Dear Liz: My life insurance policy of $500,000 will end in four years, when I’m 63. My wife’s policy ends at age 62. Our kids are 28 and 25 and successfully launched with careers. I also have a $180,000 life insurance policy through my job that expires when I plan to retire, also at age 63. My wife and I have long-term-care insurance policies. We have $170,000 in an active investment account plus $1.4 million in our 401(k)s. Our kids also have trust funds that they will get when they turn 30 of about $80,000 each. Should I buy more life insurance for 10 to 15 years? Our estate, which is in a living trust, will pass to the kids. Our house is worth about $1 million.
Answer: The first question you must ask when it comes to life insurance is whether you need it. If you have people who are financially dependent on you, you typically do. If your wife has sufficient retirement income should you die, and vice versa, then you probably don’t.
So-called permanent or cash-value life insurance is often sold as a way to pay estate taxes, but again, it doesn’t look as if you’ll need that coverage. Congress increased the estate tax exemption limit for 2012 to $5.12 million, and that amount is tied to inflation going forward.
Still, this is a good question to pose to a fee-only financial planner, and you should be seeing one for a consultation before you retire in any case. Retirement involves too many complicated, irreversible decisions to proceed without help.
Dear Liz: You recently answered a question from a reader who found an old refund check that couldn’t be cashed. You pointed out that checks typically must be cashed within six months or they’re worthless. But your reader should check the unclaimed-property department of his state. Each state has laws that all companies must follow that typically require them to turn over or “escheat” amounts from uncashed checks, dormant checking accounts, unclaimed utility deposits and other accounts. The consumer should write a letter to the company that issued the check (sent certified mail) with a copy of the front and back of the check to find out whether they escheated the funds. The consumer should also check Unclaimed.org and talk to the state that the company is based in along with his current state. Please encourage him to keep the check and not give up. Unclaimed-property laws are not well known, and they are there to protect the consumer.
Answer: Thanks for your suggestion. Not all companies follow the laws regarding unclaimed property. If this company had, it presumably would have referred this customer to the appropriate unclaimed-property department when he called asking for a replacement check. Still, checking the state treasury departments on Unclaimed.org is relatively easy and certainly worth a try.
Dear Liz: A lot of financial advice sites say you should have an emergency fund equal to three to six months of living expenses. What would be considered living expenses? Should you use three to six months of your net take-home pay or a smaller number? Is three to six months really enough?
Answer: Let’s tackle your last question first. The answer: No one knows.
It’s impossible to predict what financial setbacks you may face. You may not lose your job — or you may get laid off and be unemployed for many months. You may stay healthy — or you may get sick and your only hope might be experimental treatments your insurance doesn’t cover. Nothing may go wrong in your life, or many things could go wrong all at once, depleting even a fat emergency fund.
Having a prudent reserve of cash can help you survive the more likely (and less catastrophic) setbacks. Financial planners suggest that your first goal be three months’ worth of living expenses, typically defined as the bills that can’t be put off without serious consequences. That would include shelter, utilities, food, transportation, insurance, minimum loan payments and child care. Any expense that you easily could cut or postpone wouldn’t be included.
If you work in a risky industry or simply want a little more security, you can build your fund to equal six months of essential living expenses, or more. (The median duration of unemployment after the recent recession peaked at around five months, although many people were out of work for far longer.)
It can take many months, if not years, to build up even a three-month reserve. In the meantime, it can be prudent to have access to various sources of credit, including space on your credit cards or a home equity line of credit.
No matter how eager you are to have a fat emergency fund, you shouldn’t sacrifice retirement savings. For most people, saving for retirement needs to be the financial priority, with saving for other purposes fit in as you can.
Dear Liz: I am approaching being able to retire in three years at 56, but I’m really concerned with the current market conditions. I have around $320,000 in 401(k) and 457 accounts now, all of it invested in stocks. Should I scale this back to more moderate allocations? My pension will pay me around $5,200 a month, so I do not anticipate needing to withdraw from my investments before age 59.
Answer: Even if you’ve been a die-hard do-it-yourself investor until now, it’s time to get help. Retirement decisions can be incredibly complicated, and you may not have time to recover from mistakes.
A fee-only financial planner would ask, among other things, what your current living costs are and what additional expenses you expect, such as buying another car, taking trips and so on. Those details can help determine whether your savings are adequate. The planner also would ask you how you plan to pay for healthcare in retirement, since Medicare doesn’t kick in until age 65, and an individual policy at your age could eat into that pension check. Even with Medicare, Fidelity Investments estimates, a 65-year-old couple retiring this year would need $240,000 to cover medical expenses throughout retirement — not counting any money they might need to pay for nursing home or other custodial care.
What a planner probably wouldn’t do is approve having 100% of your investments in stock at any age, even with a nice pension. You may have time to ride out another market downturn, but watching half of your life savings disappear might increase the chances you’d sell out in a panic. Having a more moderate allocation that includes bonds and cash could help cushion those market swings and keep you invested.
You can get referrals to fee-only planners who charge by the hour at the Garrett Planning Network, http://www.garrettplanningnetwork.com. If you’re looking for fee-only planners who charge a retainer or a percentage of assets, you’ll find those at the National Assn. of Personal Financial Advisors, http://www.napfa.org. NAPFA has tools for consumers at http://www.napfa.org/consumer/Resources.asp and the Financial Planning Assn. has tips on choosing a financial planner at http://www.fpanet.org/FindaPlanner/ChoosingaPlanner/.
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A few months ago I gave a verbal spanking to a woman who equated college loans with handouts. She wondered why people didn’t just delay college for a year and earn enough money to pay for their entire education, as she did back in the day.
I pointed out that there weren’t many jobs available to newly-minted high school graduates that paid $60,000, which is about the minimum you’d need to pay for a four-year degree today.
Apparently my reader isn’t the only one having trouble keeping up with the times. A recent New York Times story quoted Virginia Foxx, a Congresswoman from North Carolina who heads a House subcommittee on higher education and work force training, saying she was bewildered why people went into debt instead of working their way through school the way she did.
Here’s what Times writer Ron Lieber pointed out:
But students nowadays who try to work their way through college without parental support or loans face a financial challenge of a different order than the one that Ms. Foxx, 69, confronted as a University of North Carolina undergraduate more than 40 years ago. Today, a bachelor’s degree from Appalachian State, the largest university in her district, can easily cost $80,000 for a state resident, including tuition, room, board and other costs. Back in her day, the total was about $550 a year. Even with inflation, that would translate to just over $4,000 for each year it takes to earn a degree.
A plucky, lucky few manage to get through college with no loans or parental support. But many of those who try wind up dropping out, unable to balance the work hours required with the demands of school.
If you’re one of those who may be stuck trying to pay your own way, Zac Bissonnette’s book “Debt Free U” can provide helpful guidance. If you’re a parent or a policymaker, however, you should check your views about the viability of kids’ working their way through college with today’s realities.
Dear Liz: I watched 60 Minutes last night regarding the 3 credit bureaus and was amazed at what I learned. I was hoping to spend time trying to repair our credit score, but according to the report last evening, it sounds like a total waste of time as the three credit bureaus basically are not accountable to anyone and they very rarely take action in your defense. Was this a one-sided view?
Answer: The credit bureaus would tell you yes, but the answer is way more complicated than that.
The show reported that 40 million Americans have errors on their credit reports. That’s about one in five U.S. adults covered by the credit bureau industry. About half (one in 10) have errors serious enough to hurt their credit scores.
(Update: A Federal Trade Commission report released today said one in four had at least one “potentially material error” on at least one of their three credit reports and that one in 20 consumers had significant errors on their credit reports that could cause them to pay more loans.)
That’s a pretty high error rate, but an even bigger problem is that the process to fix mistakes is almost completely automated and structured to favor the data provider (the banks, lenders and others supplying information) over the consumer. Here’s how the Ohio attorney general described it:
“The federal law says that if you believe that there is a mistake, you can go to them and they have an obligation to do a reasonable investigation. They’re not doing a reasonable investigation. They’re not doing an investigation at all.”
The show interviewed former bureau employees in Chile who confirmed what others have reported: that their jobs were to assign two-digit codes to the complaints. That’s it. Then the complaints are forwarded to the lenders and other data providers for response.
People can and do get errors fixed if the data provider acknowledges the error or simply fails to respond to the credit bureaus’ queries. If the data provider continues to insist it’s right, however, it’s pretty tough (if not impossible) to get the bureaus to step in.
That’s how people get caught in seemingly endless cycles of disputing mistakes only to have them reappear, or never disappear, from their reports.
The credit bureaus, which apparently turned down opportunities to respond on camera, now point to a study by the Policy and Economic Research Council that found 95% of consumers were satisfied with the outcome of their disputes. The study was paid for by a grant from the Consumer Data Industry Association, which represents the credit bureaus.
It’s not exactly pointless try to fix errors. The FTC report said four out of five people who dispute errors get results. You should still try, and you may well find it’s possible, but you should plan to be tenacious if your initial efforts are rebuffed. (You should get your free credit reports directly from www.annualcreditreport.com. Don’t go to other, lookalike sites, some of which are owned by the credit bureaus but that aren’t the federally-mandated site that gets you your free reports.)
You should also support efforts by regulators and consumer advocates to require the credit bureaus to put a more responsive system in place.
Dear Liz: My boyfriend is deployed. I have his power of attorney, and during his deployment I have paid off all of his credit card debt. The accounts now need to be closed because they are ones that were acquired with his former wife. I know you say that it will hurt his credit to close accounts, but I’d rather close them because they’re tied to his ex.
Answer: If the former wife is a joint account holder on the cards, they should have been closed and the balances transferred to other credit cards in his name only before the divorce was final. The credit score dings from closing accounts and opening new ones pale compared with the potential damage a vengeful, or neglectful, former spouse could do with those cards. She could have run up big balances or tried to wrest control of the accounts and then failed to pay them, ruining his credit scores.
If your boyfriend has several other open credit cards, you could simply close these. If he doesn’t, you might talk to the credit card companies about closing these cards and simultaneously opening new ones in his name only. This might be tricky to do while he’s deployed, however, even with a power of attorney. Another option is to simply open a new card for him online before closing the others.
Dear Liz: My homeowners insurance just went up 25%. I’ve made no claims and made no changes. I want to get quotes from other providers, but I’m afraid I’m going to get some type of “teaser” rate. I tried changing companies a few years ago and the rate was good, but when it came time for the renewal, they doubled the price! Again, I made no changes nor had any claims. So, now I want to change, but I’m afraid of falling into the same trap. Any suggestions?
Answer: You can’t assume you’re locking in a low rate for life when you buy homeowners insurance. Companies that want to expand their market share may lower their prices awhile to lure customers away from their competitors, then raise premiums when their claims costs go up or they simply want to cut their risk.
The company’s reputation for customer service should be at least as important a factor as price in your decision-making. Check the complaint surveys that many state insurance departments maintain on their websites to see which companies have the best (and worst) reputations.
One way to reduce your homeowner premium is to increase your deductible. Raising the amount you pay out of pocket from $250 to $1,000 can lower your premiums 25%. You should be paying small damages out of pocket anyway, since filing small claims can cause your rates to rise.
You also should shop around every few years, even if a company doesn’t dramatically raise your rates, to make sure you’re getting a decent deal. But again, chasing the lowest-cost insurance could be only a short-term win — an insurer that charges slightly more could be the more stable, and consumer-friendly, choice.
Dear Liz: It has been almost one year since my domestic partner passed away, and our home of 43 years is fully paid for. I am ready to sell. The house is structurally in good shape but needs upgrades and a backyard redo. I have heard that painting both inside and out is a plus, but I’m concerned that any other improvements, such as flooring, would be my taste and not the buyer’s. Is it a wise idea to indicate that any major improvements be deducted from escrow funds?
Answer: You’re smart not to take on any major remodeling just before you sell, since few home improvements come anywhere close to paying for themselves. The fix-ups that typically do return more than they cost include painting, deep cleaning, trimming and freshening your landscaping, and de-cluttering. Consider storing half or more of your possessions. You’ll have to pack them up anyway to move, and getting them out of the way now will make your house look bigger.
Talk to your real estate agent about the advisability of replacing your floors. If yours are quite worn, the investment may pay for itself. Otherwise, a cleaning may be enough. You don’t have to offer to pay for the next owner’s improvements. Just price the home appropriately to reflect the fact that it needs updates.