Q&A: Avoid running out of money before you run out of breath

Dear Liz: I have two questions regarding the required minimum distributions from retirement accounts at 70½ years old. If I started taking 15% per year at 68, would I still be required to follow the IRS tables and take 27.4% at 70½? Also, can I take the required minimum distributions and roll them into a Roth?

Answer: Please, please, please hire a tax pro before you do anything else. Required minimum distributions can get complicated, and the cost of getting it wrong is huge. If you don’t withdraw enough, you’ll pay a whopping 50% federal penalty on the amount you should have withdrawn but didn’t. If you withdraw too much, you’re paying unnecessary taxes and losing years of future tax-deferred growth.

Which is exactly where you were headed. The IRS table to which you refer does not say you need to withdraw 27.4% of your nest egg at 70½. The 27.4 number is the distribution period. You divide your account balances by that figure to get the amount you’re supposed to withdraw the first year. Think about it: otherwise, your retirement accounts would be emptied within four years.

Even withdrawing 15% a year would exhaust your funds relatively quickly. A sustainable withdrawal rate — one that leaves you a reasonable chance of not running out of money before you run out of breath — is closer to 4%.

There are situations where you might want to start distributions early, even if you don’t need the money. Diligent savers might discover that their distributions would push them into a higher tax bracket if they wait until age 70½ to begin. When that’s the case, it can make sense to withdraw just enough to “fill out” their current tax bracket and pay a lower rate now rather than a higher rate later.

Here’s a simplified illustration. Let’s say a couple in their 60s has a large retirement portfolio and waiting until their 70s to start withdrawals would push them from their current 15% bracket to the 25% bracket. Instead, they might begin taking distributions early. If their current taxable income is around $30,000, for example, they could withdraw as much as $45,900 before being kicked into the 25% bracket, which begins at $75,900 for married couples.

These calculations have lots of moving parts, including different tax rates for taxable investments and for Social Security. That’s another reason to have a tax pro help you run the numbers.

Your pro will tell you that you can’t avoid taxes by rolling required minimum distributions into a Roth. You can contribute new money to a Roth, but only if you have earned income and your modified adjusted gross income is under certain limits. Those limits start to phase out at $118,000 for single filers and $186,000 for married couples filing jointly.

Q&A: The woes of this car-less worker can’t be fixed with junkers or leasing schemes

Dear Liz: My spouse and I are in Chapter 13 repayment bankruptcy and have a few more years to go. We’re obviously on a tight budget.

My spouse has the reliable car, but I’ve already paid $1,500 cash each for two junkers and it’s caused major stress. I know we can petition the court and be allowed to get financing, but we do not want to and can’t afford to on our budget.

I am, however, up for an evaluation and raise soon at the small, private company where I work.

I am thinking of asking that instead of a raise, they lease a vehicle for me. I do travel sometimes for business so it could be legitimized in that sense. If they leased a vehicle for, say, $200 a month, that would be close to the raise I’m expecting.

The real question is how to handle insurance and liability. Is it possible for my company to lease a vehicle but have the insurance liability fall on me, meaning would I be able to insure it under my own policy though the lease would be through the company?

Answer: Probably not.

A personal auto policy might not even cover your own car if it were used primarily for business. Personal policies typically wouldn’t cover a car owned or leased by your employer.

Also, businesses usually need more liability coverage than most individuals carry, since companies can be bigger lawsuit targets. You can ask for a leased car in lieu of a raise, but expect the cost of the insurance to be part of the calculation and be prepared for the company to decline.

It’s unfortunate you bought two junkers in a row, because the amount you ultimately spent could have bought you one decent car.

Car comparison site Edmunds has advice for finding reliable vehicles for $2,500, which it says is a reasonable budget for buying a solid car.

The vehicles are likely to be 10 to 15 years old and may have over 150,000 miles on the odometer, but if they’ve been well-maintained they can be reliable rides for several more years.

You’re likely to get the best deal via a private party sale, and you’ll want a good mechanic to check out any car before you buy. Your mechanic may even have a lead or two on cars that could be good candidates.

Your raise may allow you to revisit the idea of financing a car, albeit at a high interest rate.

As you know, you won’t be able to buy anything extravagant, and the purchase will have to be approved by both your trustee and the court. If the car is a necessity for you to get to work and you’ve been in your repayment plan at least two years, you have a good chance of being allowed to finance it.

If the car is not a necessity, you may have other options.

If you live in a city, a transit pass may get you to most of the places you need to go and you can rent a car or use a ride-sharing service when you need more custom transportation. Many people have discovered that cars are a costly hassle, and they live just fine without them.

Q&A: Starting Social Security benefits early will cost you

Dear Liz: I started getting Social Security at age 62. I would have only gotten $327 a month based on my work history, but they gave me $666 based on my husband’s work history. He gets $1,966 but your article said I should get half. Should I be receiving more?

Answer: Probably not.

Your spousal benefit would have been half of your husband’s “primary benefit amount” only if you’d waited until your own full retirement age to apply. Because you started several years early at 62, your check was reduced by 30%.

His primary benefit amount is what he would have received if he started benefits at his own full retirement age. Full retirement age is currently 66 and will rise to 67 for people born in 1960 and later.

Q&A: My 401(k) is making only 2-3%, so why not borrow from it and pay it back at 5%?

Dear Liz: You have warned in the past about the risks of a 401(k) loan. I have been investing now for 15 years, and the last 14 years, my average return has been between 2% and 3%. I am considered moderately aggressive in my choices of international (24%), large and small cap (52%), midcap (16%) and 8% in bonds.

It has been an absolute joke (until last quarter) so I took out a loan a few years ago and was planning on doing it again when the first is repaid in approximately two years. I look at it as a 5% return to make myself a little something in an unstable and nasty market. I see the loan as my best consistent return option.

Answer: There is something wrong with your portfolio if your average annual return has been that low — and if you think paying returns out of your own pocket is a better option than putting your money to work in the markets.

If you had invested in a plain vanilla balanced fund 15 years ago, with 60% of its portfolio in stocks and 40 percent in bonds, you would have received an average annual return of over 9% (and it would be up 10% in the last year alone). While you wouldn’t have achieved 9% every single year, and your returns would vary based on when you bought your shares over the years, you certainly should have done better with your portfolio than you have.

It’s possible your plan charges higher-than-average fees or your investment choices have higher-than-average expenses. A site called FeeX will evaluate your 401(k) portfolio for free and show you how its costs stack up against other plans. You may be able to move to less expensive options within your plan or press your company to look for lower-cost providers.

The loan you took out depressed your returns as well. That money was pulled out of your investments, so it wasn’t able to participate in the market’s growth. The 5% interest rate you’re paying may seem cheap, but it’s a bad deal when compared to the returns the money could have been earning.

Q&A: Changing credit scoring formulas will help some — but not everyone

Dear Liz: I read that the credit bureaus have started deleting black marks from people’s credit reports. This is good news for me. I have never been late on a house payment in 30-plus years, but my credit is in the low 600s due to a loan I co-signed for an ex-girlfriend who has been chronically late.

Answer: The records the credit bureaus are deleting won’t help improve your scores.

The three bureaus — Equifax, Experian and TransUnion — are removing virtually all civil court judgments and many tax liens from credit reports. Tax liens result from unpaid state or federal tax bills and civil judgments are court rulings from lawsuits filed over old debts, unpaid child support, evictions and other non-criminal disputes.

Judgments and liens caused a lot of disputes and complaints about accuracy because the records were often missing key identifying information and weren’t regularly updated. The bureaus are removing the records that don’t include minimum identifying information such as Social Security numbers or dates of birth in addition to names and addresses. The records must also have been updated within the previous 90 days.

The deleted records are expected to lead to small credit score increases for most of the 12 million to 14 million people who have such black marks on their credit reports.

Your issue is different. Because you co-signed, the loan appears on your credit reports as well as your ex’s. Every late payment hurts your credit scores. If your ex had simply stopped paying, your scores would have plunged even more — but then would have begun to improve as your responsible use of credit began to offset the default.

After seven years and 180 days, the defaulted loan would no longer show up on your credit reports or affect your scores. Because your ex keeps paying, albeit late, your credit scores sustain fresh damage each time. Each late payment also resets the clock on how long the negative marks show up on your credit reports. You won’t begin to get relief until the loan is paid off or refinanced.

Q&A: How cosigning a mortgage loan can bring big risks

Dear Liz: I’ve been self-employed for just over a year. Because of disbursements from a recent divorce, I have enough money to make a 40% down payment on a modest house. My income will easily cover the resulting mortgage payments, health insurance and other expenses, but I’ve been turned down for a loan several times without a cosigner. A family member has offered many times to do this, as the person doesn’t have the means or interest in buying a house anytime soon for various reasons. Reluctantly I am considering it.

This person has a good job but will not be contributing any money toward my down payment or mortgage payments. I plan on setting up a separate shared bank account that will cover at least a year to 18 months of expenses for the home in case something happens to me, so my relative isn’t burdened in any way. I also plan on listing this person as a beneficiary on the mortgage so they could choose to sell the house or live in it.

What would be the tax liability if this happens? What if we become roommates and they pay me rent? Would it be a good idea to refinance in a year or so to remove the cosigner? Would a revocable living trust be a better way to handle this situation?

Answer: The best way to handle this situation is to find a good real estate attorney who can explain your options. Your relative should do the same.

Cosigning a loan would have a lot of upside to you and mostly downside to your relative. Cosigners are equally responsible for the home loan, but they aren’t typically owners of the property.

If you want your relative to inherit the house should you die, you can include her as the property’s beneficiary in estate planning documents or a transfer on death deed, if your state has that document for real estate. (Mortgages aren’t assets, so they don’t have beneficiaries.) If your relative inherits the house, she typically wouldn’t owe taxes unless yours is one of the six states that still has an inheritance tax (Iowa, Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania). In these states, closer relatives typically pay a lower rate than more distant relatives or those who aren’t related.

You also could leave a sum of money to pay the home’s expenses for a certain period. That probably would be a better idea than a shared bank account, unless your relative insists on access to such a thing as a condition of the loan. In general, you should minimize financial entanglements with people if you’re not married to them or legally or morally responsible for them.

You probably should try to refinance this loan at your earliest opportunity, rather than leaving her on the loan or inviting her to be your tenant. Even in areas where landlord-tenant law favors the landlord, such a relationship can be tricky. In other areas, you could find yourself saddled with a relative who would be extremely difficult to evict.

Q&A: When waiting to take Social Security doesn’t make sense

Dear Liz: I receive $2,400 per month in Social Security. My wife, who turned 66 in early April, was told by the Social Security Administration that her retirement benefit will be about $800. Can I get spousal benefits for her of $1,200, less what her Social Security amount will be? My problem is that she wants to wait to get her maximum amount of Social Security. Could she start spousal benefits now or does she have to wait until age 70?

Answer: Waiting would be pointless. Even though she would boost her retirement benefit by 8% each year, or a total of 32% by age 70, she still would receive less than if she just signed up for spousal benefits now.

Because she has reached her full retirement age of 66, her spousal benefit would equal 50% of what you’re receiving. (Technically, she will receive her own benefit plus an additional amount that brings her up to 50% of your benefit.)

Delayed retirement credits, which increase retirement benefits between full retirement age and age 70, don’t compound but increase benefits by two-thirds of 1% each month. There are no delayed retirement credits for spousal benefits, but spousal benefits are reduced when people start them before their own full retirement age.

Q&A: When student debt payoff becomes complicated by identity theft

Dear Liz: I went back to school in 2002 to get my teaching credential. I took out several student loans and set up a repayment plan upon graduating with automatic deduction out of my checking account. Several years ago, the IRS started garnishing my bank account stating that there was a lien but I never received any other type of indication what was going on.

After contacting the IRS, we found that someone took out a fraudulent student loan using my former married name. I also got my credit reports, which showed the loan. I was able to get the signed loan documents from the U.S. Department of Education but now the department does not respond to my certified letters or phone calls.

I’m at a loss at what to do at this point. I filed a police report and notified the credit reporting agencies. I’m out almost $10,000. Is there any other advice you could give me?

Answer: First, follow up with the credit bureaus to make sure the fraudulent loan has been removed from your credit reports. Consider setting up credit freezes at all three bureaus to reduce the chances of being victimized again. The Identity Theft Resource Center at www.idtheftcenter.org has more information to help you protect yourself.

Getting the actual loan dismissed and your money back is a more difficult task. You may be able to have the loan erased under what’s known as a false certification discharge, but qualifying for that isn’t easy, said Jay Fleischman, a Los Angeles attorney who specializes in student loan problems.

It’s not enough to have a police report. You’d need to identify and file a lawsuit against the thief. If you can get a court judgment against that person, you would provide the Education Department with that as well as proof of your identity and possibly signature samples from the approximate date of the loan.

Even if you did everything necessary to prove eligibility for discharge, the department could still deny it if you received any benefits from the loan — if it paid any costs of your education instead of someone else’s, Fleishman said.

At this point, you may need to hire an attorney familiar with identity theft issues. You can get referrals from the National Assn. of Consumer Advocates at www.naca.net.

Q&A: The road to homeownership should be paved with skepticism

Dear Liz: My husband is 46 and I am 43. We have been living in Las Vegas for six years. We are aware that we missed out on buying a home a few years ago. Are we chasing a dream or do you think that we might have another chance to buy a house in the next few years? I am also very concerned about another recession. Some websites forecast one in 2018.

Answer: Some websites forecast the end of the world in 2016. And 2015. And 2014. And so on.

Recessions, by contrast, are pretty much inevitable but they’re not really predictable. You shouldn’t try to time your real estate purchases hoping to avoid, or take advantage, of the lower prices they might bring.

In general, you need to be a lot more skeptical about what you read and what you’re told if you want to be a homeowner and not get fleeced.

Everyone involved in real estate transactions — as well as in most other financial transactions — may have an incentive to mislead you or at least not tell you the whole truth. That’s why it’s so important to do your own research and make your own decisions.

Here’s just one example. A lender will tell you how large a mortgage it will give you, but that doesn’t necessarily mean you can really handle that loan. You may have other goals, such as retirement, that you won’t be able to achieve if you take on a too-large payment.

The best time to buy a home is when you want to be a homeowner, you’re financially ready to do so and you can afford to stay put for several years, because it can take a few years’ worth of appreciation to offset the costs of buying and selling a home (not to mention moving costs).

You also should make sure you have a healthy emergency fund — three months’ worth of expenses is a good start — to handle the inevitable unexpected expenses that arise when you own a home.

Q&A: Start saving early for retirement in case that last day of work sneaks up on you

Dear Liz: What advice would you give to a Silicon Valley professional who hasn’t done a good job planning for retirement? I’m 53 and maxing out my 401(k), saving $24,000 a year with my employer matching my contributions dollar for dollar up to 6% of salary. In addition, I’m saving $50,000 to $60,000 of my $240,000 annual salary. I’m debt free.

I wish I had started saving like this early in my career. Looks like I’ll probably have to work until I’m at least 65 or 70. Any advice on retirement planning would be greatly appreciated.

Answer: Your current savings rate is impressive, but you probably should plan to work at least until your full retirement age for Social Security, which is age 67.

Retiring earlier would require you to cut back even more on your spending or increase the odds your funds won’t last you through a long retirement.

Early retirement may be involuntary, of course.

Many people retire sooner than they expect thanks to a layoff, a health crisis or the need to take care of a family member. That is yet another reason why people should get started saving for retirement as early as possible — they may not have as many years to save as they think, and making up for lost time gets increasingly difficult the longer they wait.

Most people aren’t in the fortunate position to be able to save 30% or more of their incomes in their 50s, which means catching up is close to impossible.

You may still have options if your career and your savings sprint are cut short.

If you own a home, you can tap the equity either by downsizing (selling and moving to a smaller place) or using a reverse mortgage. You can reduce your expenses, possibly by moving to an area with a lower cost of living. You can supplement your retirement income by working part-time.

You also should consider maximizing your Social Security check by delaying benefits until age 70, even if you wind up retiring earlier. Social Security benefits grow by 8% a year between full retirement age and age 70, which is a guaranteed rate of return you can’t find anywhere else.

Delaying Social Security is a way to insure against longevity — if you live longer than you think and run out of other money, that larger check can help protect you from poverty at the end of your life.