taxes on any gains that you withdraw.

The combination of taxes and penalties effectively eliminates the 529 as a tax shelter for most folks unless the money is used for education — or unless they’re in a much lower tax bracket when they withdraw the money than they were during the years in which the gains were accrued.

Q: I’m 21 and thinking about buying my first home. How much house can I afford to buy, and is it OK to bid less than what the seller is asking?

A: You have actually asked two of the more difficult questions to answer when it comes to real estate.

Many people believe there are strict formulas that determine how much they can borrow for a home. In reality, lenders have loosened their standards considerably in recent years, and some borrowers may find — much to their later sorrow — that they can get a much bigger mortgage than they can comfortably repay.

A good rule of thumb is to keep your total housing costs — including mortgage, taxes and insurance — to about 25% of your gross income. That way, you’ll have enough money for other goals, such as retirement savings and vacations.

You can stretch a bit more if you expect your income to rise considerably within a few years or if you have no other debt. But you might want to be even more conservative if your income is uncertain or your debt load is particularly heavy.

Once you have a target monthly payment, you can play with the online mortgage affordability calculators offered by companies including Bankrate Inc. and E-Loan Inc. to see how much house that will buy.

As far as how much to bid, you might consider consulting an experienced real estate or buyer’s agent who is well-versed in the neighborhoods you’re targeting for your house hunt.

There are no hard-and-fast rules. Some sellers overprice their homes; others set the price too low, hoping to set off bidding wars. A smart agent can help you figure out which is which and coach you on the best bidding strategies for your market.

Dear Liz: I want to disagree with you over your recent advice about buying cars for kids.

I was extremely depressed during my senior year of high school for many reasons, but a big part of it was that I couldn’t drive because of our financial situation. My mom had other bills to pay, and my paychecks weren’t big enough to cover the insurance.

I really don’t think you grown-ups know how it feels to wait for rides, walk home past the young sophomores that drive and have people look down on you. All I can say is that when I have kids, I will do anything to make sure they have a car.

A: No, you probably won’t — because someday you’ll be the grown-up and you’ll realize what a service your mother did for you by not buying you something your family couldn’t afford.

You also will learn, with any luck, that how you react to circumstances is a lot more important than the circumstances themselves.

By the way, many of us grown-ups know exactly how it feels to wait for rides, and we survived just fine.

Question: I’m in my 20s and make a good salary, but I still live in my parents’ house — actually, in their basement.In my culture it’s considered the child’s duty to help support the parents, but I’m the only one of several children with a good job. So I help my parents pay their mortgage, and I also give my mother spending money each month.

Answer: Of course, and so do you. You just haven’t been willing to take the first step.

It’s important to honor your culture, but it’s unlikely your culture includes an ancient tradition of supporting tantrum-throwing wannabe comedians. If your mom is passing along your largess, then you’re giving too much and indirectly aiding your brother’s refusal to grow up.

Figure out how much money you need to get your own place, build up a decent emergency fund and begin saving for retirement. Your parents may have convinced you that supporting them in their old age is your duty, but you shouldn’t count on being able to convince your own kids of the same thing. Your parents’ stipend can come out of what’s left.

If that’s not enough to pay for the lifestyle to which they’ve become accustomed, they may need to take the opportunity to downsize — perhaps into a house that’s too small to house Brother Freeload. If your mother has reason to fear your brother’s reaction, a call to the local domestic violence hotline can offer resources for dealing with the situation.

All this assumes your parents aren’t elderly, disabled or otherwise dependent on you to stay above the poverty line. If cutting back would throw them into an economic tailspin, you may need to remain at home awhile longer as you transition them to a more realistic standard of living.

You may well face a barrage of parental and familial criticism for daring to put limits on your dole. But if you’re convinced that you have a right to a life of your own — one that allows you to help your parents without being drained by their demands — then you’ll be able to survive. Interestingly enough, so will they. Good luck.

Q: My stepson is a victim of identity theft. Are there any government agencies or other organizations that he might contact for help?

A: The only good thing about the identity theft epidemic — the Federal Trade Commission estimates 9.9 million victims in 2003 alone — is that plenty of resources have sprung up to help the victims.

Your stepson still has a lot of work ahead of him. He can turn to others for education and information, but he’s the one who will need to contact the credit bureaus, file a police report and take the other steps necessary to clear his name.

He can’t expect anyone else to do the work for him, and he’ll be lucky if any official investigation is conducted. Most police departments place a pretty low priority on identity crimes, and research firm Gartner has estimated that the thieves face only a 1-in-700 chance of being caught.

But your stepson can limit the damage. He can get information from the FTC by visiting its consumer website at www.consumer.gov/idtheft/ or by calling (877) FTC-HELP (382-4357). Make sure he gets a copy of the FTC’s “ID Theft: When Bad Things Happen to Your Good Name.”

He also can check out the Identity Theft Resource Center, a nonprofit organization that recently won a National Crime Victim Service Award from the Department of Justice. Your stepson can visit its website at http://www.idtheftcenter.org or call the center at (858) 693-7935.

Dear Liz: I filed a personal Chapter 7 bankruptcy five years ago to erase my debts. The reason I filed wasn’t because I lived beyond my means, but because I used my personal credit to finance my business, which fell apart after the Sept. 11 terrorist attacks. Since that time, I have emerged with credit scores in the 665 to 700 range. My problem is that when I apply for loans, I’m sometimes denied because the creditor says I have too many late payments on my credit cards. Those late payments are all from my previous life and the debts were wiped out in the bankruptcy. Now I pay everything off in full every month. How can I get these late payments off my credit reports?

Answer: You’ve restored your credit scores, the three-digit numbers lenders use to help gauge your credit-worthiness, to near-prime levels. Typically, scores of 720 and above are considered “good” under the FICO scoring system used by most lenders. Scores in your range are acceptable to many lenders as well, although you’ll typically pay higher interest rates than if you’d had unblemished credit.

Still, as you’ve discovered, your scores and credit history aren’t acceptable to some lenders. You may feel that the five years that have passed since your bankruptcy are an eternity, but these potential creditors obviously don’t. Your problems paying bills in the past lead them to suspect you may default again. (Most lenders don’t care why you were late, by the way; they just care that you were.)

If you want a loan from these particular lenders, you’ll probably have to wait until the late payments drop off your credit reports–typically about seven years after the delinquencies occurred. The bankruptcy, which also will discourage some lenders from accepting you, legally can stay on your credit reports for 10 years.

Some fly-by-night credit repair outfits promise to “clean” your report of negative marks. Don’t fall for their scams, which usually involve committing fraud or trying to overwhelm the credit bureaus with disputes that often result in only temporary improvement, if that.

A better course is to continue using credit responsibly, as you evidently have since your bankruptcy, and to shop around when you need a loan. Just because some lenders have turned you down doesn’t mean others will.