Ask Liz Weston

Get smart with your money

Liz Weston

You’ll probably live longer than you think

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Women often don’t score as well as men in surveys of financial literacy. One area where we seem to do better is “longevity literacy,” or understanding how long we’re likely to live.

Longevity literacy is essential to smart retirement planning. Overestimate your longevity, and you could retire too late or scrimp too much. Underestimate it and you could run short of money.

In a recent TIAA Institute study, 43% of women correctly estimated the life expectancy of 60-year-old women in the U.S. (The right answer was 85.) Only 32% of men chose the correct answer for the life expectancy for 60-year-old men, which was 82. Men also were far more likely than women to underestimate life expectancy — and that’s a huge potential problem for both sexes.

A man who expects to die in his 70s might draw too much from retirement funds or start Social Security too early. That could leave him — and the spouse who may outlive him — with too little income later on.

In my latest for the Washington Post, learn what you can do to protect against longevity risk.

This week’s money news

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This week’s top story: Smart Money podcast on money scams, and renting credit card tradelines for cash. In other news: AI and hiring decisions,  June 2023 rent report, and CFPB warning that student loan borrowers will struggle with repayment.

Smart Money Podcast: Money Scams, and Renting Credit Card Tradelines for Cash
This week’s episode starts with a discussion about new scams, including Google Voice and AI scams.

AI Could Prevent Hiring Bias — Unless It Makes It Worse
Advocates say AI can eliminate human biases in hiring. Skeptics point out that AI tools are trained by … humans.

June Rent Report: Rent Growth Is Cooling, but Prices Remain High
The May data, released June 6, shows typical rent prices in the U.S. are now $2,048.

Student Loan Borrowers Will Struggle With Repayment, CFPB Warns
One in five borrowers could struggle when student loan payments resume later this summer.

Q&A: Annuities can come with a tax surprise

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Dear Liz: I made a one-time purchase of a variable deferred annuity with a $10,000 inheritance I received about 25 years ago, based on a co-worker’s advice. Over the years I have not made any additional payments or withdrawn any funds. It matures in about a year with an option of withdrawing the lump sum, which was nearly $60,000 this year, or receiving monthly payments. Would I be subject to capital gains taxes for the entire $50,000 increase if I take the lump sum? Are there any special tax exemptions or rules I should be aware of?

Answer: The increase in your annuity’s value isn’t subject to capital gains taxes. Instead, the gain will be subject to higher — perhaps much higher — income tax rates, regardless of whether you choose the lump sum or monthly payments.

Variable annuities are insurance products that allow you to invest money tax-deferred for retirement. Like other retirement accounts, you could face penalties for early withdrawal in addition to income taxes if you take money out before you’re 59½.

Taking the lump sum could push you into a higher tax bracket and possibly cause a temporary increase in your Medicare premiums if you’re 65 or older. If you opt for monthly payments instead, you’re likely giving up access to the money in an emergency. (Annuitization means you’re giving up the lump sum you could have accepted in exchange for a stream of monthly payments that typically lasts for life.)

A tax pro can help you weigh the effects of the different withdrawal options on your finances.

Q&A: Social Security misunderstandings

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Dear Liz: As a former Social Security Administration employee, I can tell you there are countless times people misunderstand the information that is provided to them or only hear what they want to hear. There is no incentive for the employees to misinform or mislead people. Maybe you can begin your responses by saying, “If what you are saying is accurate,” instead of just assuming the worst and blaming the Social Security employees for people’s lack of knowledge.

The letter writer in a recent column not only indicated how helpful the employee was but also that they slept on the information and also discussed that with their trusted advisor. Your response assumed that the representative encouraged them to make a decision you indicated might not be the best.

Most employees do not encourage but inform people of their options. I am very disappointed that you once again chose to bash them with limited information and even when the person said how wonderful and knowledgeable the representative was, and even that they consulted with their trusted advisor.

Answer: The original letter writer mentioned that she learned in a chat with a Social Security spokesperson what her “break-even” point would be for waiting until full retirement age to start her benefit. My response pointed out that break-even calculations aren’t the best way to determine when to start Social Security, since they don’t include important factors such as inflation, tax rates and the impact of early claiming on survivor benefits. Many people also have a poor understanding of life expectancy and assume they will die before their break-even age when they probably won’t.

Social Security is an incredibly complex program, so people may indeed misunderstand what they hear from its representatives. But readers and financial planners alike report countless incidents in which representatives clearly gave inaccurate information. For example, people have been told they couldn’t suspend their benefit at full retirement age to earn delayed retirement credits (they can) or that they wouldn’t receive cost-of-living increases if they hadn’t started their benefits (not true — your benefit starts earning annual COLAs at age 62, whether or not you’ve started).

Bad guidance can be costly. A 2018 report by Social Security’s own inspector general found that faulty counsel from its representatives cost 9,224 widows and widowers approximately $131.8 million in benefits.

My responses aren’t intended to bash hardworking Social Security representatives but to alert readers that they should educate themselves about their options and seek guidance from financial experts before claiming.

Q&A: Student loan payoff and gift taxes

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Dear Liz: I adopted my granddaughter when she was 2. She has a number of student loans. Do I have the right to pay off her loans as her parent without tax consequences to her or to me?

Answer: Paying off someone’s student loans would be considered a gift. You may have to file a gift tax return, but you’re extremely unlikely to owe gift taxes.

The IRS requires you to file a gift tax return if you give any individual more than a certain amount in a year. (The 2023 annual exemption limit is $17,000.) You don’t owe gift taxes until the amount you give away above this annual limit exceeds the lifetime limit (which is 2023 is $12.92 million).

Your relationship doesn’t matter unless the recipient is your spouse. (You can give an unlimited amount to a spouse who is a U.S. citizen without gift tax consequences.)

Q&A: Social Security and break-even math

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Dear Liz: You recently wrote about the complexity of retiring with a government pension and Social Security. You left out one very important resource: the Social Security Administration. Going into a Social Security office and sitting with a representative who can explain exactly how much a person will get (almost impossible to determine online using formulas) was the most helpful thing I did. I retired with a government pension at 60 years of age, and at 63 I went to the SS office to chat. I learned that if I waited until full retirement age (67) my break-even point would be 18 years! I slept on the numbers, discussed that with a trusted advisor and filed to take my Social Security benefit. Couldn’t be happier. The employees in the local office were wonderful, knowledgeable about the windfall elimination provision and could give exact numbers.

Answer: It sounds like the representative you consulted encouraged you to make your decision using a simple break-even calculation. That’s unfortunate for a number of reasons.

Break-even calculations typically purport to show the point at which the larger checks you get from delaying your Social Security application outweigh the smaller checks you pass up in the meantime. But the calculators usually don’t include important factors, such as inflation, tax rates and the impact of your filing decision on survivor benefits. These calculators also don’t include pertinent information about life expectancies. According to Social Security actuarial tables, for example, 63-year-old females in the U.S. can expect to live an additional 21.24 years.

That’s average life expectancy, of course. The more educated you are and the more income you make, the more years you can probably add to that tally. And the longer you live, the more likely you are to run through your savings. Many people who are able to make ends meet in their 60s and 70s wind up struggling financially in their 80s because they started Social Security too soon, says actuary Steve Vernon, a former research scholar at the Stanford Center on Longevity.

Of course, you’ll be much less dependent on Social Security than most people, thanks to your pension. It’s possible your trusted advisor took that into consideration, along with your longevity profile, tax situation and other possible income sources, when suggesting you apply for a permanently reduced check. Most people can’t afford such reductions.