Get smart with your money
Dear Liz: I am 53 and Social Security is giving me a hold time for my widow support. What should I do?
Answer: The only thing you probably can do is wait.
Survivor benefits are normally only available once you turn 60. You can start as early as age 50 if you are disabled or at any age if you are caring for the deceased worker’s minor children.
Dear Liz: You recently discussed the importance of adding spouses to financial accounts before one of them dies to make it easier for the surviving spouse. I wholeheartedly agree. I would add that this needs to be done sooner rather than later. If one of the spouses is diagnosed with dementia, the bank will likely not make changes to accounts. People have to be able to understand what they are signing.
Answer: That’s an excellent point. Another important task is to create powers of attorney for healthcare and finances. These allow someone else to make decisions for you if you are incapacitated. Someone in the early stages of dementia could sign such a document if they understand what it is, but otherwise the family might have to go to court to get a conservatorship, which can be an expensive process.
Dear Liz: You’re not a fan of prepaying student loans in most cases because the extra money sent to lenders is “gone for good” — it’s not like credit cards, where paying down a balance can free up some of the credit line to be used again. But what’s wrong with paying down a primary mortgage? That can create more equity that people could borrow against.
Answer: Perhaps. To tap that equity without selling the home, though, you need a lender’s cooperation, which isn’t always forthcoming when you’re experiencing a financial emergency. If you lose your job, for example, a lender may be reluctant to offer you a cash-out refinance or allow you to establish or expand a home equity line of credit.
Contrast that with paying down a credit card, which typically opens up available credit as soon as the transaction is processed. That’s not guaranteed, of course, because lenders can lower credit limits or even close accounts if your credit scores drop or if bad economic times make lenders more cautious. But for the most part, credit cards are a much more flexible and accessible source of credit than mortgages.
That’s not to say you should never make extra payments on a mortgage. If you’re on track with saving for retirement, you’ve paid off higher rate debt and you have a sufficient emergency fund, then prepaying a mortgage can make sense.
Dear Liz: Can you offer advice on finding the right accountant for someone doing taxes for the first time after divorce? My husband always handled this. Also, same question for a financial planner for a newly divorced person? It’s all so overwhelming.
Answer: It is, and you’re smart to reach out for help.
You might consider hiring a personal financial specialist. This is a designation earned by CPAs who handle not just taxes but financial planning as well.
A CPA-PFS is a fiduciary, which means they’re committed to putting your best interests first. Also, many are working virtually now because of the pandemic, so you should be able to find several candidates to interview even if you live in a more remote area. You can start your search at the website of the American Institute of Certified Public Accountants.
Dear Liz: You recently wrote that a wife could apply for Social Security at 62 and then switch later to her spousal benefit. I do not believe this is accurate. Once the wife starts drawing, she is committed.
Answer: Typically, that’s true. When someone applies for Social Security, their retirement benefit is compared with their potential spousal benefit and they would get the larger of the two amounts. If the spousal benefit is larger, they would technically get their own benefit plus a supplemental amount.
Because they had already started getting their own benefit either way, they couldn’t switch later — there’s nothing else to switch to. (In the past, someone could start a spousal benefit and leave their own benefit to grow, but that’s no longer an option.)
For a spousal benefit to be available, however, the husband must have already started his retirement benefit. In this case, he would not have done so. That means the only benefit the wife could qualify for when she applies is her own. Once he applies at age 70, a spousal benefit would be triggered. If that amount is larger than what she was getting, she would get a supplement on top of her retirement benefit, as described above.
Dear Liz: You’ve been writing about things people should do after a spouse dies. May I recommend that before your spouse dies, be sure every account is in both your names.
It took six months to cancel my landline phone after my husband died and I moved out of our home. Apparently when we moved in 30 years ago, the service was in just my husband’s name. (I finally reached someone who said, “I don’t know why you’re having so much trouble with this!” and fixed it.)
Also, it took 1½ years, plus hundreds in lawyer fees, to get access to the safe deposit box that he’d had with his parents. This is despite a trust and will leaving everything to me. I was told that “banks don’t care about wills.”
Answer: That’s an excellent suggestion. It’s a lot easier to add a spouse to an account while you’re both alive. It’s a good idea to review all your accounts periodically to make sure the right people are on them, either as joint account holders or as beneficiaries.
Not every account can or should be in both spouses’ names, of course.
Modern credit card accounts, for example, typically aren’t jointly held but instead have a primary cardholder and an authorized user. Also, retirement accounts are in one person’s name alone, although the spouse typically is the beneficiary.
Banks aren’t the only entities that can ignore wills. Typically a payable-on-death account will go to the beneficiary, regardless of what a will or trust says. And speaking of estates, sometimes accounts will be held separately for estate planning purposes.
If you have an estate planning attorney, check with that person before changing how accounts are held.
Dear Liz: I confess that I am one of those people who panicked and sold a portion of my portfolio in March, against the advice of many who said, “Hold, don’t fold.” Thus, when the market bounced back, I was left standing out in the cold.
I am filled with a tremendous sense of stupidity. I have no idea what I should do with the cash, which remains in a money market account.
Do I wait for a 5% or 10% market correction to reenter the market? Do I leave the money in a money market account, where it earns 0.01% interest, and wait for interest rates to rise?
Answer: You tried to time the market once, with painful results. Why would you want to make the same mistake again?
That’s what you’re doing when you wait for a correction to enter the market. Many people think they’ll have the discipline to do this, but the reality can be quite different.
Once the market drops 5% to 10%, what’s to keep it from dropping further? Would you be able to jump in as others are bailing out? And what if the correction is manageably small but happens after the market has climbed considerably? You would still have missed out on a substantial amount of growth.
You may have panicked because you were taking too much risk with your portfolio. Perhaps you were trying for maximum returns or the proportion devoted to stocks had increased during the previous bull market.
The solution is to craft an asset allocation that reflects your goals and risk tolerance. Then you regularly rebalance back to that asset allocation.
Having such a plan can help you resist the urge to cash out in a downturn. So too can having an advisor who can help you craft a plan and talk you down when anxiety has you climbing the walls.
Dear Liz: I was 21 and my husband was 69 when we got married. He died in 1992 after 13 years of marriage. Our young son and I received survivor benefits for years. I got remarried in 2000 and divorced in 2008. When I reach my full retirement age of 66 years and 8 months, could I still claim survivor benefits from my first husband?
Answer: Yes, although you may want to start them sooner.
If your second marriage had lasted, you wouldn’t have been eligible for survivor benefits based on your first husband’s earnings record. Widows and widowers who remarry before age 60 aren’t eligible for survivor benefits.
Since that marriage ended, though, you were eligible to begin benefits at age 60. You are also free to remarry at 60 or later without losing those benefits.
Starting before your full retirement age for survivor benefits, however, means your check would be reduced and also subject to the earnings test, which reduces your benefit by $1 for every $2 you earn over a certain amount ($18,960 in 2021).
As mentioned in a previous column, your full retirement age for survivor benefits is different from your full retirement age for retirement benefits. Since you were born in 1958, your full retirement age for survivor benefits is four months earlier, or 66 years and 4 months.
In most cases, starting a Social Security benefit early locks you into a smaller check permanently. With survivor benefits, though, you also have the option of switching to your own retirement benefit later, if it’s larger. The ability to switch benefits is severely limited with Social Security, but survivor benefits remain the exception.
Being eligible for survivor benefits complicates claiming decisions, so consider using a more sophisticated claiming calculator such as Maximize My Social Security or Social Security Solutions to determine how best to file.
Dear Liz: I’m a teacher on an income-based repayment plan for my federal student loans. I don’t qualify for any loan forgiveness programs for teachers because I teach in an affluent area. Right now, interest and payments on federal education loans have been suspended because of the pandemic.
I’m trying to decide what to do when payments have to restart. Should I pay down a chunk of the loans from the money that accumulated in my savings from not having to make loan payments since April? Or pick back up where I left off with making near-double payments to get down the principal (slowly) and pay off loans in another five to six years? Or only make the minimum income-based payments while waiting to see if the new administration offers more comprehensive loan forgiveness for teachers? Thank you for any insights.
Answer: Although you may not qualify for loan forgiveness through programs meant to help underserved communities, you can still qualify for the federal public service loan forgiveness program. This program erases debt for schoolteachers and other public servants after they’ve made 120 qualifying payments toward their federal student loans.
You can learn more about this program at the U.S. Department of Education site. Follow the rules carefully because many people who thought they were on track to get forgiveness have discovered otherwise.
If you’re eligible, consider making only the minimum payments on your loans so that the maximum amount is forgiven. Even if you’re not eligible for forgiveness, though, you don’t necessarily want to rush to pay off this relatively low-rate, tax-deductible debt.
You should be on track with your retirement savings, have paid off all other, higher-rate debt and have a substantial emergency fund before you make extra payments on education debt (or a mortgage, for that matter). “Substantial” means having three to six months’ worth of expenses saved. If your job is anything less than rock solid, you may want to set aside even more.
Keep in mind that the money you send to your lenders is gone for good; you can’t get it back should you need it later.
Dear Liz: I think you left one thing off your list of things to do when your spouse dies. If you’re a homeowner, establish the value of the house as of the date of death. The best way would be to have a local Realtor run some comparables for your neighborhood. But even a printout from Zillow would suffice. As you know, a surviving spouse receives a step-up in basis as of the date of death so it’s important to know what the house was worth at that time for when the house is sold down the road. I see many clients at our CPA firm who have to try to figure out many years later what their house was worth when their spouse died.
Answer: Thank you for the excellent suggestion.
In fact, many things were left off last week’s list of things to do when a spouse dies, which is why I directed people to their attorney or accountant for a detailed checklist. I also recommended people consult a fee-only financial planner, since there probably will be decisions that require expert help.
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