q&a Archives - Page 54 of 106

April 30, 2018 By Liz Weston

Q&A: The idea here is not to cheat public servants

Dear Liz: Thanks for your column about Social Security claiming strategies. Here’s a further complication you didn’t address. If the surviving spouse is a teacher in many states, access to survivor’s Social Security benefits is further restricted (if not entirely blocked) by a misogynistic, anti-teacher ruling dubbed the windfall elimination provision, which perhaps was a backlash against the women’s liberation movement of the 1970s and 1980s.

Any clarification on the windfall elimination provision’s inconsistent application and its impact on my widow’s fixed income will be greatly appreciated.

Answer: The explanation is actually a lot more prosaic.

The windfall elimination provision and a related measure, the government pension offset, were not designed to rob public servants of benefits other people get. Instead, the provisions were meant to keep those who get government pensions from getting significantly bigger benefits than people in the private sector.

The provision that would reduce and possibly eliminate your spouse’s survivor benefit is actually the government pension offset. The offset, like the windfall elimination provision, applies to people who get pensions from jobs that didn’t pay into the Social Security system. (Some school systems, as well as other state and local government employers, have opted out of Social Security and provide their own pensions instead.)

If both you and your spouse had only Social Security and no government pensions, one of your two Social Security checks would stop at your death. After that, your spouse would get one check — the larger of the two checks the household received — as a survivor benefit.

If the government pension offset didn’t exist, your widow could receive two checks: a survivor benefit equal to your Social Security benefit, plus her pension. She potentially would be getting a lot more from Social Security than those who paid into Social Security their entire working lives.

The windfall elimination provision, meanwhile, applies to people who have government pensions but also worked in jobs that paid into Social Security.

When people don’t pay into the system for several years because they have jobs with government pensions instead, their annual Social Security earnings for those years are reported as zero. Because Social Security is based on workers’ 35 highest-earning years, those zeros make it look like they have lower lifetime earnings than they actually did.

That’s a problem because the Social Security system is progressive, replacing more income for lower-earning workers than for higher-earning ones. Without adjustments, people with pensions would look like lower earners than they actually were. They would wind up with bigger Social Security checks than someone who had the same income in a private-sector job that paid in a lot more in Social Security taxes.

These provisions are complicated and hard to explain, which is part of the reason some people jump to the conclusion they’re being denied something others are getting. In reality, the provisions were meant to make the system more fair.

Filed Under: Q&A, Retirement Tagged With: pensions, q&a, Social Security, teachers, windfall elimination provision

April 23, 2018 By Liz Weston

Q&A: Don’t run out of money in retirement: Here’s how much to use per year, and why

Dear Liz: I am confused about “safe withdrawal rates” from retirement accounts. I’ve read that withdrawing 4% of savings each year is the gold standard that financial planners utilize to ensure that life savings are preserved in retirement.

However, if the Standard & Poor’s 500 index returns on average 8% a year, and if the life savings are locked down in a mutual fund that is indexed to the S&P 500, then shouldn’t the annual withdrawal amount, to preserve those savings, be 8%? Limiting my withdrawals to 4% means my retirement would be pushed several years down the road. Can you clarify?

Answer: It’s good you asked this question before you retired, rather than afterward when it might have been too late.

You’re right that on average, the S&P 500 has returned at least 8% annualized returns in every rolling 30-year period since 1926. (“Rolling” means each 30-year period starting in 1926, then 1927, then 1928, and so on.)

But the market doesn’t return 8% each and every year. Some years are up a lot more. And some are down — way down. In 2008, for example, the S&P 500 lost about 37% of its value in a single year.

Such big downturns are especially risky for retirees, because retirees are drawing money from a shrinking pool of assets. The money they withdraw doesn’t have the chance to benefit from the inevitable rebound when stock prices recover. Bad markets, particularly at the beginning of someone’s retirement, can dramatically increase the odds of running out of money.

Inflation also can vary, as can returns on cash and bonds. All these factors play a role in how long a pot of money can be expected to last. The “4% rule” resulted from research by financial planner William Bengen, who in the 1990s examined historical returns from 1926 to 1976. Bengen found there was no period when an initial 4% withdrawal, adjusted each year afterward for inflation, would have exhausted a diversified investment portfolio of stocks and bonds in less than 33 years.

Some subsequent research has suggested a 3% initial withdrawal rate might be better, especially for early retirees or those with more conservative, bond-heavy portfolios.

Free online calculators can give you some idea of whether you’re on track to retire. A good one to check out is T. Rowe Price’s retirement income calculator. But you’d be smart to run your findings past a fee-only financial planner as well. The decisions you make in the years around retirement are often irreversible, and what you don’t know can hurt you.

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

April 16, 2018 By Liz Weston

Q&A: What’s better, collecting Social Security early or blowing through retirement savings?

Dear Liz: I am married and six months away from my full retirement age, which is 66. I have not filed yet. My wife started collecting Social Security at 62 but does not get very much. We are both in excellent health and have longevity in the genes. We don’t own a home. I have around $960,000 in diversified investments. I take out around $7,000 to $8,000 a month to meet my monthly expenses. Fortunately, the markets have been good, helping my portfolio, but I am not counting on that to continue at the same pace.

Doesn’t it make more sense to be taking less money out each month by starting Social Security now? I know I would receive less money than waiting until 66 or later, but between my check and the spousal benefit my wife could get, I would reduce my annual living expense withdrawals from my account by close to 50%. This would give my portfolio more opportunity to grow, since I will not be taking out so much every month.

I wish I could cut my expenses or could earn more income but cannot at this point. I am shooting for not taking more than 5% a year out of the portfolio going forward.

Answer: You’re right that something needs to change, because your withdrawal rate is way too high.

You’re currently consuming between 8.75% and 10% of your portfolio annually. Financial planners traditionally considered 4% to be a sustainable withdrawal rate. Any higher and you run significant risks of running out of money.

Some financial planning researchers now think the optimum withdrawal rate should be closer to 3%, especially for people like you with longevity in their genes. Chances are good that one or both of you will make it into your 90s, which means your portfolio may need to last three decades or more.

So even if you start Social Security now, you’ll need to reduce your expenses or earn more money to get your withdrawals down to a sustainable level.

Generally, it’s a good idea for the higher earner in a couple to put off filing as long as possible. The surviving spouse will have to get by on one Social Security check, instead of two, and it will be the larger of the two checks the couple received. Maximizing that check is important as longevity insurance, since the longer people live, the more likely they are to run through their other assets. Your check will grow 8% each year you can delay past 66, and that’s a guaranteed return you can’t match anywhere else. In many cases, financial planners will suggest tapping retirement funds if necessary to delay filing.

But every situation is unique. Your smartest move would be to consult a fee-only financial planner who can review your individual situation and give you personalized advice.

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

April 16, 2018 By Liz Weston

Q&A: The ins and outs of inherited IRAs

Dear Liz: I have questions about inherited IRAs. A friend has designated me and three others as beneficiaries of her IRA. Is this to be considered community property with my husband? How can I inherit this as “sole and separate property”? Must taxes be paid on this? Also, may I give gifts of cash to relatives beforehand rather than naming them as recipients of my IRA and burdening them with taxes? If I do not name survivors to my IRA, what happens to my hard-earned money after I die?

Answer: Inheritances are considered separate property in every state, including community property states. If you commingle the funds — by depositing a withdrawal in a jointly held checking account, for example — then that money potentially becomes community property. You should consult a tax pro or financial planner about the rules governing non-spouse inheritors, since they’re somewhat complicated. You’ll pay income taxes on withdrawals from regular IRAs you inherit, but typically not from Roths.

You’re welcome to give anyone as much as you want, and they won’t have to pay taxes on the gift. You could owe taxes if you give away enough money, but that’s unlikely. You have to file a gift tax return if you give more than $15,000 per recipient in a given year, but you won’t actually pay gift taxes until the amounts you give away over that annual exclusion limit exceed your lifetime limit, which is currently $11.2 million.

If you’re concerned about taxes, though, naming people as IRA beneficiaries is often a smarter tax move than not doing so and having your estate inherit the money.

If your estate is the beneficiary, the money typically would have to be paid out to your estate’s heirs — and taxed — faster than if specific people were named. Your heirs might have to empty the account within five years, or the IRA custodian may opt to distribute the whole amount to the estate in one taxable distribution. Naming people, on the other hand, may allow the option of stretching the IRA, which means taking distributions over their lifetimes. The tax-deferred money that remains in the account can continue to grow. This is another topic to discuss with your advisor.

Filed Under: Inheritance, Q&A, Retirement Tagged With: Inheritance, IRA inheritance, q&a

April 9, 2018 By Liz Weston

Q&A: Their kids are spendthrifts. How do parents protect them with a trust?

Dear Liz: My wife (71) and I (68) have been diligent savers our entire lives. We have accumulated IRA assets of approximately $2 million along with a house and other assets. Our total estate is under $10 million. We have two adult children in their 20s who did not inherit the saving gene. My question is: Does a trust exist that would maintain the IRA’s tax-deferred status, make required minimum distributions to our kids and include appropriate spendthrift provisions? Also, would the distributions be based on our life expectancies or on theirs?

Answer: Yes, you can create a spendthrift trust and name it as the beneficiary of your IRAs. Your children could be named beneficiaries of the trust. Required minimum distributions for inherited IRAs would be based on the elder child’s life expectancy. Your children would not be able to “invade” or tap the principal.

A spendthrift trust would not only prevent your kids from blowing through any money left in the IRAs. It also would prevent creditors from getting the money in case of bankruptcy. In many states, inherited IRAs are vulnerable to creditor claims.

Here’s the thing, though: This is a question you should be asking your estate planning attorney. If you don’t have one, you need to get one. People with small, simple estates may be able to get away with do-it-yourself planning, but yours is neither small nor simple. Trying to save money by using software or forms just isn’t a good idea. Whatever money you save may be wasted when your estate plan goes awry in ways you didn’t foresee, because you’re not an estate planning expert.

Trusts that name IRAs as beneficiaries, for example, must have special language to accomplish what you want, said Jennifer Sawday, an estate planning attorney in Long Beach. Without the right language, the IRA custodian might liquidate the IRA instead. That would trigger the taxes and lump sum payouts you’re trying to avoid.

Filed Under: Estate planning, Q&A Tagged With: Estate Planning, Inheritance, q&a, spendthrift trust, trust

April 9, 2018 By Liz Weston

Q&A: Managing debt with credit counseling

Dear Liz: I contacted a company to help me resolve my debt. They present themselves as a nonprofit organization and seem to offer a possible solution by reducing the interest rate I’m paying on my credit cards. How do I determine the trustworthiness of this and other such organizations?

Answer: If the organization is affiliated with the National Foundation for Credit Counseling, then it’s a legitimate credit counseling agency. These agencies offer debt management plans that typically allow people to pay off their credit card debt over three to five years at reduced interest rates. People enrolled in the plans make monthly payments to the counseling agency, which then distributes the money to the creditors. Fees vary by agency, but the cost to set up a plan is typically less than $50 and the monthly fee around $35.

Debt management plans are not loans or debt consolidation. They’re also not a way to settle your debt for less than you owe. They’re a potential solution for people to pay off what they owe over several years.

Credit counseling got a bad name in the 1990s when a bunch of companies masquerading as nonprofits got into the business of offering debt management plans. Many siphoned off money that was meant for creditors or failed to pay creditors at all. The IRS cracked down and cleared out many of the worst offenders.

You can visit www.nfcc.org to see if the agency is listed and to get its contact information. (It’s best to get the information directly from NFCC, just in case you’re dealing with a copycat.)

Before you sign up with a credit counselor, though, you also should consult with a bankruptcy attorney. Credit counselors may try to steer you away from bankruptcy, and you’ll want an attorney to review your situation to help you understand if bankruptcy may be a better option.

Filed Under: Credit Counseling, Q&A Tagged With: Credit, credit counseling, debt, q&a

April 2, 2018 By Liz Weston

Q&A: Procrastination can mean estate-planning disaster

Dear Liz: My husband and I own all our assets as joint tenants. Because we have no children, we did not want to rush into making a will. But for the past few years, my husband’s older sister has been pressuring him to write a will benefiting her 60-year-old daughter.

His sister has gone so far as to ask my husband to send her a notarized list of all our assets, including bank accounts. He’s declined but she does not take “no” for an answer. He no longer communicates with her. It is our wish to benefit only the organizations and institutions that we already support. Although family members and relatives will not be named in the will, I wonder if his sister or anyone else can still try to claim an inheritance.

Answer: If you don’t stop procrastinating, everything you own may be inherited by that pushy sister-in-law. So get a move on.

Your jointly owned assets should pass to the other spouse when one of you dies, but when the survivor dies the property would be distributed according to your state’s laws if you don’t have a will or other estate plan. The laws of intestate succession typically put any children first in line, followed by parents. If you don’t have kids and your parents are dead, then siblings usually inherit.

People who would have inherited in the absence of a will typically have the “standing” or legal ability to challenge a will. Given your sister-in-law’s extreme sense of entitlement, you should count on her doing so. You should enlist an experienced attorney to help set up a will that can survive such a challenge.

Filed Under: Estate planning, Q&A Tagged With: Estate Planning, q&a

April 2, 2018 By Liz Weston

Q&A: You need a planner for personalized advice

Dear Liz: I have five questions. I have enclosed five sheets of paper with each question printed at the top. Please feel free to simply write your advice on each page, and then insert them into the addressed and stamped envelope I have enclosed. This is my attempt to make it easy for you to respond.

Answer: Thank you, but it’s not the lack of paper or a stamp that prevents columnists from replying to private inquiries. Questions of general interest may be answered here, but you’ll need to seek out a financial advisor for personalized advice.

You have many options for finding fiduciary, fee-only advisors. Fee-only advisors accept fees only from clients rather than accepting commissions or other compensation based on products the advisors recommend. Fiduciaries are advisors who promise to put clients’ best interests first. The following organizations can connect you to fee-only advisors who are fiduciaries:

—The National Assn. of Personal Financial Advisors. NAPFA advisors must be certified financial planners (CFPs). Many NAPFA planners charge a percentage of the assets they manage (called an “assets under management” or AUM fee) and have minimum asset requirements, although some charge hourly or retainer fees. A typical fee is around 1% of assets under management.

—XY Planning Network. Advisors must be CFPs and offer the option of flat monthly fees, although they may offer other arrangements including hourly or AUM fees. Monthly fees are typically $100 to $200, with some planners charging an initial fee of $1,000 to $2,000.

—The Garrett Planning Network. Planners must be CFPs or on track to get the designation, or CPAs who have the personal financial specialist (PFS) credential. Hourly fees usually range from $150 to $300.

—Assn. for Financial Counseling and Planning Education. This group offers two credentials for advisors: accredited financial counselor (AFC) and financial fitness coach (FFC). Both focus on helping middle- and lower-income people get a handle on the basics, including budgeting, debt management and retirement planning. Counselors work with clients in financial crisis or who need help with spending plans, eliminating debt, building savings and improving financial stability, said Rebecca Wiggins, the association’s executive director. Coaches focus more on helping clients understand how effective money management can help them achieve life goals, with a focus on changing financial behavior using goal setting, accountability and monitoring, Wiggins says. Many counselors and coaches work for the military, credit unions or other organizations and offer their services free or at reduced cost. Coaches and counselors who have private practices typically charge $100 to $150, but many work on a sliding scale.

Filed Under: Financial Advisors, Q&A Tagged With: financial advice, q&a

March 26, 2018 By Liz Weston

Q&A: A large foreign bequest could trigger U.S. taxes

Dear Liz: I have received an inheritance of $445,000 from a relative who died out of the country. Do I have to pay income tax on this money?

Answer: If you inherited from someone who was a U.S. citizen who lived abroad, then that person’s estate may be subject to U.S. estate taxes. The estate would have to be quite large, though. In 2017, estates worth less than $5.49 million per person were exempt from the tax. In 2018, the amount was raised to $11.18 million.

If you had paid any taxes on your inheritance to a foreign government, you could take a tax credit on your U.S. tax return for that amount.

Otherwise, you probably won’t owe any taxes. The federal government and most states don’t levy inheritance taxes on people who receive bequests. The exceptions are Iowa, Kentucky, Nebraska, Maryland, Pennsylvania and New Jersey, which do levy taxes on inheritances. All exempt spouses, and some exempt other immediate relatives.

Filed Under: Inheritance, Q&A, Taxes Tagged With: Inheritance, q&a, Taxes

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