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Liz Weston

Companies are also flunking retirement planning

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Plenty has been written about American workers’ failure to plan adequately for retirement. Their employers seem to be doing an even worse job.

Only 1 in 10 large employers offers a formal phased-retirement program that lets workers cut back their hours or responsibilities before they quit work entirely, according to the 2018 Longer Working Careers Survey by professional services consultant Willis Towers Watson. Fewer than 1 in 3 of the companies surveyed offered their employees the option to work part time or switch to a less demanding job, according to the survey, which polled 143 large U.S. companies that employ 2.9 million people.

In my latest for the Associated Press, why more companies should offer formal phased retirement programs.

Monday’s need-to-know money news

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Today’s top story: How student loan default can gut your paycheck. Also in the news: Changing your screen habits from time-wasting to money-saving, 5 tips for cutting the cost of having your taxes done, and what to do about a surprise student loan bill.

How Student Loan Default Can Gut Your Paycheck
Avoiding wage garnishment.

Change Your Screen Habits From Time-Wasting to Money-Saving
Using your apps to be more productive.

5 Tips for Cutting the Cost of Having Your Taxes Done
Free help could be available.

What to Do About a Surprise Student Loan Bill
Don’t ignore the mail.

Q&A: Who is an independent contractor?

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Dear Liz: You answered a question from a mother who was concerned that her son didn’t understand the financial implications of being an independent contractor rather than an employee. From what she wrote, the company employing him may not be following the law. The IRS has criteria to determine whether the worker qualifies as a contractor. I have been in that situation on at least two occasions. In one of those, the IRS went after the employer for all the taxes it should have paid even though I had paid all the Social Security and Medicare taxes. This could put the worker in a difficult position if the employer is found to be violating the law.

Answer: Thank you for bringing that up. There’s something called the “ABC test” that many states use to determine whether someone can be classified as an independent contractor. Many of the states use just the first and third test (A and C), but a few states, including California, require all three:

The worker is free from the control and direction of the hirer in relation to the performance of the work, both under the contract and in fact;

The worker performs work that is outside the usual course of the hirer’s business; and

The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hirer.

The second prong is what will trip up a lot of businesses hoping to reduce their costs by classifying workers as independent contractors rather than W-2 employees.

Q&A: Delaying Social Security

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Dear Liz: In a recent column you mentioned Social Security’s delayed retirement credit, writing that someone’s benefit could grow 32% by delaying benefits for four years between ages 66 and 70. Four years’ worth of accrued 8% increases in Social Security result in a cumulative increase of 36%, not 32%. I would think any financial planner would understand compound growth.

Answer: Social Security’s delayed retirement credits don’t compound.

Now, you may feel a little silly for pointing out an error that wasn’t actually an error, especially because you could have found the correct answer through a quick internet search (“Is Social Security’s delayed retirement credit compounded?”). But who hasn’t made a similar mistake? Sometimes what we don’t know about money isn’t the problem — it’s what we do know for sure that just isn’t true. (A similar quote is often attributed to Mark Twain, although there seems to be no evidence he ever said or wrote it.)

When I’ve made errors in this column, it’s often because I thought I understood something I didn’t or that my knowledge was up to date when it wasn’t. That’s why it’s so important to double-check our information with authoritative sources.

Q&A: Nearing retirement and in debt? Now isn’t the time to tap retirement savings

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Dear Liz: I’m 60 and owe about $12,000 on a home equity line of credit at a variable interest rate now at 7%. I won’t start paying that down until my other, lower-interest balances are paid off in about two years. I have about $130,000, or about 20%, of my qualified savings sitting in cash right now as a hedge against a falling stock market. Should I use some of that money to pay off the HELOC? I know I would pay tax on what I pull out of savings, but I’m not sure what the driving determinant is: the tax rate now while I’m working versus tax rate later after retirement? I don’t think there’s going to be a 7% difference in that calculus but please provide your recommendation.

Answer: There are enough moving parts to this situation, and you’re close enough to retirement, that you really should hire a fee-only financial planner.

Getting a second opinion is especially important when you’re five to 10 years from retirement because the decisions you make from this point on may be irreversible and have a lifelong effect on your ability to live comfortably.

In general, it’s best to pay off debt out of your current income rather than tapping retirement savings to do so. You’re old enough to avoid the 10% federal penalty on premature withdrawal, but the decision involves more than just tax rates. Many people who tap retirement savings haven’t addressed what caused them to incur debt in the first place and wind up with more debt, and less savings, a few years down the road.

That might not describe you, as you seem to be on track paying off other debt. But it’s usually best to tackle the highest-rate debts first, which you don’t seem to be doing. It’s also not clear if you’re saving enough for retirement. That will depend in large part on when you plan to retire, when you plan to claim Social Security, how much your benefit will be and how much you plan to spend.

A fee-only financial planner could review your circumstances and give you the personalized advice you need to feel confident you’re making the right choices. You can get referrals from a number of sources, including the National Assn. of Personal Financial Advisors, Garrett Planning Network and XY Planning Network.

Thursday’s need-to-know money news

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Today’s top story: 4 ways to cut your tax bill by April 15th. Also in the news: How banking apps can motivate you to save, what to do in a bank outage like Wells Fargo’s, and how to make extra money online.

4 Ways to Cut Your Tax Bill by April 15 (Yes, There’s Still Time)
But you’ll need to act fast.

How Banking Apps Can Motivate You to Save
Following through on wanting to save.

In a Bank Outage Like Wells Fargo’s, Here’s What You Can Do
Don’t panic.

How to Make Extra Money Online
A little extra pocket cash is always a good thing.