October 15, 2012 By

How to help a friend with big debts

Dear Liz: I have a friend who owes $30,000 in credit card debt. I suggested he see a financial advisor who can help him to get out of this situation, but he never finds the time to do it. He pays all his bills on time, but only the minimum required, and there’s nothing left for him to save for his old age. He has a good-paying job but still struggles financially. How can we help him?

Answer: If your friend can pay only the minimum on his debt and can’t save for retirement, he’s in a deeper hole than he probably realizes. Many people in his situation wind up filing for bankruptcy, often after years of throwing money at impossible-to-pay debt.

Your friend should make two appointments: one with a legitimate credit counselor (referrals from the National Foundation for Credit Counseling at www.nfcc.org) and another with an experienced bankruptcy attorney (referrals from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org).

The credit counselor will review his financial situation and see whether he qualifies for a low-interest repayment program that would allow him to pay off his debt within five years. The bankruptcy attorney will let him know whether bankruptcy might be the better option.

As a friend, you can pass these suggestions along to him, and even offer to go with him to one or both appointments if he’s comfortable with that idea. But you can’t force him to face reality or take any action until he’s ready to do so. One thing you definitely shouldn’t do is lend him money. He’s not managing the debt he has, and you don’t want your loan winding up with the rest of his bills in Bankruptcy Court.

Filed Under: Credit & Debt, Credit Cards, Q&A Tagged With: , , , ,
October 15, 2012 By

“File and suspend” can boost Social Security benefits

Dear Liz: I am 63 and not nearly ready to collect Social Security. In fact I probably won’t be ready for quite a few years. My husband, who is 64, wants to collect on my Social Security as it is higher than his. Is there a way for him to do this that would not hurt me? I have called the Social Security office five times and have received five different answers. My husband went into the local office and they told him to have me apply for benefits and then after a short time send them a letter rescinding my application. That would allow him to collect on my work record and wouldn’t hurt my eventual benefit. I am not comfortable doing this. What do you suggest?

Answer: At your current age, you must start your own benefits for your husband to get a check based on your work record. The so-called spousal benefit is basically half your retirement benefit, and it will be somewhat reduced because your husband hasn’t achieved “full retirement age” (which is 66 for both of you). When he applies for spousal benefits, the Social Security Administration will compare that benefit with the one based on his own record and give him the larger of the two.

Starting benefits now, however, would lock you into a lower payment for the rest of your life. Your checks could be further reduced based on your earnings, if you continue to work.

If you can wait three years, you have another option called “file and suspend” that would allow your husband to collect a spousal benefit without reducing your eventual checks. Once you reach your full retirement age of 66, you can go to your local office to file for your benefit and then immediately suspend your application. That would allow your husband to collect a spousal benefit while your own uncollected benefit could continue to grow.

Another advantage for your hubby if you wait: He will have achieved his full retirement age when he starts receiving spousal benefits, so he would be allowed to switch to his own benefit later, if it’s larger. If he starts receiving spousal benefits before his full retirement age, he loses the option to switch.

You can learn more about the file-and-suspend strategy on the Social Security site at www.ssa.gov/retire2/yourspouse.htm. You may want to bring a printout of that page with you to the Social Security office. File and suspend is not an obscure strategy, but it doesn’t appear that your local office is quite aware of all the details.

Filed Under: Q&A, Retirement Tagged With: , , , , ,
October 8, 2012 By

High fees can break your nest egg

Dear Liz: We have $130,000 invested in mutual funds, but the returns the last few years have been less than 4%. With the financial advisor taking 2% as a fee annually, we are not satisfied with the growth. A co-worker suggested buying blue-chip stocks with a strategy to hold and reinvest the dividends. If this is done in a self-directed plan to avoid the fees, we could be netting 4% plus. Is this a good plan or should we trust the advisor’s optimism that our returns will improve soon?

Answer: You don’t mention your age, your investment mix or your goals for this money. But if your portfolio isn’t doing significantly better this year — after all, the Standard & Poor’s 500 stock market benchmark is up about 30% over the last 12 months — you have cause for concern.

Even if your returns were better, a 2% fee is pretty high. Small investors need to keep an eagle eye on costs, since expenses can have a huge effect on your nest egg. Paying even 1% too much could shave more than $100,000 off your returns over the next 20 years.

That doesn’t mean, however, that an all-stock portfolio is a better choice. Individual stocks typically are much riskier than a diversified portfolio of mutual funds or exchange-traded funds (ETFs).

What might make more sense is consulting a fee-only financial planner who can design a low-cost portfolio for you. You can get referrals to planners who charge by the hour at http://www.garrettplanningnetwork.com.

Filed Under: Investing, Q&A Tagged With: , , , , , ,
October 8, 2012 By

How to fight a medical collection

Dear Liz: My credit score just dropped more than 100 points within 45 days. The only thing I can think of that might have caused it is a $46 medical bill that was paid by my flexible spending account. I have a confirmation that the bill was paid, but for some reason the bill went to a collection agency. How do I get my credit score back to 828? I just recently moved and need a good credit rating for numerous reasons, especially purchasing a home and a new car. I was just turned down for a credit card from the bank that holds my mortgage. I tried dealing with the original medical office that received my payment, but they said I have to talk to the collection agency.

Answer: Check first to see if the collection account is actually on your credit reports. Go to http://www.annualcreditreport.com, the only site that offers you free, federally mandated annual access to your credit files at the three major credit bureaus. Other sites may advertise “free” credit reports, but they often come with strings attached such as requirements that you sign up for credit monitoring. Sites that offer free scores typically aren’t providing the FICO scores that most lenders use.

If the collection account isn’t on your reports, something else may have caused the score plunge. Consider buying at least one of your FICO scores from MyFico.com, which will give you an explanation of why your score isn’t higher.

If you find the collection account on your records, however, you need to go back to the medical billing office and insist that someone fix this, said Gerri Detweiler, a credit expert for Credit.com.

“The bill did not magically turn up in collections,” Detweiler said. “Someone made a mistake and since it is their office that was the source of the mistake, they need to fix it.”

Detweiler recommends sending a certified letter explaining that the office has damaged your credit reports and that if someone doesn’t fix the mistake immediately, you will be talking to an attorney about a credit damage lawsuit.

“If the medical office placed it for collections, they can pull it back from collections,” Detweiler said. “It sounds like they are being lazy by refusing to help.”

If the office balks for any reason, you can follow up with an attorney (you can get referrals from the National Assn. of Consumer Advocates at http://www.naca.net). You also can send a certified letter to the collection agency explaining the mistake and insisting it be removed from your credit reports.

You should mention in the letter that you’re trying to get a mortgage and a car loan and that if you’re unsuccessful because of this error, you’ll be talking with a consumer law attorney. It would be helpful to include proof of the mistake, Detweiler said. In many cases, the collection agency will simply delete the erroneous information rather than face getting sued.

“They may not want to bother with it since it’s such a small amount and not worth risking a lawsuit over,” Detweiler said.

Filed Under: Credit & Debt, Credit Scoring, Q&A Tagged With: , , , , , , , , , , ,
October 1, 2012 By

Should you take a lump sum now or an annuity check later?

Dear Liz: My former employer is offering the one-time opportunity to receive the value of my pension benefit as a lump-sum payment. The other option is to leave the money where it is and get a guaranteed monthly check from a single life annuity when I reach retirement age. I am 40 and single, and I have been investing regularly in a 401(k) since graduating from college. I have minimal debt aside from a car payment. When does it make financial sense to take a lump sum now instead of an annuity check later?

Answer: Theoretically, you often could do better taking a lump sum and investing it rather than waiting for a payoff in retirement. That assumes that you invest wisely, that the markets cooperate, that you don’t pay too much in investing expenses and that you don’t do anything foolish, like raid the funds early.

That’s assuming a lot. Another factor to consider is that the annuity is designed to continue until you die. It’s a kind of “longevity insurance” that can help you pay your bills if you live a long life.

Some financial advisors will encourage you to take the lump sum, since they may be paid more if you invest it with them. Consider consulting instead a fee-only financial planner who charges by the hour — in other words, someone who doesn’t have a dog in this particular fight. The planner can walk you through the math of comparing a lump sum to a later annuity and help you understand the consequences of both paths. This is a big enough decision that it’s worth paying a few hundred bucks to get some expert advice.

Filed Under: Annuities, Q&A, Retirement Tagged With: , , , , ,
October 1, 2012 By

Home sale tax break won’t disappear

Dear Liz: My wife and I are trying to sell our home, which has been our primary residence for six years. I am very concerned about the $500,000 capital gains exclusion. As I understand it, the exclusion would mean we wouldn’t have to pay taxes on our home sale profit. But we are confused about this exemption being tied to the “Bush tax cuts” that could expire Dec. 31. If we sell our home after that, could we lose the exemption?

Answer: No. The law creating a capital gains exemption for home sales went into effect May 6, 1997. It’s not tied to the tax cuts approved during President George W. Bush’s tenure that are set to expire at the end of the year.

So people who live in a home for at least two of the previous five years will still be able to avoid paying capital gains on their first $250,000 of home sale profit (or $500,000 for a married couple).

Another tax you likely won’t have to pay is a new 3.8% levy on what’s called “net investment income.” Some emails circulating on the Internet falsely claim that the tax, which is scheduled to kick in Jan. 1, is a real estate sales tax. In reality, it’s a potential tax on home sale profits that exceed the capital gains exemption limit, as well as on other so-called unearned income, including investment and rental income.

If your home sale profit doesn’t exceed the capital gains exemption limit, you won’t owe the new tax. If your profit does exceed the limit, the excess amount would be added to your adjusted gross incomes to determine whether you’d have to pay it. The 3.8% tax would be levied only on people whose adjusted gross incomes are more than $200,000 for singles and $250,000 for married couples.

Filed Under: Q&A, Real Estate, Saving Money, Taxes Tagged With: , , , ,
September 27, 2012 By

Many goals, few resources: How do you focus?

Dear Liz: I have read tons of books on finance and debt repayment, but I’m having trouble deciding what to do next. My husband and I are 52. He receives a monthly disability income, and I work two days a week. We still have about $105,000 left before our mortgage is paid off. We also owe about $7,000 in credit card debt and $5,500 in overdraft charges.

Should I concentrate solely on paying off debt, including the mortgage? Should we modestly renovate our 20-year-old home because after six kids, it is in need of a little TLC? We could downsize, but I’m somewhat emotionally attached to this house, and downsizing would still mean renovating to get the house in shape to sell. At the same time, we’d like to start a small business in our town. It wouldn’t be a huge investment of money, but it’s an outlay nonetheless. I don’t really want to wait five or 10 years to have to do this because it would mean income for one of our children who needs it and sometimes has to rely on us financially. How should I focus?

Answer: You didn’t say a word about retirement savings, but that should be a priority for most people.

If you don’t make a lot of money, Social Security is designed to replace 40% to 50% of your earnings. (The more you make, the less Social Security will replace, on the assumption that you’ve had more opportunity to save.) But most people, of any income level, would have trouble adjusting to living solely on their Social Security checks.

You can estimate your future benefit checks by using the Social Security Administration’s calculator at http://www.ssa.gov/estimator. Your results will be based on your actual earnings. Then you can use the AARP calculator (in the “work and retirement” section of the website) to figure out how much you need to save to have a comfortable retirement. You may not be able to reach that goal, but you should at least try to put aside something to improve your future life.

You don’t need to be in a rush to pay off your mortgage, but you should target that credit card debt and that shocking amount of overdraft charges. You also should know that renovations rarely pay for themselves when you’re ready to sell a home. At best, you typically get back 80 cents for every dollar you spend. A better approach is to make some cosmetic fixes that don’t cost a lot, such as new paint, clean windows and freshened-up landscaping.

As for opening a store, understand that small businesses can take a while to get off the ground. If you don’t have adequate savings or access to a line of credit, the business could fail and take your investment with it. The Small Business Administration at http://www.sba.gov has resources and Small Business Development Centers to help you understand what lies ahead. Do your research before you begin, and consider holding off at least until your toxic debts are repaid.

Finally, you didn’t explain why your child needs your money. If he or she is still a minor, that’s one thing. If he or she is an adult and not disabled in some way, however, then the parental dole needs to stop. It doesn’t sound like you and your husband are adequately providing for your futures. Your kids need to know they have to provide for their own.

Filed Under: Credit & Debt, Credit Cards, Q&A, Retirement Tagged With: , , ,
September 27, 2012 By

How to set up savings “buckets”

Dear Liz: You’ve written about how helpful it can be to have “savings buckets” or separate savings accounts earmarked for different goals such as vacations, property tax payments and so on. I have been trying to do this myself, but every bank I find charges so much in fees that it would cost more money than I would save. Either that, or they tie the savings accounts to a “free” checking account that has a high minimum balance. Can you please pass along any information about free savings accounts that have no minimum balance? I cannot use Internet banks because I cannot deposit cash when I have $5 or $10 in my pocket that I would take to the bank.

Answer: Actually, you can. Internet banks can be linked to your checking account at a brick-and-mortar bank. You can take your money to the bank, then transfer it to one of your savings accounts at the Internet bank. Unlike traditional banks, Internet banks such as ING Direct, Ally and FNBO don’t have balance minimums or monthly fees. You can set up several savings accounts without paying extra fees.

You still need a low-cost checking account, of course. You should be able to find one at a local credit union.

Filed Under: Q&A, Saving Money Tagged With: , , ,
September 18, 2012 By

Botched remodel holding up refinancing

Dear Liz: My husband and I are wondering whether it is time to file for bankruptcy. We have about $20,000 in credit card debt, largely because of a home addition and remodeling project my husband began five years ago. It has been much more costly and time consuming than he anticipated and is not even close to being finished. That prevents us from being able to refinance, which would free up money to pay our debt.

A mortgage broker recently suggested we apply for a home equity line to get enough cash for materials and labor to finish this project. We pay our mortgage and two car loans on time and make at least minimum payments on the cards.

My husband’s health has been declining, making it very difficult for him to do physical work on this project, and one of our kids has had two surgeries in the last few years, so there have been a lot of medical bills as well. How should we proceed?

Answer: You’re having trouble managing the debt you already have, so it’s definitely risky take on more. On the other hand, if you have enough home equity to get a line of credit, that could be a path out of this mess.

First, though, make an appointment with an experienced bankruptcy attorney (you can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org). A credit card balance of $20,000 isn’t by itself insurmountable, depending on your income, but the fact that you’re not paying much more than the minimums on your cards is a huge red flag — as are those medical bills.

The lawyer can review your situation and let you know whether bankruptcy is even a reasonable option. Each state’s laws differ, so you need to consult an expert.

If you decide instead to take out the home equity line, make sure you hire a competent and well-recommended contractor to finish what your husband started. The last thing you need is for someone else to botch the job.

Filed Under: Bankruptcy, Q&A, Real Estate Tagged With: , , , , , , ,