Ask Liz Weston

Get smart with your money

Q&A

Q&A: Social Security misunderstandings

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Dear Liz: As a former Social Security Administration employee, I can tell you there are countless times people misunderstand the information that is provided to them or only hear what they want to hear. There is no incentive for the employees to misinform or mislead people. Maybe you can begin your responses by saying, “If what you are saying is accurate,” instead of just assuming the worst and blaming the Social Security employees for people’s lack of knowledge.

The letter writer in a recent column not only indicated how helpful the employee was but also that they slept on the information and also discussed that with their trusted advisor. Your response assumed that the representative encouraged them to make a decision you indicated might not be the best.

Most employees do not encourage but inform people of their options. I am very disappointed that you once again chose to bash them with limited information and even when the person said how wonderful and knowledgeable the representative was, and even that they consulted with their trusted advisor.

Answer: The original letter writer mentioned that she learned in a chat with a Social Security spokesperson what her “break-even” point would be for waiting until full retirement age to start her benefit. My response pointed out that break-even calculations aren’t the best way to determine when to start Social Security, since they don’t include important factors such as inflation, tax rates and the impact of early claiming on survivor benefits. Many people also have a poor understanding of life expectancy and assume they will die before their break-even age when they probably won’t.

Social Security is an incredibly complex program, so people may indeed misunderstand what they hear from its representatives. But readers and financial planners alike report countless incidents in which representatives clearly gave inaccurate information. For example, people have been told they couldn’t suspend their benefit at full retirement age to earn delayed retirement credits (they can) or that they wouldn’t receive cost-of-living increases if they hadn’t started their benefits (not true — your benefit starts earning annual COLAs at age 62, whether or not you’ve started).

Bad guidance can be costly. A 2018 report by Social Security’s own inspector general found that faulty counsel from its representatives cost 9,224 widows and widowers approximately $131.8 million in benefits.

My responses aren’t intended to bash hardworking Social Security representatives but to alert readers that they should educate themselves about their options and seek guidance from financial experts before claiming.

Q&A: Student loan payoff and gift taxes

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Dear Liz: I adopted my granddaughter when she was 2. She has a number of student loans. Do I have the right to pay off her loans as her parent without tax consequences to her or to me?

Answer: Paying off someone’s student loans would be considered a gift. You may have to file a gift tax return, but you’re extremely unlikely to owe gift taxes.

The IRS requires you to file a gift tax return if you give any individual more than a certain amount in a year. (The 2023 annual exemption limit is $17,000.) You don’t owe gift taxes until the amount you give away above this annual limit exceeds the lifetime limit (which is 2023 is $12.92 million).

Your relationship doesn’t matter unless the recipient is your spouse. (You can give an unlimited amount to a spouse who is a U.S. citizen without gift tax consequences.)

Q&A: Social Security and break-even math

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Dear Liz: You recently wrote about the complexity of retiring with a government pension and Social Security. You left out one very important resource: the Social Security Administration. Going into a Social Security office and sitting with a representative who can explain exactly how much a person will get (almost impossible to determine online using formulas) was the most helpful thing I did. I retired with a government pension at 60 years of age, and at 63 I went to the SS office to chat. I learned that if I waited until full retirement age (67) my break-even point would be 18 years! I slept on the numbers, discussed that with a trusted advisor and filed to take my Social Security benefit. Couldn’t be happier. The employees in the local office were wonderful, knowledgeable about the windfall elimination provision and could give exact numbers.

Answer: It sounds like the representative you consulted encouraged you to make your decision using a simple break-even calculation. That’s unfortunate for a number of reasons.

Break-even calculations typically purport to show the point at which the larger checks you get from delaying your Social Security application outweigh the smaller checks you pass up in the meantime. But the calculators usually don’t include important factors, such as inflation, tax rates and the impact of your filing decision on survivor benefits. These calculators also don’t include pertinent information about life expectancies. According to Social Security actuarial tables, for example, 63-year-old females in the U.S. can expect to live an additional 21.24 years.

That’s average life expectancy, of course. The more educated you are and the more income you make, the more years you can probably add to that tally. And the longer you live, the more likely you are to run through your savings. Many people who are able to make ends meet in their 60s and 70s wind up struggling financially in their 80s because they started Social Security too soon, says actuary Steve Vernon, a former research scholar at the Stanford Center on Longevity.

Of course, you’ll be much less dependent on Social Security than most people, thanks to your pension. It’s possible your trusted advisor took that into consideration, along with your longevity profile, tax situation and other possible income sources, when suggesting you apply for a permanently reduced check. Most people can’t afford such reductions.

Q&A: Credit report mistakes are common. Here’s how to fix them

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Dear Liz: Two of my credit card issuers have drastically lowered my credit limits. They blamed my credit report at Equifax. At first, Equifax could not even find my report. I had to send paperwork to verify that I even exist. It turned out that my credit file had some inaccuracies. One of the credit card companies restored the credit limit on one of my cards but kept the lower limit on the other card. I have filed complaints with the Consumer Financial Protection Bureau and would appreciate any advice as I am confused and upset.

Answer: That’s understandable, and you’re not alone. Problems with credit bureaus topped the CFPB’s list of consumer complaints in 2022.

You did all the right things: getting a copy of your credit report, disputing the errors, following up with the credit card companies and filing a complaint with the CFPB when your credit limits weren’t restored. The CFPB will reach out to companies to help facilitate a resolution.

If that doesn’t work, consider contacting your local congressional representative. These lawmakers typically have constituent services staff that may be able to help.

You should check your credit reports at Experian and TransUnion in case the errors aren’t limited to a single bureau. If the inaccuracies stem from possible identity theft, consider freezing your credit reports at all three bureaus to make it harder for scam artists to open new accounts in your name.

Q&A: Social Security and government pensions

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Dear Liz: When is the “sweet spot” for me to start receiving Social Security benefits? I am retired and collecting two government pensions — mine and my ex-husband’s. I paid into Social Security for 26 years of substantial earnings when I was in the private sector. I do not want to return to work to get to 30 years of substantial earnings in order to avoid the windfall elimination provision reduction. I will reach full retirement age early next year and have a family history of longevity (my parents lived into their 90s). I am paying all of my bills currently but will do more traveling once I am collecting Social Security. Should I wait until 70 to collect? I think I need to live until about 84 to make waiting a good choice. I tried to get this answer from a financial planner at a free seminar and he would not tell me without hiring him for further consultations.

Answer: That’s not surprising. Social Security claiming strategies can be a complex topic, and your situation is more complex than most.

As you know, the windfall elimination provision can reduce Social Security benefits for people receiving pensions from government jobs that didn’t pay into Social Security. The provision doesn’t apply to people who have 30 or more years of “substantial earnings” from jobs that did pay into Social Security. (The amount considered substantial varies by year, but in 2023 it’s $29,700.) Your 26 years of substantial earnings will mitigate, but not eliminate, the provision’s effects.

Social Security has tools that can help you estimate the impact. Start by opening an account with Social Security, if you haven’t already, and getting your earnings record from those 26 years. You’ll then enter each year’s worth of “substantial earnings” into Social Security’s windfall elimination provision calculator to determine what your benefit is likely to be at various ages.

Next, consider using a paid Social Security claiming site, such as Maximize My Social Security or Social Security Solutions, to get recommendations on when to claim rather than using calculators that purport to show a “break even age” for delaying Social Security.

These calculators typically don’t include important factors such as tax rates, rates of return and, for married couples, future survivor benefits. They also don’t really address “longevity risk” — the substantial danger that the longer you live, the more likely you are to run through your savings and wind up short of money.

On the other hand, you have not one but two government pensions that will provide guaranteed income for the rest of your life. If your Social Security benefit is truly “fun money,” rather than the lifeline it serves as for most people, maximizing your benefit may not be your top priority. But get all the information you can about the cost and benefits of claiming at different ages before making your decision.

Q&A: Should your retirement savings plan include life insurance? Here are some pros and cons

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Dear Liz: Are indexed universal life insurance products worthwhile, and how do they compare to a Roth IRA?

Answer: Both offer the potential for tax-free distributions in retirement, but indexed universal life insurance is a complex product with high expenses that’s not a good fit for most investors.

With a Roth IRA, virtually all of your money can go toward your retirement investment. (Most investments have fees of some kind, but you can minimize those by using exchange traded funds or low-cost index funds.) With permanent life insurance, some of your money goes toward paying premiums for the death benefit and other administrative expenses, including commissions for the person who sells you the policy. The remaining cash can be invested in accounts that are tied to the performance of a stock market index. Your principal is guaranteed, but the amount you earn is subject to caps.

Financial planners generally recommend that you first max out other retirement savings options, such as 401(k)s and IRAs, before considering investing through a life insurance policy. Also, you should be someone who needs permanent life insurance — the kind that is meant to cover you for the rest of your life. (Term insurance, by contrast, is a much less expensive option meant to cover you for a set term, such as 20 years.)

Some people do need permanent coverage. Their estates may be large enough to incur estate taxes that they want to pay with insurance, for example. Or they may have a special needs child who will require ongoing support. If you need permanent coverage, consider hiring a fee-only financial planner to help you sort through your options.