July 15, 2019 By

Q&A: This son’s failure to launch is hurting his parent’s finances

Dear Liz: I have a 24-year-old son who has been trying to get through college for nearly seven years. I have helped him with direct gifts and by co-signing loans, but I am pretty tapped out. He tells me he has one year left but has no way to pay for it. He is disorganized and not particularly motivated, although he does talk about things he’s learning and I think is at least somewhat committed to school (he maintains about a B to C average at the state school he attends). He has moved back home to save money and is working full time but had gone many months without a job in the last year. He accumulated credit card debt and generally is a financial disaster.

Do I take out a second mortgage or co-sign another loan, which would be a stretch for me, or do I watch him drop out of school, which seems a really harsh life lesson? I know he might be able to take a year off and then go back, but let’s be honest — if he takes a break, it becomes less likely that he’ll ever return.

Answer: You sound like you’re more than tapped out. You already may be overextended because those private education loans you co-signed are just as much your responsibility as his — and he doesn’t sound like a terrific credit risk, at least at this point. Doubling down by borrowing more money doesn’t seem like the wisest choice for either of you.

Taking a break from school could increase the chances he won’t get his degree, but it also could give him time to get his financial life in better shape and perhaps tackle some of the issues impeding his progress. His disorganization and slow pace through school could point to an underlying problem such as a learning disability or attention-deficit/hyperactivity disorder (ADHD). His college may have a counseling center that could connect him with resources to help, or you could ask your family physician for a referral.

Filed Under: Kids & Money, Q&A, The Basics Tagged With: , , ,
July 15, 2019 By

Q&A: Keeping pace with retirement saving

Dear Liz: My wife is distressed by your recent column about how many multiples of salary are needed to retire. She interpreted the column as saying you must have the sum total of those numbers. So if you need one times your salary saved at 30, three times by 40, six times at 50 and eight times at 60, she thinks you would need 18 times your salary in total by age 60, or $1.8 million if you earn $100,000. I interpreted it to mean that your target would be $800,000 at age 60. Am I wrong?

Answer: You are interpreting the guidelines correctly: You would need eight times your salary at 60, not 18 times. The numbers, by the way, come from Fidelity Investments and are meant as general guidelines for people hoping to retire at 67 (at which point, Fidelity says they should have 10 times their salaries saved). Your needs may vary; some people will need less, some will need more. People who have large traditional defined benefit pensions, for example, may not need to save as much, while those who want to retire early or indulge in expensive hobbies, such as traveling or supporting adult children, may need to save more.

Guidelines tend to be the most helpful when you’re many years away from retirement and only guessing about how much money you’ll need. Once you’re five to 10 years from your desired retirement age, you should have a better handle on your likely expenses and sources of income. Well before you actually retire, though, you should consider consulting with a fee-only, fiduciary financial planner for a second opinion on your retirement plans. (“Fee only” means the advisor is compensated only by fees paid by clients, rather than through commissions or other arrangements. “Fiduciary” means the advisor is required to put your interests first.)

The National Assn. of Personal Financial Advisors, the XY Planning Network and the Garrett Planning Network all represent fee-only planners and can offer referrals.

Filed Under: Q&A, Retirement, Saving Money Tagged With: , ,
July 15, 2019 By

Q&A: Claiming an ex’s benefits

Dear Liz: You recently answered a question pertaining to divorced spousal Social Security benefits. Social Security told me years ago that I had to wait till my former husband died before receiving a part of his benefits. We divorced after a long-term marriage, and I remarried after age 60. Is this still true for remarried former spouses? My ex does collect Social Security, and I collect my small benefit (both of us started at full retirement age).

Answer: The information you received was correct. You can’t get spousal benefits from your ex’s work record if you’re married to someone else. You can, however, get survivor benefits if your ex dies, as long as you remarried after you turned 60.

Filed Under: Divorce & Money, Q&A, Social Security Tagged With: , ,
July 8, 2019 By

Q&A: Escaping California’s tax auditors is tough even after leaving the state

Dear Liz: My husband and I will be trying out several different areas after the sale of our Los Angeles area house, which will be some time this summer. What happens if we end up renting in three different states? I’m under the impression that we need to be able to prove that we resided in a particular state for six months and one day in order to say we are residents of that state. Even though my husband has been retired for many years, he still does a small amount of business through a company based in Southern California. Will we be forced to pay California tax even though we are residing elsewhere?

Answer: California, like other higher-tax states, has residency auditors whose specialty is asserting that affluent people who have left the state are still legal residents and thus are subject to its taxes. The audits can be stunningly thorough, looking at everything from the doctors you visit to where your artwork and other valuable possessions are stored.

If audited, you would need to prove that you have a fixed, permanent residence elsewhere and that it’s truly your home. And yes, it’s up to the taxpayer to prove this — there’s no presumption of innocence in tax audits, says tax attorney Mark Klein, chairman of Hodgson Russ LLP in New York City. (New York is another state with notoriously hard-nosed residency auditors.)

Just leaving the state for six months and registering to vote elsewhere typically won’t be enough. You likely would need to spend substantially more time in your new “home” state than in California. Klein, who recently taught a session on establishing residency at the AICPA’s annual ENGAGE conference, tells his clients to spend at least two months in the new place for every month they spend in the old one.

Also, you should “stick the landing,” in Klein’s words. Let’s say you try to establish residency in Nevada but then move to Florida by the time California’s auditors find you. They may well decide that your Nevada stay was temporary and that you were still subject to California taxes during the time you lived in the Silver State.

Escaping the long arm of California’s tax auditors could be tough while you’re still figuring out where to live next. You’d be smart to consult a CPA experienced with California residency audits for advice on how to cut ties to the state cleanly.

Filed Under: Q&A, Taxes Tagged With: , ,
July 8, 2019 By

Q&A: Limiting your rate shopping window

Dear Liz: We’re planning to refinance our mortgage and are concerned about generating multiple credit inquiries which would lower our excellent credit scores. Is there some kind of licensed, bonded ethical middle-agent who could get just one official credit report from each of the three bureaus and then send it to all the lenders I designate? Our FICOs are so good that we want lenders to compete for our refi business but don’t want the process itself to lower FICOs just for inquiries only.

Answer: The FICO formula has you covered. With the FICO scores most lenders use, multiple mortgage inquiries made within a 45-day window are aggregated together and counted as one. Furthermore, any inquiries made within the previous 30 days are ignored entirely. That allows you to rate shop for mortgages without dramatically affecting your scores.

The FICO formula extends this “de-duplication” process to two other types of borrowing: auto loans and student loans. Only similar types of inquiries are grouped together, however. If you shopped for both mortgages and auto loans, then two inquiries eventually would be factored into your credit scores, rather than just one.

Credit cards, personal loans and other types of borrowing don’t get the same treatment. If you apply for two credit cards while shopping for a mortgage, you would have three inquiries — two that are immediately factored into your scores and a third that would be counted after 30 days had passed.

Also, some lenders use older versions of the FICO formula that have a shorter rate-shopping window — 14 days instead of 45. If you want to be absolutely sure your mortgage shopping has a minimal impact on your scores, you can limit your shopping to that two-week period.

Filed Under: Credit Scoring, Q&A, Real Estate Tagged With: , , , ,
July 1, 2019 By

Q&A:Ready to retire? If you’ve saved 8 times your salary by age 60, maybe

Dear Liz: I keep reading about how much money one should have saved at various ages to comfortably retire. These are usually a multiple of your annual salary. Do these projected amounts factor in whether you are single or married with a single income? Or if you still have a mortgage? What about having to take a lower-paying job in future years because of downsizing? Is Social Security included? It’s tough to know what these suggested amounts assume to know, given that each person’s situation is different.

Answer: Exactly. So it’s smart to do a little digging.

Fidelity Investments, for example, has come up with some salary-based rules that suggest you have an amount equal to:

One time your salary by age 30

Three times your salary by age 40

Six times your salary by age 50

Eight times your salary by age 60 and

10 times your salary by age 67.

Fidelity assumes you’ll want your standard of living to continue basically unchanged in retirement. Its rules are based on a number of factors, including a 1.5% real wage growth throughout one’s working life, a 15% savings rate starting at age 25, claiming retirement and Social Security at age 67 and a portfolio invested at least 50% in stocks that replaces 45% of your individual income in retirement. Fidelity used multiple market simulations “to support a 90% confidence level of success.”

Few people’s lives will follow an idealized trajectory. For example, many people who enter their 50s with full-time jobs will lose them, and only 1 in 10 will find a new one that earns as much, according to a study by ProPublica and the Urban Institute. You can’t know for sure how long you’ll live, what investment returns you’ll get, whether you’ll need long-term care (although that’s likely) or even what your fixed expenses will be, at least until you’re relatively close to retirement.

People also will have vastly different needs and interests in retirement. A thrifty homebody will probably need less than a globe-trotting spender. Working at least part time in retirement also can shift the math in your favor because you’ll need to draw less from your retirement funds.

What we do know is that people who save a lot tend to have more options as they age. And once you reach your 50s, you’d be smart to consult a fee-only financial planner who can give you a second opinion on your retirement plans to ensure you’re on track.

Filed Under: Retirement Tagged With: ,
July 1, 2019 By

Q&A: About the ex’s Social Security

Dear Liz: I’ve been divorced since 2004. My ex received half of all my pension funds and lives off that and his Social Security. I have not yet drawn Social Security, but I am retired. Am I eligible to receive part of his Social Security? How does that work?

Answer: Yes, if your marriage lasted at least 10 years. If you were born before Jan. 2, 1954, you also have the option of filing a “restricted application” for divorced spousal benefits while allowing your own benefit to continue growing.

Divorced spousal benefits, like regular spousal benefits, allow you to get an amount of up to half your ex’s benefit. The amount would be reduced if you start before your own full retirement age, which is currently 66 and rising to 67 for those born in 1960 and later. If you start at age 62, for example, you would get about one-third of his benefit, rather than half. (Your claim doesn’t take money away from him or any of his current or former spouses, in case you were concerned.)

Regular spousal benefits require that the primary worker has started his or her own retirement benefit. Divorced spousal benefits don’t have that requirement: You both just need to be at least 62. Also, the divorced benefit is based on the primary earner’s benefit at his or her full retirement age. With regular spousal benefits, the amount is typically based on what the primary earner actually receives, which could be less if the primary earner started benefits early.

If you were born on or after Jan. 2, 1954, you can’t file a restricted application. Instead, you’ll be deemed to be applying for both your own benefit and the divorced spousal benefit, and given the larger of the two amounts. You can’t switch to your own benefit later.

If your ex should die before you do, you also would be eligible for a divorced survivor benefit that is up to 100% of his. That has the unfortunate effect of making your ex worth more to you dead than alive.

Filed Under: Divorce & Money, Q&A, Social Security Tagged With: , ,
June 24, 2019 By

Q&A: Social Security minors’ benefits

Dear Liz: One thing I rarely see mentioned in discussions of when to take Social Security is the benefit for minors who are still in school. I took my benefit at 62. Social Security called me and told me that my daughter was eligible as well. We collected over $60,000 by the time she graduated high school.

Answer: Child benefits can indeed change the math of Social Security claiming strategies.

To get a child benefit, the parent must be receiving Social Security retirement or disability benefits. The child must be unmarried and benefits stop at age 18, unless she is still in high school — in which case checks stop at graduation or two months after she turns 19, whichever comes first. Child benefits are available for those 18 or older with a disability that began before age 22.

The child can receive up to half the parent’s benefit, although both benefits are subject to the earnings test if the parent started Social Security before his or her full retirement age. The earnings test reduces checks by $1 for every $2 the parent earns over a certain amount, which in 2019 was $17,640. Also, there’s a limit to how much a family can get based on one person’s work record. The family limit is 150% to 180% of the parent’s full benefit amount.

Many free Social Security claiming calculators don’t include child benefits as one of the variables they include, so if your child would be eligible it can make sense to pay $40 for a customized strategy from a more sophisticated calculator, such as the one at Maximize My Social Security.

Filed Under: Q&A, Social Security Tagged With: ,
June 24, 2019 By

Q&A: Don’t fall for Social Security phone scams

Dear Liz: I have just received a phone call advising me that my Social Security number “is about to be suspended” and that for help, I should call a certain number. Is this legitimate?

Answer: No. Your Social Security number can’t be locked or suspended or any of the other dire-sounding consequences these robo-callers threaten. If you did call the number, the scam artist on the other end would try to trick you into revealing personal information or convince you to wire money or buy gift cards, which they can quickly exchange (or “wash”) to erase their trails. People lost $10 million to these Social Security scams last year, according to the Federal Trade Commission.

Filed Under: Q&A, Scams, Social Security Tagged With: , ,
June 24, 2019 By

Q&A: Don’t expect timeshares to increase in value

Dear Liz: I’m trying to get rid of my timeshare. Do you have any suggestions for me, as a single mom, on making any money from this? Even a few grand would be nice (and yes, I’ve tried both Craigslist and EBay). I paid a whopping $15,000 in 2010, so it’s paid for, but annual maintenance fees have just gone up each year. The fees are now over $1,100, and I fear for the future.

The developer is willing to take back my timeshare and not charge me the $1,000 they usually do. They act like they’re doing me this huge favor but I’m out $15,000! I was told by their sales representative it was real estate property that would increase in value. I’m just so sick to my stomach over this. Should I just give it back and walk away, or do you have anything you can think of for me to try to get even a small amount of money?

Answer: Timeshares should not be purchased, or sold, as an investment. The developer may raise the price of newly sold timeshares, but that doesn’t mean the one you purchased has any value at all on the resale market.

Clearly the sales rep deceived you, but timeshare contracts typically have a clause that absolves the developer from responsibility for anything sales reps say. Timeshare attorney Michael Finn of Largo, Fla., calls that the “license to lie” clause.

Your $15,000 is what economists call a “sunk cost.” You’re not going to get the money back. If you continue to try, you may fall victim to another type of scam, where con artists convince you that they can sell your timeshare — if only you pay them a hefty upfront fee.

You should take the developer up on its offer. Many developers won’t take back timeshares even if you pay them. Your other alternative is to try to sell it for $1 or less on a timeshare owners’ site such as Redweek or Timeshare Users Group, but sometimes owners have to offer to pay one or two years’ worth of maintenance fees just to convince someone else to take the timeshares off their hands.

Filed Under: Q&A, Real Estate