Ask Liz Weston

Get smart with your money

Liz Weston

Q&A: Here’s a way to fight Social Security fraud

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Dear Liz: To make us less likely to become victims of fraudulent activity, years ago I froze our credit bureau files. I assume the Social Security Administration could be hacked as well. Can those files be frozen?

Answer: No, but you can create an online account to track and monitor your Social Security records — and it’s probably a good idea to do so. Fraudsters are creating such accounts and using them to divert benefits onto prepaid debit cards. If you created yours first, this fraud will be harder to pull off. If someone has already created an account in your name, you can find out and start the process of taking back your identity. The place to set up your account is www.ssa.gov/myaccount.

Q&A: Don’t jump into early retirement without considering these things

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Dear Liz: I am almost 59½. Can I retire at 60½?

I have $570,000 in a 401(k) and $180,000 in an IRA. I owe $253,000 on a condo that would sell for $600,000. I plan to buy a home next year for $400,000 and pay off the mortgage with the proceeds of the condo. Then I would be left with no bills. I will start collecting Social Security at 62 for approximately $1,850 a month.

I had a wonderful job for 23 years but something changed at work and now just going to work is hard on me. Let me know if you think this is doable.

Answer: That depends. How much do you need and want to spend?

Financial planners typically consider a 3% to 5% withdrawal rate as “sustainable.” The rate depends on how long you’re expected to live and your asset allocation, among other factors, but you should err on the conservative side if you expect to retire early.

A 3% initial withdrawal rate would give you $1,875 a month. A higher withdrawal rate could dramatically increase your chances of running short of money later in retirement.

While you might not have a mortgage, you would certainly have other bills, including the cost of healthcare insurance. If your employer is subsidizing your coverage, as many do, you could end up paying a lot more.

And if Congress dismantles or alters the Affordable Care Act, your health insurance could get even more expensive or perhaps hard to find. Your healthcare costs may go down once you qualify for Medicare at age 65, but they certainly won’t go away.

Also consider that taking Social Security retirement early means a smaller check for the rest of your life. If you do run short of money, that check may be your only source of income, and you may curse yourself for locking in the smaller amount.

You certainly shouldn’t bail on your job before you’ve had a fee-only financial planner look at your situation and see if your plans are realistic.

Equifax hack: Freezing your credit isn’t enough

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The Equifax hack exposed the names, addresses, birthdates and Social Security numbers of up to 145.5 million Americans. Drivers license information for 10.9 million people was also exposed, according to a Wall Street Journal report.

Credit freezes won’t prevent criminals from taking over credit, bank, retirement and investment accounts, says security expert Avivah Litan with Gartner Research. Thieves also could use the purloined information to snatch your tax refund or mess with your Social Security benefits. Your email, phone, shopping and cloud-based storage accounts aren’t safe, either.

Read my Associated Press column for the steps you should take now.

Q&A: Help your son by helping yourself

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Dear Liz: I’m a new mom and want to start saving for my son’s college/car/other life expenses while also planning a secure future for him. If I only had, for example, $300 a month to put toward this goal, what would you recommend I spend it on? Life insurance? Savings accounts for him? Savings accounts for my household? A 401(k)? Stashing away money under the mattress? Something else I haven’t thought of yet? I just want to make sure I’m doing the very best for my son and our future.

Answer: Congratulations and welcome to the wonderful adventure that is parenthood.

This adventure won’t be cheap. The U.S. Department of Agriculture estimates the cost of raising a child to age 18 is now $233,610 for a middle-income married couple with two kids. Your mileage will vary, of course, but there’s no denying that your income will have to stretch to cover a lot more now that you’re providing for a child.

Your impulse will be to put your son first. To best care for him, though, your own financial house needs to be in order.

Begin by creating a “starter” emergency fund of $500 or so. Many people live paycheck to paycheck, which means any small expense can send them into a tailspin. Eventually you’ll want a bigger rainy-day fund, but it could take several years to build up the recommended three months’ worth of expenses, and you don’t want to put other crucial goals on hold for that long.

Once your starter fund is in place, you should contribute enough to your 401(k) to at least get the full company match. Matches are free money that you shouldn’t pass up.

You probably need life insurance as well, but don’t get talked into an expensive policy that doesn’t give you enough coverage. Young parents typically need up to 10 times their incomes, and term policies are the most affordable way to get that much coverage.

After life insurance is in place, you can boost both your retirement and emergency savings until those accounts are on track. If you still have money left over to devote to your son’s future, then consider contributing to a 529 college savings account. These accounts allow you to invest money that can be used tax free to pay for qualifying education expenses anywhere in the country (and many colleges abroad, as well).

Keep in mind that post-secondary education really isn’t optional anymore, particularly if you want your kid to remain (or get into) the middle class. Some kind of vocational or college degree is all but essential, and the money spent can have a huge payoff in terms of his future earnings.

Q&A: Adding daughter to home could create a tax burden

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Dear Liz: My wife and I are both 80 and we are contemplating adding our 56-year-old daughter as a co-owner and borrower to our home. The house is now valued at $600,000 and our mortgage balance is $196,000.

If it is advisable, and I am able to do this, will it prevent the house going into probate when my wife and I have passed on? Because my daughter will be the sole beneficiary of our assets, is a will or living trust required?

Answer: Please don’t do this without consulting an estate planning attorney — who will most likely tell you not to do this.

You can’t add your daughter to the mortgage without refinancing the loan. Adding your daughter to the deed means she would lose the valuable “step up” in tax basis that would otherwise happen after your deaths.

If she’s made a co-owner, she could be subject to capital gains taxes on all the appreciation that happened on her share. That tax burden essentially would disappear if she were to inherit the home instead.

How you should bequeath the home to her depends on where you live. In most states, probate — the court process that typically follows a death — isn’t that bad.

However, in some states, such as California or Florida, probate can be lengthy, expensive and worth avoiding. It can be worth investing in an attorney to draw up a living trust.

Another option in many states, including California, is a “transfer-on-death” or beneficiary deed, which allows you to sign and record a deed now that doesn’t transfer until your death. You can revoke the deed or sell the property at any time.

Florida doesn’t have transfer-on-death deeds, according to self-help site Nolo.com, but the state offers something similar called an “enhanced life estate” or “Lady Bird” deed.

But again, discuss this with a qualified estate planning attorney before proceeding.

Today’s must-read: Run–don’t walk–out of this store

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Everybody knows that renting-to-own furniture, televisions and electronics is an expensive way to buy. What you may not know are all the other ways these transactions can hurt you. It’s not just ruined credit and aggressive collection tactics. In some states, you can even go to jail.

NerdWallet’s investigative reporting team exposes the horror stories behind the largest rent-to-own chain, which has expanded into stores serving middle-income customers. The stories include “Kicking in Doors and Crushing Credit,” “Rent-to-Own Slip-Up Can Land You in Jail,” “Rent-to-Own: Be Informed Before You Sign” and “Why Would Anyone Rent-to-Own?”

Read the full coverage here.