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Dear Liz: I wish to add a little more information for the retired individual who had trouble getting approved for a home equity loan because he had no regular income (although he had plenty of assets). I’d suggest consulting a mortgage broker, not a bank. An independent broker is not captive to one set of policies. My broker suggested that I set up automatic withdrawals from my IRA to show that I had income in addition to Social Security. Once this was done and I met all the other credit requirements, I closed on a refinance in less than 30 days at a very good interest rate. Then, I discontinued my automatic withdrawals and went back to taking my funds as needed. I learned to use a qualified mortgage broker many years ago after a divorce and not having a job. I could not get a mortgage on my own, but my mortgage broker did and at very good terms. Each time I’ve used a broker, the process went smoothly and was stress free.

Answer: Many people don’t realize that lender policies differ quite a bit. In this case, mortgage buyers Fannie Mae and Freddie Mac have clarified that mortgage lenders can calculate a retiree’s income based on his or her assets, but not all lenders are willing to do the extra work these loans require.

People who are W-2 employees with solid income histories and great credit scores probably don’t need help finding a loan, because plenty of lenders will want to compete for their business. When your situation is outside the norm, however, a mortgage broker may be able to track down a lender when others balk. The National Assn. of Mortgage Brokers at http://www.namb.org offers referrals.

Categories : Q&A, Real Estate, Retirement
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Social security switch

Apr 13, 2014 | | Comments (0)

Dear Liz: When I turned 66, I applied for and then suspended my Social Security benefits so that my husband could take spousal benefits based on my work record. Shortly after he turned 69, he decided to start taking his full benefit from his own work record, so we canceled the spousal benefits.

After he applied to take his full benefit, I applied for spousal benefits from his account. Since I am only 67, the plan was for me to collect spousal benefits until I reached 70 and then collect off my account. Since I am the primary breadwinner, that allows the maximum lifetime funding should something happen to either of us. I sat with an employee at the local Social Security office. Together we processed all the appropriate documentation and she submitted it.

I just received a notice of denial that says, “We cannot approve your request because we received it after the 12-month limit.” I took the letter to the Social Security office for an explanation, and the woman had never heard of the rule it cited. The rule, it turns out, was designed to prevent people from repaying all the benefits they’ve received over the years so that they can restart their benefit at age 70. The rule says that they can pay back only benefits received in the prior 12 months to restart their benefits. But that is not what I did.

Answer: No, it’s not, but what you tried to do still won’t work.

Here’s the simplest way to explain it: There’s only one spousal benefit for each couple. Once you filed for your own benefit, allowing your husband to claim spousal benefits, you aren’t allowed to switch even though you hadn’t started receiving checks yet.

If it’s any consolation, you chose the right spouse to receive spousal benefits, since you’re the higher earner. It would have been best if your husband had waited to switch at age 70, when his benefit reached its maximum, but his checks are still substantially larger than they would have been if he had started earlier.

Another point that should be made because it’s often misunderstood, is that your husband was allowed to switch from spousal benefits to his own benefit because he started Social Security at or after his own full retirement age. If he’d started benefits before his full retirement age, which is currently 66, he would have been stuck with a discounted spousal benefit and couldn’t have switched to his own benefit later.

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Dear Liz: My wife will be 62 in a few months. I am 77 and we both work full time. Can she collect her spousal Social Security benefit while still working and take her full benefit at 70?

Answer: That option is available to her only if she waits until her full retirement age (currently 66) to apply for spousal benefits. If she applies for spousal benefits before age 66, she won’t be able to switch to her own benefit later. Also, applying early means that her benefit would be reduced by $1 for every $2 she earns above an annual limit, which is $15,480 in 2014.

Categories : Q&A, Retirement
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Dear Liz: I am 55 and my wife is 65. She only worked a few part-time jobs as she spent most of her working years raising our nine beautiful children. My question is, since she does not have enough credits to collect Social Security on her own work record, can she claim spousal benefits on my work history? If so, at what age and how will it affect my benefits?

Answer: Your wife can receive spousal benefits based on your work record, but those checks can’t start until you’re old enough to qualify for benefits at age 62 (when she’s 72).

If you apply at 62, however, you’re typically locked into a check that would be about 30% smaller than what you’d get if you waited until your “full retirement age” to start. Full retirement age used to be 65, but it’s now 66 and will gradually increase to 67 for people born in 1960 or later.

At your full retirement age, you have the option to “file and suspend,” in which you file for retirement benefits and then immediately suspend your application. Your wife can start receiving spousal benefits, but because you aren’t actually receiving checks, your benefit can continue to grow until it maxes out at age 70.

For many couples, it makes sense for the higher earner to delay starting benefits as long as possible. Given your big age gap, however, you may be better off with a hybrid approach: starting your own benefits (and your wife’s spousal benefit) at age 62 and then suspending your benefit when you reach full retirement age, said economist Laurence Kotlikoff, a Boston University professor who created the site MaximizeMySocialSecurity.com to help people analyze their claiming options. Your benefit would grow 8% a year from the time you suspend to the time you restart at age 70. Your wife would continue to receive her spousal benefit in the interim.

Because your wife will be older than her own full retirement age of 66 when she starts receiving checks, she will be entitled to half of the benefit you’re scheduled to get at your full retirement age. What she gets doesn’t diminish what you get. Spouses who haven’t reached their full retirement age when they apply for spousal benefits have to settle for a discounted check.

Clearly, claiming decisions can be complicated, especially for married people and even more so when there’s a big gap in their ages. AARP has a free calculator that can help most people understand their options. T. Rowe Price also has an easy-to-use calculator, but it doesn’t work for married couples with more than a six-year age gap.

For a more detailed and customizable calculator, you may want to pay $40 to use the software at sites such as MaximizeMySocialSecurity.com or SocialSecurityChoices.com, co-developed by economist (and Social Security recipient) Russell F. Settle.

Categories : Q&A, Retirement
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Strategic bill paying

Mar 03, 2014 | | Comments (1)

Dear Liz: We received $100,000 from the sale of some undeveloped land. We are trying to figure out the best way to pay off our bills. Our primary residence has a balance of $173,000 at 4.25% and is a 30-year loan. We also own a home we rent out in which we cover the mortgage with the rent income. The balance on it is $131,500 at 4.5% for a 20-year loan. This home is often a burden when tenants change on an average of every 1 to 2 years, and we don’t have the income to cover the mortgage without the rental income. My husband took a $20,000 loan out of his retirement fund for closing costs for our primary residence, a debt that is being paid back through paycheck deductions. We also have an auto loan with a balance of $7,800 at 2.74% and credit cards with varying interest rates with total owing of $22,000. What should we do?

Answer: Your first task should be examining your spending habits to see why you have so much credit card debt. If you don’t fix the problem that’s causing you to live beyond your means, you’re likely to find yourself in a deeper hole eventually, regardless of how well you deploy this windfall.

You also should see if you’re on track with retirement savings. Boosting your retirement plan contributions at work and to individual retirement accounts can help you convert this money into long-term economic security.

Next, pay off the credit card debt and consider retiring the retirement plan loan. If your husband lost his job and couldn’t repay the debt, the outstanding balance would become a withdrawal that would incur income taxes and penalties.

Any money that’s left over can go into an emergency fund to protect against job loss and to keep you from going into debt between tenants. Your low-rate car loans and tax-advantaged mortgage debt aren’t top priorities for repayment, but you can start paying them down over time once your other bases are covered.

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Dear Liz: I retired last year. I am 67, have more than $1 million in my retirement accounts, $80,000 in individual stocks, $50,000 in cash and more than $200,000 in equity in my home. I don’t need to tap my Social Security benefit yet and can afford to wait until I am 70 to get the maximum monthly amount. I recently purchased a new car with a 0% loan for five years. That and my mortgage are the extent of my debt. One thing I would like to do is some home improvement. My fee-only financial planner suggested getting a home equity line of credit to cover the repairs and upgrades. This makes sense to me in that it spreads out the burden over time and is tax-deductible. My credit scores are 736, 801 and 839. But I’m finding it difficult to get a commitment from either my credit union or my bank because they don’t see an income. I have been with both of these institutions for more than 30 years and the credit union holds the first mortgage. How do we get the lenders to factor retirement assets into the qualification calculations?

Answer: Last year, mortgage giants Fannie Mae and Freddie Mac issued guidelines on retirement fund annuitization that would allow mortgage lenders to calculate a borrower’s income based on his or her retirement assets.

Lenders, however, have to be willing to go to a little extra effort to learn the rules and apply them properly.

If yours aren’t willing to do so, then it might be time to take your business elsewhere. A mortgage broker (referrals from http://www.namb.org) may be able to connect you with a lender who’s more up to date.

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Dear Liz: I read your recent article in which you advised waiting before starting Social Security benefits. Is this good advice for everyone? You probably know that there is a break-even age around 85, so that if you die before 85, starting benefits early is better, but if you die after 85, starting late is better. “Better” means you receive more money. So, right off the bat the advice to delay is wrong for half the people in their 60s, since about half will die before the crossover, and if they had delayed, they lost money.

Answer: The problem with do-it-yourself financial planning is that people often focus their attention too narrowly and ignore the bigger picture. That’s what leads them to do things like pay down relatively low-rate student loan debt while failing to save for retirement. They may focus only on the expected returns of each option, while ignoring the tax implications, company retirement matches and the extraordinary value of future compounding of returns.

Obsessing about the break-even point — the date when the income from larger, delayed retirement benefits outweighs what you’d get from starting early — is often a mistake, financial planners will tell you. There are a number of other considerations, including the value of Social Security benefits as longevity insurance. If you live longer than you expect, a bigger Social Security check can be enormously helpful later in life when your other assets may be spent. Also, if you have a spouse who may be dependent on your benefit as a survivor, delaying retirement benefits to increase your checks will reduce the blow when she has to live on just one check (yours) instead of two (yours and her spousal benefit).

In his book “Social Security for Dummies,” author Jonathan Peterson offers a guide to figuring out your break-even point based just on the dollars you can expect to receive (rather than on assumed inflation or investment returns). In general, the break-even point is about age 78. That means those who live longer would be better off waiting until full retirement age, currently 66, than if they started early at age 62.

Currently, U.S. men at age 65 can expect to live to nearly 83, and the life expectancy for U.S. women at age 65 is over 85.

You can change that break-even by making assumptions about inflation and your future prowess as an investor, but remember that the increase in benefits you get each year by delaying retirement between age 62 and 66 is about 7%. It’s 8% for delaying between age 66 and age 70, when your benefit maxes out. Those are guaranteed returns, and there’s no “safe return” anywhere close to that in today’s environment.

Don’t forget that those benefits will be further compounded by cost-of-living increases. One researcher published in the Journal of Financial Planning found that an investor would have to achieve a rate of return that exceeds inflation by 5% to justify taking benefits at 62 rather than at full retirement age.

“At higher inflation rates and/or higher marginal tax rates, the rate of return may need to be even higher, perhaps in excess of 7% or 8% above inflation to justify taking benefits at age 62,” wrote Doug Lemons, a certified financial planner who retired from the Social Security Administration after 36 years.

You can read Lemons’ paper, as well as other research that planners have done on maximizing Social Security benefits, at http://www.fpanet.org/journal.

Categories : Q&A, Retirement
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Dear Liz: Recently I’ve paid off almost $20,000 in credit card debt and am determined not to go down that path again. Because I haven’t used these cards in a while, though, I’m starting to get notifications from the credit card companies that they’re closing my accounts because of inactivity. I know having long-standing accounts on your credit report is a good thing, but I don’t want to be tempted to use these cards just to keep the account open. Is it a bad thing if almost all of my credit card accounts get closed?

Answer: Your good histories with these cards should remain on your credit reports for years. But if you stop using credit entirely, eventually your credit reports won’t generate credit scores. That could cause you problems if you later want to borrow money (say, to buy a home) and could even affect your insurance premiums, since insurers use credit information as well.

It’s not too hard to keep accounts active without slipping into debt again. Simply set up a bill to be charged automatically to each account, then set up automatic payments with the credit card issuer so the full balance is taken out of your checking account each month.

 

Categories : Credit Cards, Q&A, Retirement
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Why company 401(k) matches matter

Feb 04, 2014 | | Comments Comments Off

Dear Liz: As a CPA financial advisor to individuals and small businesses, I devour your column. It’s almost always spot on. But the first sentence of your advice to the person whose 401(k) doesn’t offer a match — “start looking for a better job” — was not, and you missed an opportunity to educate your readers in how to compare job compensation.

I encourage my small-business and wage-earning clients to adopt a “total compensation” view to evaluate labor costs and to talk wages with their employees or employers. Employer A offering $100,000 might be better, worse or equal to Employer B offering $70,000 plus retirement plan match and, more importantly, employer-subsidized family health insurance. Besides the intangible factor of job satisfaction, one just doesn’t know which employer’s total financial compensation is “better” without crunching the numbers before and after tax. The two companies might be different only in philosophy of how compensation is paid, not better or worse.

Answer: Some jobs come with pensions or pay so good that the lack of a company 401(k) match is all but irrelevant. It’s safe to say those jobs are not in the majority. The median full-time wage at the end of last year was under $44,000, which means half of all workers earned less. Given stagnant incomes and rising costs, many workers have a tough time saving, so the extra help provided by a company match can make a world of difference in their ability to achieve a comfortable retirement.

Nine out of 10 employers that have a 401(k) offer a match, according to PlanSponsor.com, so plans that don’t are definitely outliers. The most common match is now 100%, or one dollar for each dollar contributed, up to 6% of the worker’s salary, according to the most recent Aon Hewitt study. Nineteen percent of the employers surveyed offered this match, up from 10% in 2011. The most common match used to be 50 cents for each dollar contributed up to 6% of salary.

Clearly, more employers are getting the message that good company matches are an excellent way to signal that they care about their employees’ futures.

Categories : Q&A, Retirement
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Who should save 10%

Jan 20, 2014 | | Comments Comments Off

Dear Liz: I often hear financial planners say you should save 10% of your income, but they don’t go into exactly what that means. Is that 10% separate from retirement or including retirement? Does that include saving for your emergency fund? Is this just archaic advice now? I’m 46 with only $40,000 saved for retirement so I’m in the panic mode that I will never be able to save enough for retirement.

Answer: Saving 10% for retirement is often considered a minimum for those who start saving in their 20s. The older you are when you begin, the more you’d need to save to match the nest egg you would have accumulated with an earlier start. That means saving 15% to 20% if you start in your 30s, 25% to 30% if you start in your 40s, and 40% of your income, or more, if you don’t start until your 50s.

Clearly, the wind is at your back when you start saving young. It starts blowing pretty hard in your face if you wait.

If you can’t carve out a huge chunk of your income for retirement, though, you shouldn’t despair. Save what you can, as anything you put aside will help supplement your Social Security checks. You may find that your expenses drop substantially in retirement, particularly if you have a mortgage paid off by then, so you won’t need to replace as much income as you think.

Another technique for coping with a late start is to work longer. That gives you longer to save, but it also allows your savings — and your Social Security benefits — more time to grow. You will be able to claim early Social Security benefits at 62, but you’ll be locking in a smaller check for life. It’s usually better to wait until your full retirement age, which will be 67, to begin benefits, since each year you wait adds nearly 7% to your check. If you wait three more years, until age 70, your check would grow by 8% each year. That’s a guaranteed return unavailable anywhere else.

Categories : Q&A, Retirement
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