Ask Liz Weston

Get smart with your money

Liz Weston

How couples can maximize Social Security

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Dear Liz: I will be 68 this summer and plan on working two more years. My wife retired in 2011 after turning 60. We would like to maximize our Social Security and are planning on having her take spousal benefits when I retire. When she turns 70, she can switch to her own benefit. How much of my benefit will she receive if she starts receiving it when she is 64 and I’m 70?

Answer: If your goal is to maximize your Social Security benefits as a couple, you should rethink having her apply before her full retirement age.

If she applies before she turns 66, she won’t have the choice of switching benefits later. The Social Security Administration will compare the benefit she has earned with her spousal benefit (basically half of your benefit, reduced by the fact that she is applying early). If her spousal benefit is larger, she will get her own benefit plus an amount of money to make up the difference between the two. What she won’t get is the option to let her benefit continue to grow so that she can switch to that larger check later. The option to switch is available only if she waits until her full retirement age to apply.

There are several good online calculators to help you compare your Social Security options, including ones at AARP and T. Rowe Price.

Don’t sweat the small (FICO) stuff

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Dear Liz: Over the last couple of years I have managed to pay off my credit cards. I know that closing those accounts will hurt my credit so I kept them open. When I checked my credit report, I found that my rating had gone down and was told that I had to actually use the credit cards and pay them off to keep my score up. I’ve been doing that over the last year or so and my credit score responded well. This past month my credit score went down again by a few points and I learned that it was because the credit card companies had rewarded my diligence by raising my credit limit. This apparently hurt my score. What’s up with this? Is there any way not to get dinged by the reporting agencies?

Answer: Higher credit limits would reduce the percentage of available credit you are using, and that should help your credit scores, rather than hurt them. So the score you’re seeing either isn’t a FICO score, which is the score used by most lenders, or you are being given questionable information about what affects your scores. Many score monitoring systems are set up to give you explanations for any change in your numbers, but those explanations might be vague or might not accurately depict what’s truly influencing your scores.

Your FICO credit scores change all the time, based on the ever-changing information in your credit reports. Variations of a few points shouldn’t be a cause of concern. Continue to use your cards lightly but regularly, paying the balances off in full each month. Over time, the variations will smooth out into higher scores.

Catch me on CNBC today

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DWYD cover2013I’ll be discussing how 10 years of savings can be worth more than 30 years of savings on today’s “Closing Bell” with Kelly Evans and Scott Wapner.

Today’s 20-somethings have a unique–and easily blown–opportunity to set themselves up for their future. Because of the power of compounding, the money they save now for retirement is worth far more than if they start even a few years later. The idea that you can put it off and “catch up” when you’re older? Basically, it’s a myth, since it’s so very, very hard to make up for missing that early start.

NBC News columnist Bob Sullivan outlines how this works in “When $30k is worth more than $90k.”

The takeaway? Paying off debt is important, but not as important as saving for your future. Opportunities to save for retirement really are “use it or lose it,” and blowing them off could make your future self the real loser.

Please join us around 4:50 p.m. Eastern/1:50 p.m. Pacific for the discussion.

 

How to avoid moving scams

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Unhappy MoverThe last time we moved, our stuff was held hostage.

The mover had a variety of entirely bogus reasons for hanging onto our stuff while trying to exceed the written, “not to exceed” estimate. Among the excuses: We didn’t tell him there were steps at the new house (there were two) or it was at the fringes of Los Angeles (we’re actually quite close to the geographic center of the city).

At the time, I didn’t know that reputable movers were being bought up by bad guys who pulled these stunts, or that moving in many areas is so lightly regulated that they can get away with this crap.

If you’ve got a move planned this summer, take the time to check out Consumer Report’s tips for avoiding scams.

One of the best tips I know isn’t included: Ask your employer, or another major company in the area, which companies they use to move their executives. These movers won’t be the cheapest, but since they rely on repeat business, they’re far less likely to be scamsters.

In the end, I paid a couple hundred dollars more than we agreed to ransom our stuff–much less than the $1,000 or so the mover demanded, but still too much. If we ever have to move again, I’ll be a lot more diligent in choosing a mover.

It’s National 529 Day!

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College studentWho doesn’t love obscure commemorative/promotional days? But this one is worthwhile since it brings attention to the state-run college savings plans that can help you pay for your children’s future education.

Here are the most important facts you need to know about college savings:

If you can save for college, you probably should. The higher your income, the more the financial aid formulas will expect you to have saved for college–even if you haven’t actually saved a dime. Even people who consider themselves middle class are often shocked by how much schools expect them to contribute toward the cost of education. (By the way, it’s the parents’ assets and income that determine financial aid, so if you don’t help your kid with college costs, he or she could be really screwed–no money for school and perhaps no hope of need-based financial aid.)

More savings=less debt. Most financial aid is in the form of loans these days, so your saving now will reduce your kid’s debt later. (A CFP once told me to substitute the words “massive debt” when I see “financial aid.” So when you say, “I want my child to get the most financial aid possible,” I hear: “I want my child to get the most massive debt possible.”

529 plans get favorable treatment in financial aid formulas. These accounts are presumed owned by the parent, so less you’re expected to spend less than 6% of the total each year–compared to 35% of student-owned assets.

Learn more by reading “The best and worst 529 plans” and this primer on Motley Fool.

Split credit accounts when you split with a spouse

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Dear Liz: I just finished paying off my last credit card and checked my credit report as I am now separated from my wife. I found we had one joint account that she had not been paying. There are two stretches of five months each of no payment.

I immediately called up the creditor and paid off the balance and the creditor closed the account due to the lack of payments. This one account killed my credit score. I also found two old accounts on my credit report that are both still active but I have not used them for years. Both accounts are in good standing.

I was thinking that if I started using the accounts again, paying them off each month, it would boost my credit score faster. I am looking to buy a house this summer and would have an easier time with a better score. Do you think using the old accounts would help improve my score faster or do you think my score would be better if I closed those accounts?

Answer: Closing accounts can’t help your credit scores and may hurt them. You should avoid closing any credit account when you’re trying to improve your credit rating.

Your experience shows why it’s so important to separate financial accounts when you’re separating from a spouse. Failure to pay any joint account can hurt both parties’ scores. This would be true even if you were divorced and had a divorce decree making her responsible for the debt. Your creditors don’t have to pay attention to such agreements.

Lightly using a few credit cards can help you recover from missteps like this one. “Lightly” means charging 10% or less of their credit limits, and you should pay the balances in full each month, since carrying credit card debt doesn’t help your scores. You shouldn’t expect your scores to bounce back overnight, however. If you had good scores before this incident, it may take you a few years to recover completely.