Q&A: Talking money before marriage

Dear Liz: My daughter is getting married in September. She recently confided that she and her fiance have never discussed their respective debts (if any), credit scores or financial goals. She is hesitant to bring this up with him but realizes it’s a discussion that needs to happen before they marry. I suggested they consider meeting with a financial counselor so they can have an honest talk about money as a practical matter rather than an emotional one. Would a fee-only financial planner be appropriate in this instance?

Answer: Absolutely. If you’d like, you could make a session with such a planner your engagement present to them.

Of course, they don’t need a professional to start talking about their financial situations. Presumably she knows him well enough by now to have some idea about how best to broach the topic. It could be as simple as “Hey, I was just paying some bills and I realized we probably should talk about our financial situations.”

A way to start the decision is to talk about dreams and goals. Would they like to raise a family? Buy a home? Start a business? Travel a lot? Retire early? All financial planning stems from knowing what your goals are, and then you can figure out how to achieve them. Your daughter shouldn’t be too worried if they aren’t on exactly the same financial page, since few couples are. What’s important at this stage is knowing what’s important to each person.

It can be trickier to talk about the present. Most people have made mistakes with money, and many have more debt and less savings than they’d like. Being a sympathetic listener and suspending judgment can go a long way toward putting a partner at ease in these discussions.

After they’ve had a few talks and feel comfortable, they probably should take a look at each other’s credit reports. Those would give them a fairly good idea of how much each person owes. That can help them understand roughly how much of the family budget will need to go toward retiring those debts and how much is available to achieve their goals.

Q&A: Windfall Elimination Provision followup

Dear Liz: In a recent column, I believe you got one aspect of Social Security’s Windfall Elimination Provision wrong. If you’re affected by WEP, in no case can you get more than 90% of your Social Security benefit. It is a sliding scale. With 20 years of earnings under Social Security, you get 40%. It goes up 5% per year to a maximum of 90% at 30 years. I worked 28 years as a paramedic and firefighter, most of the time for agencies that offered a pension instead of paying into Social Security. I also have 22 years of substantial earnings that were covered by Social Security and plan on working eight to 10 more years to get to 90%.

Answer: It’s easy to get confused about how Social Security figures benefits, but rest assured: If you have 30 years of substantial earnings from jobs that paid into Social Security, you will get 100% of your Social Security benefit even if you have a pension from a job that didn’t pay into Social Security.

Here’s what you need to know. Social Security is designed to replace more income for lower-wage workers, because higher-wage workers presumably find it easier to save for retirement. People who get pensions from employers who don’t pay into Social Security, but who also had jobs from employers that did, can look to the Social Security system as though they were long-term low-wage workers even when they’re not. Without the Windfall Elimination Provision, they could get a bigger Social Security check than they would have earned had they paid into the system all along.

To compute our benefits, Social Security separates our average earnings into three amounts and multiplies those amounts by different factors. For a typical worker who turns 62 this year, Social Security would multiply the first $816 of average monthly earnings by 90%, the next $4,101 by 32% and the remainder by 15%.

Those affected by WEP have a different formula, but it affects only that first part of their average earnings — the part where everyone else gets credited for 90%. The WEP formula is, as you note, on a sliding scale. Someone with 20 or fewer years of substantial earnings from jobs that paid into Social Security would see the first $816 multiplied by 40%. Someone with 28 years, by contrast, would have the first $816 multiplied by 80%. Someone with 30 years or more would get the full 90%.

Social Security’s pamphlet on WEP lays this out, and notes that the Windfall Elimination Provision does not apply to anyone with 30 or more years of substantial earnings from jobs that paid into Social Security. You can read more about it here: http://www.ssa.gov/pubs/EN-05-10045.pdf.

Friday’s need-to-know money news

Holiday-tipping-in-tough-times-7FKMMIM-x-largeToday’s top story: A stress-free guide to holiday tipping. Also in the news: How to ease the financial strain of caregiving, financial resolutions to keep in 2015, and credit card strategies for travelers.

A Last-Minute Guide to Holiday Tipping
One less thing to stress over.

5 Ways to Ease the Financial Strain of Caregiving
Hiring help can actually save you money in the long run.

10 Financial Resolutions to Keep In the New Year
“Keep” being the operative word.

3 Irresistible Credit Card Strategies for Travelers
Supercharging your travel budget.

Retirement: 5 ways to make the most of 2015
Your retirement checklist for 2015.

Thursday’s need-to-know money news

Wills-in-TexasToday’s top story: Tips for writing your will. Also in the news: The most important thing to ask your financial advisor, how to spend the rest of your FSA money, and how to calculate your tax refund by checking out your pay stubs.

5 Tips for Writing Your Will
An unpleasant but absolutely necessary task.

The Most Important Question To Ask Your Financial Advisor
No, it’s not “can you make me rich?”

3 Tips to Use Remaining Health Flexible Spending Account Money
Don’t let your FSA money go to waste.

3 Ways to Calculate Your Tax Refund Using Your Pay Stub
Get a preview of next year’s bounty.

How to Stop Making Excuses and Finally Get Your Finances in Order
Excuses are for wimps.

Wednesday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: What the experts think you should do with you money in 2015. Also in the news: Saving money on winter driving, tax strategies to use before the end of the year, and how to survive living paycheck to paycheck.

Here’s What the Experts Are Saying You Should Do With Your Money in 2015
New strategies for the new year.

5 Ways to Save Money, Your Sanity for Winter Driving
Surviving the winter in one piece.

11 year-end tax strategies to use before Dec. 31
Tick tock.

Living Paycheck to Paycheck: 7 Strategies for Survival
Getting through the tough times.

7 Holiday Savings Tips for Newlyweds
Your first holiday together doesn’t have to break the bank.

Tuesday’s need-to-know money news

santa-3-resized-600Today’s top story: How your procrastination is costing you money. Also in the news: Holiday shipping mistakes to avoid, which report you need to read before buying a house, and the digital piggy bank that could finally convince you to start saving.

5 Ways Procrastination Costs You Money
Time equals money.

Don’t make these costly shipping mistakes this season
The gifts were expensive enough.

The Report You Should Ask For Before Buying A House
Get a C.L.U.E.

This Digital Piggy Bank Could Finally Get You To Start Saving
Meet your new savings pal.

The Best Way to Tap Your IRA In Retirement
Using your IRA strategically.

Monday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: The credit card perk that can save you time and money. Also in the news: The dumb things people do to be frugal, why a big tax refund isn’t always a good thing, and the investment fees you didn’t know you were paying.

The Credit Card Perk That Can Save You Big Money
Getting the lowest price on your purchase.

7 Dumb Things People Do in the Name of Being Frugal
Good intentions, bad results.

Why a Big Income Tax Refund Is Not a Good Thing
The instant windfall that means you’ve been shortchanged.

The Investment Fees You Don’t Realize You’re Paying
How to start tracking stealthy fees.

The Best Hotel Rewards Credit Cards in America
Getting the most points for your money.

Q&A: Can installment loans help repair bad credit?

Dear Liz: I am working on paying my bad debt from the past to rebuild my scores. I have one credit card that I pay in full every month, but no installment loan. I recently was given the opportunity to take a car loan with monthly payments I could easily afford. Here is my confusion: Taking on more debt while trying to eliminate past debt is usually not advisable. But I also know creditors like to see both revolving and installment credit. Am I OK taking the car loan to give the “well-rounded use” credit, or should I just put that extra money to pay off my past debt?

Answer: Paying off old bad debts typically doesn’t help your credit scores. If these accounts are now in collections, the damage has been done and won’t be erased by your payments.

And if the accounts are in collections, the money you’re paying probably isn’t going to the creditors you originally owed. Those creditors probably sold your debts to collection agencies for pennies on the dollar. If that’s the case, those collectors may be willing to settle for 50% or less of what you owed the original creditor. If you have the cash to make lump sum offers and you decide to take this route, get written assurance from the collector — in advance and in writing — that any remaining debt won’t be resold to another collector. Also, reserve some cash for the tax bill, because forgiven debt is usually considered taxable income.

You also can request a “pay for deletion,” which means the collection agency stops reporting the collection account to the credit bureaus in exchange for your lump sum payment. Getting rid of the collection could help your scores, but many collectors resist this step.

Now, back to your question. Adding an installment loan such as an auto loan, mortgage or student loan to your credit mix can indeed help rehabilitate troubled scores. The scoring formulas like to see people responsibly handling a mix of credit accounts.

If you decide to take out a car loan, shop around for a lender before you commit. Those affordable payments you were shown could disguise a bad loan — one with a sky-high interest rate, a long repayment period or both. It’s wise to make at least a 20% down payment on any car purchase and to limit the loan term to four years or less.

Q&A: Student loan co-signer repercussions

Dear Liz: I co-signed a student loan for my son. He was unemployed for a year and has now returned to work. The lender is not being cooperative with accepting a lesser monthly payment or any payment until he gives them a lump sum he does not have. They have been calling me about this debt. I am retired, 74, with a pension and Social Security as my sole income. I have no assets. What can they do to me?

Answer: If this were a federal loan, the government could take a chunk of your Social Security check and withhold your tax refunds. But your son also would have far more options for getting caught up, including a pathway out of default and income-based repayment plans.

Because it’s a private loan, evidenced by the fact it required a co-signer, the lender has fewer powers to collect, but you and your son also have fewer consumer protections. The Consumer Financial Protection Bureau recently released a report detailing people’s complaints about private lenders’ unwillingness to offer affordable payment options or modifications for unmanageable student loans.

That doesn’t mean your son should quit trying. The CFPB has a sample letter on its site that he can use to request a repayment plan he can afford. If he’s still having problems, he can make a complaint to the CFPB.

When you co-signed, you promised to pay if he couldn’t. Private collectors typically can’t take your retirement income, however. You may want to make an appointment with a bankruptcy attorney who can assess your situation. (Student loans, federal or private, typically can’t be discharged in bankruptcy, but the attorney will know the rules for creditors and borrowers in your state.) You and your son also should review the information about negotiating with private student lenders that you’ll find on the Student Loan Borrower Assistance site run by the National Consumer Law Center.

Vanguard–the new robo-advisor?

IiStock_000014977164Medium‘ve written a lot recently about digital advisors (including the piece I wrote for AARP, “Do-it-yourself made easy“). Wealthfront, one of the leaders in this space, now has $1.7 billion under management.

That seemed pretty impressive, until I saw a recent piece in InvestmentNews about Vanguard’s Personal Advisor Services. Although still basically a pilot program, the “human-augmented online advice platform,” as IN termed it, now has $4.2 billion under management.

For all that’s been written about the start-ups who use powerful algorithms to manage your portfolio while you sleep, it’s the the Vanguard offering that may be the game changer. Vanguard can offer everything the start-ups do–asset allocation, automatic rebalancing, ultra-low-cost investment choices–in the mantle of a trusted firm known for its integrity and thrift. The cost? Three-tenths of one percentage point, or $300 a year for a $100,000 portfolio. That’s only slightly more than the .25 percent the newcomers typically charge.

Advisors charging more certainly will argue they’re adding value. But if you’re paying much more for financial management, you might want to at least take a look at what you can get for less.