Liz Weston

Tuesday’s need-to-know money news

October 1, 2013 By Liz Weston

How to win the retirement lottery, getting help with your finances, and what boomers need to know about Obamacare enrollment.

Open A 401(k) And Win The Retirement Lottery
Opening a 401k as soon as possible could be the key to a prosperous retirement.

How Can I Get Help With My Finances?
How to take the important first step.

Protect Your Financial Life in the Event of a Disaster
Sharknado season is just around the corner.

Absolutely everything you need to know about how the government shutdown will work
How the government shutdown may affect you.

A boomer’s guide to Obamacare enrollment
The health care exchanges officially open today.

Monday’s need-to-know money news

September 30, 2013 By Liz Weston

How to do your banking on your phone, solving the mysteries of Obamacare, and avoiding the habits that could ruin your retirement.

Can a Debt Collector Double My Debt?
Unfortunately, they can.

How to Stay Safe Banking on Your Phone
Learn how to safely pay your bills in between rounds of Angry Birds.

Obamacare Isn’t Communism, And 13 Other Questions Answered
Clearing up the mysteries surrounding the Affordable Care Act.

Habits That Can Ruin Your Retirement
Retiring doesn’t mean you can get lazy.

What Obamacare will mean for retirees
The prescription drug plan donut hole is shrinking.

How to make charitable giving part of your financial plan

September 30, 2013 By Liz Weston

Dear Liz: What are your thoughts on charitable giving? I hear about tithing (giving 10% of income) but would have real problems trying to maintain that commitment. That said, I’d like to become a regular donor to a reputable charity.

Answer: Most U.S. households give to charity, according to the Center on Philanthropy at Indiana University, but the average contribution rate for those who give is closer to 3% than 10%.

If you want to step up your charitable giving, take the time to plan and prioritize as you would any other part of your financial life.

Making larger donations to a few charities is typically better than scattershot donations to a bunch of causes, said Ken Berger, the president and chief executive of nonprofit watchdog Charity Navigator. Charities spend money to process donations, and those costs tend to eat up more of small donations, he said. A $100 donation to a single charity might incur $2 in processing costs, leaving $98 for good works, Berger noted. The same $100, spread among 10 charities, would require each to spend $2 for processing — leaving just $80.

Because smaller donations don’t benefit charities as much, some are tempted to increase their “yield” by selling your information to other charities or repeatedly hitting you up for additional contributions, Berger said. Giving more allows you more leverage to ask that your information not be sold and that the charity limit its appeals.

You can research charities at websites such as Charity Navigator and GuideStar to make sure you understand their finances and how effective they are in reaching their goals.

Finally, consider setting up automatic donations rather than rushing to make contributions at year’s end. Some companies have payroll deductions for charities, or you can set up a recurring charge on a credit or debit card. Making your contributions automatic helps ensure you can achieve your charitable giving goals. It’s like saving or “paying yourself first” — when you don’t have to constantly remind yourself to do it, it’s more likely to get done.

Reverse mortgage: what to consider

September 30, 2013 By Liz Weston

Dear Liz: All my friends have said I should get a reverse mortgage to be able to live more comfortably and still stay in my house. I would think our greedy banking system would give you only 50% of value and have a high interest rate that would chew up the remaining value. What is your advice on the merits of this option?

Answer: A reverse mortgage program that lets you tap too much of your home equity wouldn’t be in business very long.

Reverse mortgages allow people 62 and older to borrow against the value of their homes without having to make payments on the debt. Instead, the amount they owe typically increases over time because interest is charged on the loan, and that adds up. Lenders get paid back when the owner moves out, sells the house or dies. If the house is worth less than the debt, the lender (or more often the insurer) suffers a loss.

Too-generous lending standards have already caused trouble for previous iterations of the Home Equity Conversion Mortgage, the federally insured option most often used by borrowers. Too many borrowers grabbed big lump sums up front, straining the program’s reserves and leaving the borrowers with few options if they ran into hard times later. Defaults rose as borrowers failed to pay their property taxes and insurance premiums as required.

The Federal Housing Administration, which insures HECMs, has tightened the rules so that borrowers can access less of their equity upfront. Fees also have increased.

How much you can borrow using a HECM depends on your age, the home’s value and current interest rates. Interest rates for lump-sum withdrawals are fixed, while those for lines of credit you can tap over time are variable.

You’ll certainly get a better (or at least less expensive) deal if you borrow 60% or less of your home’s value. The mortgage insurance premium for loans below that level is 0.5% of the home’s appraised worth under the new federal government rules that go into effect Monday. Those borrowing more than 60% face a premium equal to 2.5% of the home’s value. That’s in addition to a 1.25% annual mortgage insurance premium.

There’s no getting around the fact that these are expensive and complex loans. They’re usually not a great choice for people who have other assets to tap. They also can prove a land mine for people who drain their home equity too early and wind up with no resources later in life. On the other hand, they can provide a more comfortable retirement for those who would otherwise be strapped for cash, particularly if the borrowers opt for a steady stream of monthly payments rather than the upfront lump sum.

If you are considering a reverse mortgage, you should talk to a fee-only financial planner who is familiar with the program and who can review your other alternatives.

What you need to know about estate planning

September 28, 2013 By Liz Weston

Exclusive to Ask Liz Weston, this post comes courtesy of Ally Bank.

Whether you’ve worked for years or you’re just starting out, it makes sense to create a plan for distributing your assets after you’re gone. That’s where estate planning comes in. Estate planning may involve everything from creating a will to establishing trusts to designating guardians for dependents.

Below are a few common questions about estate planning addressed by several experts in the field.

What is estate planning?

Estate planning is the process of arranging for the disposal of your estate—your assets—during your life. In an interview with Ally Bank, Erin Baehr, president of Baehr Financial in Stroudsburg, Pennsylvania, stated, “all it really means is to organize the distribution of the things you own and the legacy you want to leave, large or small.”

Most estate plans are set up with the help of an attorney with experience in estate law. The core document in estate planning is the will, which describes which assets go to whom. Other aspects of an estate plan may include naming an executor of the estate, setting up durable power of attorney, and designating guardians for dependents. An estate plan usually will involve a trust.

In a recent interview with Ally Bank, Bruce D. Steiner, an attorney at the New York City firm Kleinberg, Kaplan, Wolf & Cohen and editorial advisory board member at Trusts & Estates, explained, “For most people, the focus is on what their will says. And in their will, if they’re sufficiently wealthy, and they give things away during their lifetimes, they almost always do it in some sort of a trust.”

Why establish a trust?

You want to ensure your beneficiaries receive what you intend to give with as few legal hurdles and unnecessary taxes as possible. A trust is a legal document that protects and controls your assets. Diane Morais, Ally Bank Deposits and Line of Business Integration Executive, explains, “As the economy stabilizes and Americans aim to grow their personal investments, Ally Bank suggests that savers protect the assets they have worked so hard to attain. Trusts can protect their legacies.”

Morais also noted in a recent article in The Huffington Post that many people are looking for bank products that work well with trusts: “With many Americans now able to save for the first time in years, many are evaluating bank accounts that are ideally suited for trusts . . . to firm up their own savings while simultaneously easing the burden on their beneficiaries.” Many banks, including Ally Bank, have deposit products ideally suited for trusts.

Who is estate planning for?

Anyone can benefit from planning for the future. Steiner explains that estate planning is for “Anybody who has assets and would like them to go in a way that might be different than the way they would go by default. That’s really most people.” And according to Baer, “Everyone should have an estate plan, if for no other reason than to make things easier on the people left behind.”

When should you start thinking about estate planning?

The answer is unique to you and your situation. As you age and accumulate assets, you may be more inclined to start thinking about how to protect what you’ve worked for. Steiner suggested that a person’s family situation usually plays into his or her decision to get started with an estate plan. He notes, “It might be when [you] have a spouse, but for most people, I think it’s certainly when they have a child, since you have to decide, if you’re not around, who’s going to take care of that child? And if you leave money to a child, and the child can’t manage money, you have to decide who’s going to be the trustee for the child’s money.”

How should you prepare to meet with an estate planner?

As part of the estate-plan process, you will want to draw up a list of your assets, making it as complete as possible. You should include life insurance policies and retirement benefits. You also want to think about your wishes regarding family members, dependents, executors, trustees, guardians, and beneficiaries.

What are recent changes in estate planning law?

The American Taxpayer Relief Act of 2012 was approved earlier this year. Explains Steiner, “It permanently fixed the federal estate tax exempt amount at $5.25 million, as indexed for inflation. It made portability permanent, which means if I have a spouse and I don’t use my entire exempt amount, my spouse can inherit my unused exempt amount.”

Want to learn more about estate planning? Check out these posts:

Who owes taxes after death?

Missed deadline could limit inherited IRA benefits

Tax bills for inherited IRAs

Inherited IRA may have more options than you’re told

Elderly mom isn’t the only one overdue for estate planning