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Dear Liz: I would like to start a Roth account for each of my kids. (They’re in their 30s.) Is it better to start an account in my name with them as beneficiaries or to start the accounts in their names?

Answer: Roth IRAs can be a wonderful way to save, but they’re not custodial accounts. You won’t be able to control the accounts or prevent your adult children from spending any money you deposit.

If you still want to help, though, let your kids know you’ll contribute to any Roths they set up. They can open a Roth if they have earned income at least equal to the annual contribution and their incomes are below the Roth limits. The ability to contribute to a Roth phases out between $178,000 to $188,000 for married couples in 2013 and from $112,000 to $127,000 for singles.

Ideally, you’ll contribute to your own Roth first. The limit on contributions is $5,500 this year.

Categories : Kids & Money, Q&A, Retirement
Comments (9)

Dear Liz: My 401(k) plan has grown exceptionally well this year. I think we all know that it can’t last. I just recently heard about self-directed IRAs. I was intrigued at the possibility of opening one by rolling over a portion of my 401(k) money directly. The problem is, my company’s 401(k) provider will not allow the direct rollover of funds. Is there an alternative means of withdrawing 401(k) funds without penalty and still get them into a self-directed IRA?

Answer: You can quit your job. Otherwise, withdrawals while you’re still employed with your company will trigger taxes and probably penalties.

Your premise for wanting to open a self-directed IRA is a bit misguided, in any case. Your 401(k) balance may occasionally drop because of fluctuations in your stock and bond markets, but over the long term you should see growth.

You may have been sold on the idea that self-directed IRAs would somehow be less risky. Some companies promote self-directed IRAs as a way to invest in real estate, precious metals or other investments not commonly available in 401(k) plans. The fees these companies charge as custodians for such accounts are usually much higher than what they could charge as traditional IRA custodians, so they have a pretty powerful incentive for talking you into transferring your money to them.

The problem is that you could wind up less diversified, and therefore in a riskier position, if you dump a lot of your retirement money into any alternative investment. It’s one thing for a wealthy investor to have a self-directed IRA that invests in mortgages or gold, assuming that he or she has plenty of money in more traditional investments. It’s quite another if all you have is your 401(k) and you’re putting much more than 10% into a single investment.

Also, there’s a lot less regulation and scrutiny with self-directed IRAs than with 401(k)s, which increases the possibility of fraud. (Southern California investors may remember First Pension Corp. of Irvine, a self-directed IRA administrator that turned out to be a Ponzi scheme.) So you’d need to pick your custodian, and your investments, carefully. You also would need to understand the IRS rules for such accounts, because certain investments — such as buying real estate or other property for your own use — aren’t allowed.

If you’re determined to diversify your investments in ways your current 401(k) doesn’t allow, you can open a regular IRA at any brokerage and select from a wider variety of investment options. Or you can look for a self-directed IRA option with low minimum investment requirements to start.

Categories : Q&A, Retirement
Comments (5)

Dear Liz: I read with interest your recent column about the filial obligation law possibly coming into effect in California. I hope this is true. I have three grown daughters who make terrific money and who will not offer a pittance to me. I live on Social Security, period. I could really use a few hundred dollars a month to supplement. They had a glorious childhood and this is really sad and inexplicable. I want to contact someone involved with this law, if possible. I am puzzled and hurt. More than money, this situation has a strange malignity to it.

Answer: Currently, California’s filial responsibility law — which makes adult children responsible for supporting their indigent parents — isn’t being enforced. When similar laws in other states have been invoked, it’s typically because the parent is receiving governmental aid or has racked up a bill with a nursing home that wants to get paid.

One of the reasons the laws aren’t enforced is because most people feel an obligation toward their parents. The fact that your daughters apparently don’t indicates that there’s either something missing in their characters or in your characterization of the situation.

Here’s another perspective:

Dear Liz: I am 67 and live in a retirement home. I strongly feel that children should not have to take care of their parents. We all have time to save for our own futures. I left a marriage with very little other than a small child. We did lots of free events together because there was not money to spend. I did immediately start saving for retirement and her college. It all worked out, but had it not, I would not expect her to support me in my old age. I chose to get pregnant and have her…. She did not chose to have me!

Answer: Thanks for sharing your experience. My guess is that if your financial life had not worked out — if you hadn’t been able to save enough or if your savings had been wiped out — your daughter happily would have stepped up to help if she could. People who do their best to take care of themselves often find the support that isn’t offered to those who don’t.

Categories : Elder Care, Q&A, Retirement
Comments (14)

Dear Liz: In your answer about filial responsibility, your statement that the letter writer’s financial situation is the result of her own choices and that she needs to stop blaming her parents is completely misjudged and inappropriate. Clearly, the writer is not blaming the parents and seems amazingly strong and clear thinking for one with her early background.

Answer: Here’s what the writer wrote about her situation:

“I am an only child in my late 30s and received no financial help from [my mother] from the age of 18. In addition, my father died when I was very young, leaving us fairly destitute with no life insurance. I feel that both of these legacies have contributed to my less-than-optimal financial situation.”

The writer goes on to say that she’s trying to catch up financially but she feels it would be futile because she may have to support her mother in the future.

The writer started her adult life at a financial disadvantage compared with people whose parents helped them pay for college. She may now regret the choices she made — perhaps she took on too much student loan debt or spent more than she earned to make up for early deprivation. Those were her choices, however, and at some point she needs to take responsibility for them. Twenty years later, it’s time to let go of the idea that her financial situation is her parents’ fault.

Comments (6)

Dear Liz: My mother is 65 and refuses to plan for retirement. She has worked for the same organization for almost 20 years and, despite my begging her over the last decade, has not contributed a dime to her 403(b).

I am an only child in my late 30s and received no financial help from her from the age of 18. In addition, my father died when I was very young, leaving us fairly destitute with no life insurance. I feel that both of these legacies have contributed to my less-than-optimal financial situation.

I have had to work very hard on my own for everything, with very little support from anyone. I am now trying to catch up financially but am afraid that all of my efforts will be futile as I will be required to take care of my mother.

She says she expects to be able to live on Social Security and the $70,000 her company contributed to her 403(b) over the years. I’ve been advised by friends that I have no legal obligations to provide for her. I certainly have social ones though. What are her options once she becomes too old to work and doesn’t have enough money to cover her expenses?

Answer: Your friends may be wrong about your legal obligations, because 29 states — including California — have what are called “filial responsibility” laws. These laws create a legal duty for adult children to support indigent parents.

Most states don’t enforce these laws currently, but that doesn’t mean they won’t in the future, said elder-law attorney Michael Amoruso, a past president of the New York chapter of the National Academy of Elder Law Attorneys. States struggling with money issues may be tempted to step up enforcement, he said.

According to Katherine Pearson of Penn State‘s Dickinson School of Law, who has studied such statutes, the states with filial-responsibility laws are Alaska, Arkansas, California, Connecticut, Delaware, Georgia, Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Montana, Nevada, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia and West Virginia.

Your mother isn’t indigent yet, but she may be soon if she thinks Social Security and a five-figure retirement account will sustain her.

The good news is that you may still have time to influence her decision-making, because she hasn’t quit work yet. You should tell her, gently, that you can’t afford to support her if she runs out of money, and suggest that together you consult a fee-only financial planner about her future.

The planner can review your mother’s financial situation and offer suggestions — which are likely to include delaying retirement and considering part-time work in retirement. The planner also can explain that her $70,000 nest egg will provide only about $200 a month if she withdraws 4% initially. Four percent is considered a sustainable withdrawal rate by many financial planners.

You can tell her that consulting a planner is a good idea for anyone considering retirement — since that’s quite true. If you like the planner, you can book a session for yourself and learn some concrete strategies for getting your own finances on track. This may require an attitude adjustment.

You’re still blaming your parents for your financial situation, but your father’s been dead for decades and you’ve been on your own since age 18. In other words, the statute of limitations on blaming your folks has long since expired.

Your finances are the result of the choices you’ve made, just as your mother’s situation reflects the choices she’s made. Let’s hope you both make better choices in the future.

Categories : Q&A, Retirement
Comments (1)

Dear Liz: I’m in my late 60s and plan to retire in about two years. I have a pension that will pay close to my current take-home income. I also have about $500,000 in annuities and IRAs. These plus Social Security make retirement look good. But right now finances are tight. Should I continue to put $1,300 a month into my retirement plan or use that money for expenses and travel now — while we’re still relatively young?

Answer: You appear to be in the fortunate position of being able to try a “practice retirement.”

The term was created by mutual fund company T. Rowe Price after it discovered that people who have saved substantial amounts for retirement by age 60 may not have to save much more to have a comfortable retirement. Just putting off the day when they take Social Security and tap their retirement funds may be enough. That’s because Social Security benefits grow about 7% to 8% a year, plus inflation adjustments, for each year you delay starting your checks. Not starting retirement plan distributions also allows your nest egg to grow, and the delay shortens the length of retirement you’ll need to cover.

T. Rowe Price found that people who have saved four to eight times their annual income by their early 60s may be able to crank back on their retirement contributions. Instead, they could use the money to “practice retirement” by taking some trips and doing some of the other things they had planned for golden years while continuing to work.

The company recommends practice retirees continue to contribute enough to employer retirement plans to get any available match (it’s free money, after all), while delaying the start of Social Security to age 70 if possible.

T. Rowe Price researchers assumed that its practice retirees would live only on their savings and Social Security. The fact that you have such a generous pension means you may not need as much saved as they recommend. In any case, if this idea appeals to you, run it past a fee-only financial planner who can review your situation and ensure the plan is viable for you.

Categories : Q&A, Retirement
Comments (4)

Divorced spousal benefits cause confusion

Oct 15, 2013 | | Comments Comments Off

Dear Liz: You’ve been writing about Social Security and how people can qualify for benefits based on a spouse’s or ex-spouse’s earnings record. Please add that given the parameters you already cite, a divorced spouse may remarry after the age of 60 and collect Social Security from the ex. However, if a person is collecting a public pension, any Social Security, whether one’s own or that of the former spouse, will be offset, possibly to the extent that one cannot collect anything from that former spouse. It is important to have all of the information.

Answer: It is indeed — but you’re incorrect about the availability of divorced spouse benefits after remarriage.

Only spouses or ex-spouses who are receiving survivors’ benefits may remarry after 60 without worrying about losing their checks. If the primary earner is still alive, the rules are different. Here’s what Social Security has to say on its website: “Generally, we cannot pay benefits if the divorced spouse remarries someone other than the former spouse, unless the latter marriage ends (whether by death, divorce or annulment), or the marriage is to a person entitled to certain types of Social Security auxiliary or survivor’s benefits.”

People who are eligible for pensions from the government or from a job not covered by Social Security should learn about the offsets that affect their benefit. The Social Security website has information about these offsets at http://www.ssa.gov/gpo-wep/. Information also is available by calling 1-800-772-1213.

Categories : Q&A, Retirement
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Dragging debt? You’re not ready to retire

Oct 07, 2013 | | Comments Comments Off

Dear Liz: I just turned 65 and had planned to wait until 70 to retire. I love the actual work I do but my boss is very challenging. I’m starting to question whether working here another five years is really how I want to spend my days at this point in my life. I have about $175,000 in my 401(k), about $35,000 in an IRA and $1,500 in a single stock that’s not in a retirement account. I have two years left on my primary mortgage and a $17,000 balance on my second mortgage, plus I owe $3,500 on a line of credit and $2,000 on credit cards. I was starting to take money out of my IRA to pay down my mortgage early but the taxes at the end of the year were so much that I stopped that distribution. (I still owe $500 to the state tax agency.) I have also had trouble keeping up with my property taxes and owe about $3,500. I live in a 900-square-foot home which I love and live a fairly simple life. I’m wondering about cashing in the stock and some of my IRA to pay down my debt, then using my 401(k) for living expenses until I actually draw from Social Security. As I’m typing this out I’m thinking, “Are you crazy?” I’d love your thoughts.

Answer: One definition of insanity is doing the same thing over and over again, expecting different results.

Tapping your IRA incurred a big tax bill that you’ve yet to fully repay. You also lost all the future tax-deferred gains that money could have earned. Why would you consider doing that again?

You may long for retirement, but it’s pretty clear you aren’t ready. You don’t have a lot of savings, given how long retirement can last, and you’re dragging a lot of debt. The type of debt you have — second mortgages, credit lines, credit cards — is an indicator you’re regularly spending beyond your means. If you can’t live within your income now, you’ll have a terrible time when it drops in retirement.

So instead of bailing on work, take retirement for a test drive instead. Figure out how much you’d get from Social Security at your full retirement age next year (you can get an estimate at http://www.ssa.gov.) Add $700 a month to that figure, since that’s what you could withdraw from your current retirement account balances without too great a risk of running out of money. Once you figure out how to live on that amount, you can put the rest of your income toward paying off debt (starting with your overdue taxes), building up your retirement accounts and creating an emergency fund. It’s OK to cash out the stock to pay off debt, since it’s not in a retirement account, but make sure you set aside enough of the proceeds to cover the resulting tax bill.

Don’t forget to budget for medical expenses, including Medicare premiums and out-of-pocket costs. Fidelity estimates a typical couple retiring in 2013 should have $220,000 to pay out-of-pocket medical expenses that aren’t covered by Medicare. That doesn’t include long-term-care costs. Your costs may be lower, but you’ll want to budget conservatively. Spend some time with the Nolo Press book “Social Security, Medicare & Government Pensions: Get the Most out of Your Retirement & Medical Benefits.”

You’ll be ready to retire when you’re debt-free and able to live on your expected income without leaning on credit.

Categories : Q&A, Retirement
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Dear Liz: All my friends have said I should get a reverse mortgage to be able to live more comfortably and still stay in my house. I would think our greedy banking system would give you only 50% of value and have a high interest rate that would chew up the remaining value. What is your advice on the merits of this option?

Answer: A reverse mortgage program that lets you tap too much of your home equity wouldn’t be in business very long.

Reverse mortgages allow people 62 and older to borrow against the value of their homes without having to make payments on the debt. Instead, the amount they owe typically increases over time because interest is charged on the loan, and that adds up. Lenders get paid back when the owner moves out, sells the house or dies. If the house is worth less than the debt, the lender (or more often the insurer) suffers a loss.

Too-generous lending standards have already caused trouble for previous iterations of the Home Equity Conversion Mortgage, the federally insured option most often used by borrowers. Too many borrowers grabbed big lump sums up front, straining the program’s reserves and leaving the borrowers with few options if they ran into hard times later. Defaults rose as borrowers failed to pay their property taxes and insurance premiums as required.

The Federal Housing Administration, which insures HECMs, has tightened the rules so that borrowers can access less of their equity upfront. Fees also have increased.

How much you can borrow using a HECM depends on your age, the home’s value and current interest rates. Interest rates for lump-sum withdrawals are fixed, while those for lines of credit you can tap over time are variable.

You’ll certainly get a better (or at least less expensive) deal if you borrow 60% or less of your home’s value. The mortgage insurance premium for loans below that level is 0.5% of the home’s appraised worth under the new federal government rules that go into effect Monday. Those borrowing more than 60% face a premium equal to 2.5% of the home’s value. That’s in addition to a 1.25% annual mortgage insurance premium.

There’s no getting around the fact that these are expensive and complex loans. They’re usually not a great choice for people who have other assets to tap. They also can prove a land mine for people who drain their home equity too early and wind up with no resources later in life. On the other hand, they can provide a more comfortable retirement for those who would otherwise be strapped for cash, particularly if the borrowers opt for a steady stream of monthly payments rather than the upfront lump sum.

If you are considering a reverse mortgage, you should talk to a fee-only financial planner who is familiar with the program and who can review your other alternatives.

Categories : Q&A, Real Estate, Retirement
Comments (2)

64 and broke: what now?

Sep 18, 2013 | | Comments Comments Off

Dear Liz: I’m 64 and lost my last full-time job a year ago. I have since exhausted my unemployment benefits and been on and off food stamps. (I’m waiting to get back on them right now because my temporary-to-permanent job didn’t become permanent after all.) Fortunately I almost never need to go to a doctor, or if I do, I don’t know that I do and can’t afford to find out. I have about $3,000 in emergency savings, and my IRA is about $15,000. I was fortunate enough to sell a home in Hawaii 20 years ago, but I managed to run through all the money. My income when I was working full time was only $26,000 a year. I don’t know what to do, and I don’t know why I listen to all these financial programs that seem to target twentysomethings or people with retirement savings and comfortable incomes. They do not speak to my situation. My priority isn’t saving for retirement. It’s paying the bills.

Answer: Financial programs are, at least to some extent, concerned about the entertainment value of their programming. They often focus on people who fit their audience demographics and whose problems have satisfying solutions. That’s why the people featured tend to be younger or to have resources, because those are the ones who typically can recover from past mistakes and get their finances on track.

When people have no income, there’s not much financial advice to give. And when they’re in their 60s and have virtually no retirement savings, there’s no way to “catch up.”

That doesn’t mean your situation is hopeless, but it does mean you’ll have to hustle to stay afloat.

Finding a full-time job at this point is a long shot, so part-time work and Social Security probably will provide your income in the coming years. Social Security might replace as much as 40% of your previous low income (the replacement rate is lower for higher earners), but that still leaves you with a substantial gap to fill.

Ideally, you would hold out until age 66 before applying so you can get your full Social Security benefit. You’re eligible for benefits now, but your checks will be permanently reduced if you start early and your earnings could potentially reduce your check further under the earnings test (which you can learn more about at http://www.ssa.gov/oact/cola/rtea.html). The benefits that are withheld aren’t lost, because at full retirement age your monthly check would be increased to account for the withholdings. You’ll have to balance whether those disadvantages outweigh the upside of starting a guaranteed income now.

By the way, if you’ve ever been married and the marriage lasted at least 10 years, you may qualify for spousal or survivor benefits (even if the marriage ended in divorce) that could exceed the benefit you’ve earned on your own record. You can discuss your options by calling the Social Security Administration at (800) 772-1213.

You’ll need to look for ways to reduce your expenses so that you can get by on whatever income you receive. If you qualify, the federal Section 8 program could help pay for housing (start at Benefits.gov to see what programs are available). Some of the other ways to reduce housing costs — the biggest expense for most people — include getting a roommate, becoming a live-in caregiver for an older person or a family with kids, or becoming an apartment manager or the caretaker of a property.

At 65, you’ll qualify for Medicare. Although this government health insurance program for older Americans doesn’t cover everything, you will have access to healthcare again.

Categories : Q&A, Retirement
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