Q&A Archives - Page 44 of 163

March 8, 2021 By Liz Weston

Q&A: They paid off the mortgage rather than save for retirement. Now what?

Dear Liz: My wife and I aggressively paid down our mortgage and now have it paid off, but we don’t have much saved for retirement. I make about $90,000 a year and will receive a teacher’s pension that will replace between 30% and 60% of that (depending on what option we choose) when I retire in about 10 years. It probably won’t be enough to live on. We will receive no Social Security benefits. We have no other debts, and we would like to make up for lost time as best we can on retirement preparation. What is your best advice for people like us who have diligently paid off their mortgage but have not diligently put money away for retirement?

Answer: The older you get, the harder it is to make up for lost time with retirement savings. You probably can’t do it if retirement is just a few years away.

This is not to make you feel bad, but to serve as a warning for others tempted to prioritize paying off a mortgage over saving for retirement.

If you’re in your 50s, you’d typically need to save nearly half your income to equal what you could have accumulated had you put aside just 10% of your pay starting in your 20s. The miracle of compounding means even small contributions have decades to grow into considerable sums. Without the benefit of time, your contributions can’t grow as much so you have to put aside more.

But you can certainly save aggressively and consider a few alternatives for your later years.

Once you hit 50, you can benefit from the ability to make “catch up” contributions. For example, if you have a workplace retirement plan such as a 403(b), you can contribute as much as $26,000 — the $19,500 regular limit plus a $6,500 additional contribution for those 50 and older.

You and your spouse also can contribute as much as $7,000 each to an IRA; whether those contributions are deductible depends on your income and whether you’re covered by a workplace plan. If you’re covered, your ability to deduct your contribution phases out with a modified adjusted gross income of $105,000 to $125,000 for married couples filing jointly. If your spouse isn’t covered by a workplace plan but you are, her ability to deduct her contribution phases out with a modified adjusted gross income of $198,000 to $208,000. (All figures are for 2021.)

If you can’t deduct the contribution, consider putting the money into a Roth IRA instead because withdrawals from a Roth are tax free in retirement. The ability to contribute to a Roth IRA phases out with modified adjusted gross incomes between $198,000 and $208,000 for married couples filing jointly.

If possible, a part-time job in retirement could be extremely helpful in making ends meet. So could downsizing or tapping your home equity with a reverse mortgage. A fee-only financial planner could help you sort through your options, as well as help you figure out the best way to take your pension when the time comes.

Filed Under: Mortgages, Q&A, Retirement Tagged With: mortgage, q&a, Retirement

March 8, 2021 By Liz Weston

Q&A: When credit scores are fine

Dear Liz: I was once told that the reason my credit score wasn’t higher was an insufficient credit history. Now I am doing what you have recommended by charging a monthly security alarm service to one credit card, a weekly church donation to another and satellite TV to a third. All are paid off each month. I checked my credit score recently and read that the reason my score isn’t higher is that I now have too many cards with balances. My score is around 860 but the comment concerns me. Should it?

Answer: Most credit scores are on a 300 to 850 scale. If your score is at or near the top of that range, you’re doing fine. Scores over 760 or so generally get the best rates and terms from lenders (the cutoff is often 740 for mortgage lenders). Higher scores just get you bragging rights.

The services that provide you with credit scores often give you automated reasons why your scores aren’t higher. Those messages can be helpful when you’re trying to build or rebuild credit. The higher your scores, though, the less helpful those messages seem to be. Even if you could fix the “problem” they’re pointing out, there’s no guarantee your scores would increase.

Filed Under: Credit Scoring, Q&A Tagged With: credit report, Credit Score, q&a

March 1, 2021 By Liz Weston

Q&A: Retirement saving after layoff

Dear Liz: My husband and I are both in our early 50s and have been contributing the full amount to each of our 401(k) plans, plus the catch-up amounts since we turned 50. I was laid off in February 2020 and had only contributed $3,000. I had assumed I’d get a new job quickly, but as of now, I still have not. Fortunately, my husband still has a good job and has been able to make his full contribution plus the catch-up. Is there any way we can increase my contribution to retirement savings at this point? Can I fund an IRA if I already contributed to a 401(k)? We don’t want to lose any more ground.

Answer: The fact that you were both contributing the maximum amount — $26,000 each, or $52,000 total — is impressive. That, plus the fact that you’re still able to contribute given your unemployment, indicates your household income could affect your ability to deduct your IRA contributions.

You can still make the contributions, however. Anyone with earned income can contribute as much as $6,000 to an IRA (or $7,000 if you’re 50 or older) even if they’re covered by a workplace plan such as a 401(k). There used to be an age limit for IRA contributions, but that’s been eliminated. You have to earn at least as much as you contribute in the form of wages, salary or self-employment income. If you only earned $4,000 in 2020, for example, that’s the maximum you could contribute to an IRA.

Unemployment insurance doesn’t count as compensation, so you can’t use that — or interest, dividends, pension payments and other such nonwage income — to determine your contributions.

If you were covered by a workplace plan at any point in 2020, the ability to deduct your contribution phases out for modified adjusted gross incomes between $104,000 and $124,000 for married couples filing jointly for 2020. (The phaseout range rises to $105,000 to $125,000 for 2021.)

If you can’t deduct your contribution, consider putting the money instead into a Roth IRA if possible. You don’t get an upfront tax deduction, but withdrawals are tax-free in retirement. The ability to contribute to a Roth IRA starts to phase out with a modified gross income of $196,000 in 2020 (and $198,000 in 2021).

If your income is too high and you don’t already have a large IRA, you could use the “back door Roth” maneuver by contributing to a regular IRA and then converting it to a Roth, since there are no income limits on conversions. (You have to pay taxes on any pretax money that’s converted this way, which is why this might not be an ideal approach for those with big IRAs.)

You also can open up a taxable brokerage account and invest an unlimited amount of money. Again, there’s no upfront deduction, but investments held for at least a year can qualify for favorable capital gains tax rates.

Investing in accounts with different tax treatments is a good idea in general, since it can help you better control your tax bill in retirement.

Filed Under: Q&A, Retirement Tagged With: q&a, retirement savings

March 1, 2021 By Liz Weston

Q&A: How to keep your lightly used credit cards from closing

Dear Liz: I had a credit card that didn’t expire until 2024 but the issuer closed my account because it hadn’t been used in a few years. During these difficult times, I didn’t want to get into a lot of debt by using too many cards. The issuer should have let me know this could happen so that I could have used it at least once a year.

Answer: You’re smart not to want to charge your way into debt. If you want to keep a credit card from being closed for inactivity, though, you need to use it — and probably more than once a year.

One way to do so is to charge a recurring cost, such as a streaming video subscription, to the card. You can set up the payment to be automatic as well. You should still review the account’s transactions every month to ensure everything is working as planned and no fraudulent charges have been made. But otherwise, this approach is a low-effort way to keep open your access to credit.

Filed Under: Credit Cards, Q&A Tagged With: Credit Cards, infrequently used credit cards, q&a

February 22, 2021 By Liz Weston

Q&A: Don’t rush to start collecting Social Security

Dear Liz: Having read your advice on Social Security numerous times, I’m having a heck of a time encouraging a friend who reached full retirement age last year to start collecting her benefits. She said her Social Security isn’t enough to live on and she needs to work two more years before collecting. She said if she waits to apply that it would increase her Social Security by $400 a month. I’ve informed her that she can both collect and continue to work without penalty because she has reached full retirement age. She also would still get an annual increase based on her earnings, in addition to the annual cost-of-living increase. She won’t let me know how much her Social Security would be now, and I haven’t asked, but I’ve told her this is extra money she could invest.

Answer: Are you sure you were reading this column?

Copious research shows that most people are better off waiting as long as possible to file for Social Security. Given life expectancies at 65, most who make it that far will live beyond the break-even age where the larger checks they’ll get will more than offset the smaller ones they pass up.

Waiting is particularly important for the higher earner in a couple, since that determines what the survivor gets to live on. Waiting is also important for single people, since they don’t have a partner’s income to help. Single women have an especially high risk of finishing their days in poverty, which means maximizing their Social Security is usually the right call.

Besides, there’s no risk-free investment that would guarantee her an 8% annual return. That’s what she’s getting by waiting to start her Social Security benefit (at least until age 70, when the benefit maxes out). She might be able to generate similar returns with stock market investments, but she also could lose her shirt.

Something else to consider: Benefits are based on our 35 highest-earning years. If she’s making more now than she did in one of those previous years, she could be boosting her benefit even more by continuing to work. People who took time off to raise families or who had a history of low wages or part-time work often see a bigger benefit by continuing to work as well as waiting to apply.

Filed Under: Q&A, Social Security Tagged With: q&a, Social Security

February 22, 2021 By Liz Weston

Q&A: How much debt can you afford to pay each month? Put it in perspective

Dear Liz: I’m paying down credit card debts. At what ratio of debt to income would you consider my personal finances healthy?

Answer: The healthiest level of credit card debt is none. Credit card interest rates tend to be high and variable, which makes this kind of debt toxic to your financial health. Congratulations for making progress on getting rid of yours.

There are a number of measures you can use to judge whether an appropriate amount of your monthly income goes to debt payments. Among the most common:

◆ Traditionally, mortgage lenders preferred home loan payments to be 28% or less of your gross monthly income and total debt payments, including mortgage, to be 36% or less.

◆ Debt payments, including mortgages, that exceed 40% of gross monthly can be an indication of financial distress, according to the Federal Reserve.

◆ Under the 50/30/20 budget, all your must-have expenses — including housing, utilities, transportation, insurance and minimum loan payments — would be 50% or less of your after-tax income (your gross income minus income and payroll taxes). That leaves 30% for wants and 20% for savings and extra payments on debt. If a loan payment fits under the 50% limit with all your other must-haves, then it may be considered affordable.

You typically don’t need to rush to pay off lower-rate, potentially tax-deductible debt such as mortgages or student loans. Still, you’ll probably want to have all your debts paid off by retirement so you aren’t draining your nest egg to make the payments.

Speaking of retirement, are you saving enough for that goal? Do you have a sufficient emergency fund? Are you adequately insured? Are you able to enjoy your life without excessive stress about money? Financial health includes all those components in addition to paying down debt.

Filed Under: Credit & Debt, Q&A Tagged With: credit card debt, q&a

February 15, 2021 By Liz Weston

Q&A: Emergency fund: How big?

Dear Liz: You recently advised a teacher who was inquiring about paying down student debt. You suggested among other things to “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.” Granted, this is in the context of the student debt question, but is that emergency fund advice still valid in light of studies showing the liquidity needs of lower-income households to be much lower?

Answer: The usual advice about emergency funds is often unrealistic and sometimes absurd for most low- or even moderate-income households.

The advice is usually given by financial planners who typically work with higher-income clients. The higher your income, the more likely it is that you have the free cash flow to quickly build a large emergency fund.

An analysis in the New York Times found that a household with income over $200,000 would need about two months to save one month’s worth of expenses. A household with income of $70,000 to $99,999 would need seven to eight months to save one month’s worth. A typical household with two or more people and income of $50,000 to $69,999 would need more than two years to save a single month’s worth of expenses.

As you’ve noted, though, various studies have found that much smaller emergency funds can help households avoid catastrophe.

A 2015 study by Pew Charitable Trusts found the most expensive financial shock suffered by the typical household amounted to $2,000. But as little as $250 can reduce the odds that a low-income household will suffer serious financial setbacks such as eviction, according to a 2016 Urban Institute study.

A three-month emergency fund could be a long-term goal, but it’s not something that should be prioritized over more important tasks such as saving for retirement or paying off high-rate debt.

Such a fund should be a priority, however, over paying off lower-rate, potentially tax-deductible debt. That’s especially true when you’d be making extra payments on student loans. Paying down credit cards can free up additional credit to be used in an emergency, but payments sent to student loan lenders are gone for good.

Filed Under: Q&A, Saving Money Tagged With: emergency fund, q&a

February 15, 2021 By Liz Weston

Q&A: A young mother died in a car accident. Can her widower get survivor benefits?

Dear Liz: My grandson’s wife, 22, was killed in a motor vehicle accident just after her birthday. My grandson, 26, was left with a 2-year-old and 9-month-old. Due to COVID-19, he was staying home with the children, and she was working at a fast-food restaurant. We thought there would be Social Security survivor benefits, but he has been denied because she did not have 10 quarters of payroll. Is there an appeal for this denial? She was too young to have the required quarters.

Answer: Given her age, the family could be out of luck if she only recently started working. But there is a special rule that applies if she was working at jobs that paid into Social Security for at least a year and a half before her death.

With survivor benefits, the length of time someone needs to work typically varies according to age. To generate survivor benefits, the number of years you need to work at a job that pays into Social Security is — at most — 10 years. Each quarter of work typically generates one credit, and no more than 40 credits are needed. The younger someone is when they die, the fewer credits are needed. People, however, generally need at least six credits, and only credits earned after someone turns 22 count toward the total.

But there’s an exception. Survivor benefits can be paid if the worker earned at least six credits in the three years before death. So if your grandson’s wife worked at least 18 months before her terribly premature death, survivor benefits could be paid to her minor children and to the surviving spouse who is caring for them, said William Meyer, chief executive of Social Security Solutions, a claiming strategy site.

The benefits would be based on her earnings history, so the amounts are unlikely to be substantial, Meyer noted. Still, something would be better than nothing.

All Social Security decisions can be appealed. If your grandson already filed an application and was denied, the denial letter would explain his appeal rights, Meyer said. If he just received a verbal denial, he should go ahead and file a formal application to start the process. If his wife had earnings that might not yet have been reported, he can provide her last pay stubs or W-2 forms when filing the application.

“With there being a concern about her having enough qualifying quarters, as well as low earnings, that could be pretty important,” Meyer said.

Filed Under: Q&A, Social Security Tagged With: q&a, Social Security survivor benefits

February 8, 2021 By Liz Weston

Q&A: Dementia and financial accounts

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.

Filed Under: Banking, Elder Care, Q&A Tagged With: banking, dementia, q&a

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