Dear Liz: You recently suggested an insurance salesman be reported to state regulators because he suggested a reader stop funding a 401(k) and instead fund an insurance contract with after-tax dollars. You were way out of line. It’s very likely tax rates will be going up, so it may make sense to trade a tax benefit now for a better one in the future.
Answer: You might have a valid point if the reader were wealthy enough to be funding a life insurance policy or annuity in addition to his 401(k) contributions. Wealthier people are already facing higher tax rates, and they are more likely to be in the same bracket, or perhaps even a higher one, when they retire.
The fact that the insurance salesman suggested the reader redirect his retirement contributions to the insurance contract indicates the reader didn’t have the cash flow to do both. So it’s still quite likely that the reader will drop into a lower tax bracket in retirement, in which case he’s given up a valuable tax break now for a less valuable one in the future.
A red flag should go up anytime an insurance salesperson recommends you stop funding a tax-deductible retirement plan or that you tap home equity to buy whatever he or she is selling. That indicates the product was designed for someone wealthier than you. At the very least, you should run the purchase past a fee-only financial planner — someone who doesn’t earn commissions on product sales — to make sure you’re getting the whole story.
I only noticed the difference after I swiped my card and was about to press the key to start the pump. I checked the station’s signage, and noticed the display advertising the “cash” price was a lot bigger than the one showing the “credit” price.
Technically, California has a law that’s supposed to prevent surcharges for plastic. But as my buddy David Lazarus has pointed out in his column, Section 1748.1 of the California Civil Code has some big fat loopholes. Gas stations get away with double pricing because they’re supposedly offering a discount for cash, not a surcharge for plastic.
Now that retailers elsewhere in the country can add surcharges to Visa and MasterCard transactions, the question is: will they?
Those of us who love our credit card rewards programs—including the rewards card ninjas I highlighted in my column this week—hope the answer is no. It wouldn’t take much of a surcharge to wipe out the value most people get from their rewards cards.
Brian Kelly, the founder of The Points Guy, says retailers who add surcharges could be shooting themselves in the foot.
“High-end consumers love their rewards,” Kelly said. Retailers who don’t add surcharges will have a competitive advantage, which could make attempts to impose the fees short-lived.
I know that I’ll vote with my feet. Once I noticed I was about to pay $4.09 cents a gallon, rather than the $3.89 I expected, I hung up the nozzle. I didn’t have to drive far to find a Mobil station that charged $3.89, cash or credit. Guess where I’ll be gassing up in the future?
Dear Liz: I paid all of my old collection accounts except for two, which now are beyond the statute of limitations. I would like to find the best way to negotiate with the collection agencies without getting sued. Even though the original delinquency was over four years ago, the agencies are reporting these every month as current debt, which is really hurting my credit score. My intent is to offer a lump-sum settlement amount if they will remove the report from my credit file with the bureaus, or alternately in return for a “paid” notation on my report file. However, I cannot afford to pay the amount they say I owe.
Answer: If the collection agencies are simply reporting your debts each month with a correct “date of last activity” — usually the date you stopped paying the original creditor — your credit scores aren’t being hurt anew each month. If the agencies are reporting a new date of last activity each month, however, they are illegally re-aging your debts. You can dispute this illegal reporting with the credit bureaus and directly with the collection agencies. If the errors aren’t corrected, you can file a complaint with the Consumer Financial Protection Bureau, which took over regulation of the major credit bureaus last year.
Filing disputes is not something you’d want to do if the debts are still within the statute of limitations, said Michael Bovee, president of Consumers Recovery Network, which specializes in debt settlement. You wouldn’t want to draw attention to yourself or your debts. But you run little risk in filing a dispute now since the debts are too old for the collectors to file a legitimate lawsuit.
Bovee said that simply contacting the agencies about the debts shouldn’t restart the statute of limitations, but debt expert Gerri Detweiler of Credit.com advised caution.
“It may be well worth it to consult a consumer law attorney,” Detweiler said. “Otherwise [you] may reset the clock on these debts and owe the entire amount plus interest.”
You can get referrals to consumer law attorneys at the National Assn. of Consumer Advocates, http://www.naca.net.
You don’t have to pay the reported debts in full to reach a settlement, Bovee and Detweiler agreed. Often the totals reported are inflated by interest and fees, and the collection agencies probably paid only pennies on the dollar to buy this debt.
Start by saying you have only so much money to work with and offer 20% to 30% of what the agency says you owe.
“A realistic expectation for negotiating a debt this old would be to settle the account for 50% or less than the current balance owed,” Bovee said. “If they raise objections, there is no problem in mentioning that you are aware that the debt is past the statute of limitations for you to be sued, but that you are just trying to do the right thing.”
Don’t say you’re trying to improve your credit, since that gives the collector leverage over you, Bovee said.
You can negotiate to have the collections deleted from your credit reports, but the original delinquencies and charge-offs will remain and will continue to affect your credit scores until they pass the seven-year mark.
Dear Liz: I think you missed one of the possibilities when a reader wrote to you about a pitch he received from an insurance salesman. The salesman wanted the reader to stop funding his 401(k) and instead invest in a contract that would guarantee his principal but cap his returns in any given year. You thought the salesman was pitching an equity indexed annuity, but it’s possible he was promoting an indexed universal life policy, which would offer the same guarantees of principal and offer tax-free loans.
Answer: You may be correct — in which case the product being pitched is just as unlikely to be a good fit for the 61-year-old reader as an equity indexed annuity.
Cash-value life insurance policies typically have high expenses and make sense only when there’s a permanent need for life insurance. If the reader doesn’t have people who are financially dependent on him, he may not need life insurance at all.
Furthermore, the “lapse rate” for cash-value life insurance policies tends to be high, which means many people stop paying the costly premiums long before they accumulate any cash value that can be tapped.
Before you invest in any annuity or life insurance product, get an independent second opinion. One way is to run the product past a fee-only financial planner, who should be able to analyze the product and advise you of options that may be a better fit for your situation. If you just want a detailed analysis of the policy itself, you can pay $100 to EvaluateLifeInsurance.org, which is run by former state insurance commissioner James Hunt.
Dear Liz: My daughter co-signed a student loan for a friend who failed to pay the debt. Now my daughter cannot refinance her home because this loan appears on her otherwise very good credit reports. She has been getting calls from a collection agency.
I called the agency to discuss what it would cost to get her released from all liability regarding this loan, and they gave me an offer of $13,000 to satisfy the debt, which is now $35,000. I countered with $9,000, since the original loan was just $15,000, but they refused. My daughter is unhappy about paying anything, since her ex-friend is a gainfully employed attorney. Is it good business to pay what the collection agency is asking, or should I continue to negotiate?
“Lenders almost never settle for less than the outstanding principal balance of a defaulted student loan, so that may be the best she can get,” Kantrowitz said. “It may be the case that they are offering her a low settlement amount to release her from her obligation and then will go after her former friend for the remaining debt. When there are two borrowers on the hook, one borrower reaching a settlement does not cancel the debt. It merely releases that borrower from her obligation.”
Your daughter should have the settlement offer reviewed by an attorney, Kantrowitz said. The attorney should verify that the collection agency has the authority to settle the debt, and any agreement should list all of the loans involved.
“I’ve seen cases where a borrower thought she was getting a settlement of all the loans,” Kantrowitz said, “but the settlement was just for some of the loans.”
Ideally, the settlement agreement would require the lender to stop reporting the default and delinquencies to the credit bureaus, which would remove the stain from her credit reports. Not all lenders will agree to such a condition, Kantrowitz said, but removal would be better for her credit than simply having the debt reported as “satisfied.”
Also, the agreement should require that the lender provide a “paid in full” statement to your daughter as proof her debt has been settled, Kantrowitz said.
“She should keep this statement forever,” Kantrowitz said, “as defaulted loans have a tendency to resurrect themselves from time to time, [such as when] a bank reloads their database from old backup tapes [or] someone reviewing old records discovers the original promissory note.”
An attorney also could advise your daughter about taking further steps, such as suing the former friend for repayment or reporting the issue to the state bar, which has standards of professional conduct that may be violated by an unpaid debt.
Dear Liz: We are trying to negotiate our second mortgage and have not paid it since June. Will this affect my wanting to purchase an auto?
Answer: It may not affect your desire to purchase a car, but it’s likely to affect the actual transaction if you’re not able to pay cash.
Failing to pay a credit obligation can devastate your credit scores, the three-digit numbers lenders use to gauge your creditworthiness. The worse your scores, the less likely you are to find a lender willing to do business with you. Even if you can secure a loan, it’s likely to come with a scandalously high interest rate.
Dear Liz: I started a new job, but unfortunately it does not offer a 401(k). I have an IRA but don’t contribute to it. What is the best way to contribute so I can discipline myself in saving for retirement? I am 47.
Answer: The best way to save for retirement is to leave the issue of discipline out of it. If you have to discipline yourself to make the right choice every paycheck, you’ll wind up spending the money rather than saving it.
Instead, put your savings on automatic. You can contribute $5,500 year to your IRA. Divide $5,500 by the number of paychecks you get in a year and set up an automatic transfer of that amount. If you’re paid every other week, for example, you would divide $5,500 by 26 paychecks to get $211.54, which is the amount you should have transferred into your IRA every two weeks.
If you can save more, then open a regular brokerage account and set up automatic transfers into that. You won’t get a tax break for your contributions, but if you hold your investments for at least one year you’ll qualify for long-term capital gains rates that are lower than regular income tax rates.
Once you’ve set up these transfers you need to keep your hands off the money. Don’t treat your retirement funds as emergency cash or tap into them for any other reason. You’re getting a late start and you’ll need every dollar you can save if you want a comfortable retirement.
You may not agree with everything Helaine Olen writes in her new book, “Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.” That’s particularly true if you’re an uncritical fan of one of the personal finance gurus she skewers so effectively.
For the sake of your wallet, you should read the book anyway. She’s a friend of mine, so I’m biased, but the following sources are not:
- The New York Times, which called “Pound Foolish” one of the rare “realistic and readable” books about personal finance.
- The Washington Post’s Michelle Singletary, who says the book “provides a cautionary tale that you need to read.”
- The Economist says it’s an “excellent book, a contemptuous exposé of the American personal-finance industry.”
Helaine articulates what too many of us in the financial media took too long to figure out: that your money problems may not be entirely your own fault. Most Americans have been fighting economic headwinds for decades. Incomes have stagnated or even fallen while costs for education and health care spiral relentless upward. People can work for years to build up economic security only to have it wiped out when they lose their jobs, get divorced, suffer disability or illness or simply retire at the wrong time.
Here’s how the New York Times reviewer summarized it:
What most advice fails to factor in — and what we often choose to overlook ourselves — are the costly realities of things like job loss, protracted unemployment, medical bankruptcy and high-interest debt. Even when we do save, plummeting interest rates, falling home prices and other economic events imperil our best efforts.
Yet some of the best-known financial advice-givers make millions pretending that anyone can save his or her way to financial security. Meanwhile, legions of commissioned salespeople posing as advisors fleece people out of billions more, selling overpriced insurance and investment products to people desperate for financial guarantees.
I’m not saying, as some commentators have, that saving is pointless or impossible on modest incomes. That just plays into the hands of those who contend that financial issues are entirely a matter of personal responsibility, since they (and I) can provide plenty of examples of people who have saved prodigious amounts on small incomes, even in high-cost areas.
What the “personal responsibility” folks are missing is how easy it is to lose those savings in the 21st century, especially if you weren’t born to the right parents or are otherwise are on the wrong side of the growing wealth and income disparities.
Simply put, there are limits to how much personal finance advice or “financial literacy” efforts can help people who don’t make much money, don’t have a lot of education or aren’t just plain lucky in the lottery of life.
Personal responsibility alone isn’t enough; we need some corporate responsibility and a government capable of enforcing regulations that ensure fair play. We need affordable, available health insurance to protect people from catastrophic medical bills; we need a strong Social Security system to prevent us from ending our days in poverty. Our kids need affordable educations so more of them have a shot at staying in the middle class without drowning themselves in student loan debt.
In short, we need to stop acting like we’re in this alone. We should continue contributing to our 401(k)s, but we—and those who advise us—shouldn’t pretend that’s all we need to do to ensure our financial futures.
Dear Liz: Recently, someone from an insurance company proposed that I stop investing through my 401(k) at work and instead invest in his insurance company contract with after-tax dollars. He claims the funds would be guaranteed so that I would never lose principal, although there would be a cap on how much I could make in any given year. His claim is that it is better to forgo the tax deduction I would get from my 401(k) contributions so that I can take the money out of this contract tax-free in 20 or 30 years. I think I am too old for this program (I am 61 now) but I thought it might be appropriate for my daughter when she enters the workforce in a few years.
Answer: You may have been pitched an equity-indexed annuity. These are extremely complex investments that should not be purchased from someone who misrepresents how they work and who encourages you to forgo better methods of saving for retirement.
Withdrawals from annuities are not tax-free. You would not have to pay income tax on the portion of the withdrawal that represents your initial contributions, but any gain would be taxable at regular income tax rates.
Furthermore, most people fall into a lower tax bracket in retirement. That makes the tax break offered by 401(k) contributions especially valuable, because you’re getting the deduction when your tax rate is higher and paying the tax when your rate is lower.
The Financial Industry Regulatory Authority, which regulates securities firms, has warned that most investors consider equity-indexed annuities and other annuity products “only after they make the maximum contribution to their 401(k) and other before-tax retirement plans.”
Even then, you probably have better ways to save. Contributions to a Roth IRA would not be tax-deductible, but withdrawals in retirement would be tax-free. If you’re able to save still more, you could contribute to a regular, taxable brokerage account and hold your investments at least one year to qualify for long-term capital gains rates, which are lower than regular income tax rates.
The other possibility is that the insurance salesman was pitching a life insurance policy that would allow you to take out a tax-free loan. Although life insurance is sometimes pitched as a retirement savings vehicle, it’s an expensive way to go. In general, you should buy life insurance only if you need life insurance. To help ensure a policy is suitable for your situation, you should take it to a fee-only financial planner—one who does not make commissions from selling investments–for review.
In any case, you don’t want to do business with someone suggests you stop funding your workplace retirement plan, and you certainly don’t want to refer him to family members. What you should do instead is pick up the phone and report him to your state insurance department.
Dear Liz: I have an excellent credit rating, a steady job and an interest-only mortgage of $480,000 on a home now worth $400,000. I also owe $52,000 on an adjustable-rate home equity line of credit. In 2015, the interest-only portion of my loan ends and the principal payments will start, driving my payment to more than $4,000 a month. I have tried for the last four years to work with the lender to achieve some manner of stability, but to no avail. I have been told that my first loan has been sold to an outside investor. Is there any hope for me? I like my house.
Answer: If you haven’t already done so, you should make an appointment with a housing counselor approved by the U.S. Department of Housing and Urban Development. You can find referrals at http://www.hud.gov, or you can call the Consumer Financial Protection Bureau at (855) 411-CFPB (2372) to be connected to a HUD-approved housing counselor.
Housing counselors can evaluate your situation and offer guidance about any programs that might be available to help you refinance or modify this loan. You also should pick up a copy of attorney Stephen Elias’ book, “The Foreclosure Survival Guide,” so you can better understand this process and whether it’s worth fighting to save your home.
HUD-approved housing counselors offer free or low-cost help. Beware of anyone who promises to help you for a fat fee, because it’s probably a scam.