Ask Liz Weston

Get smart with your money

Liz Weston

Playing it safe could mean losing money

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Dear Liz: The certificate of deposit I owned in my Roth IRA recently matured. I’ve put the money into a Roth passbook account until I can figure out what to do with it. I’m a public school teacher and have a 457 deferred compensation plan to which I contribute monthly. I am 57 and will need to work until I am at least 65. What should I do with the money in my Roth?

Answer: As a public school teacher, you probably have a defined benefit pension that will give you a guaranteed monthly check for life once you retire. Depending on how long you’ve taught and where, this pension could cover a substantial portion of your living expenses.

The guaranteed nature of this pension means that you may be able to take more risk with your other investments. That would mean your Roth could be invested in stock mutual funds or exchange-traded funds that offer potential for growth. CDs and other “safe” investments can’t offer that — in fact, your money loses purchasing power since you’re not earning enough interest to even offset inflation.

Since you’re so close to retirement, you should invest a few hundred dollars in a session with a fee-only financial planner who can review your situation and offer personalized advice.

Don’t delay gratification too long

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Mom in Alaska. She landed this honking rainbow on her first cast. Getting her off the river after that was almost impossible.
Mom in Alaska. She landed this honking rainbow on her first cast. Getting her off the river after that was almost impossible.

Today is my mother’s birthday. She would have been 82.

Except that she died twenty years ago of colon cancer. She loved life and she should have had more of it.

I write about this for two reasons. First, to enlist you in my effort to get everybody screened. Colonoscopies aren’t fun, but they can save your life. Catch it early, and colon cancer is a non-issue. Procrastinate, and it can kill you. The AMA recommends you get your first colonoscopy at 50, or 40 if you have a family history of the disease. You’re not off the hook if you’re younger: start bugging your parents, your aunts and uncles, your older siblings to schedule their screenings. A little nagging can save a life.

The second is to remind you to do the things you love, go the places you want to go, take the chances you’re afraid to take. Don’t put this stuff off indefinitely. Although plenty of people are live-for-today grasshoppers, I suspect more than a few of you are careful ants, focused diligently on the future.

I once heard from a man who wanted to take his 11-year-old on a trip to Europe. But he also felt he should start paying down his mortgage, as he was on track with his retirement savings and that seemed to be the next logical goal. Go, I told him, while she still wants to spend time with you. She’ll be off on her own soon enough, and the mortgage will still be there for you to tackle.

Delayed gratification is good and necessary if you want a sound financial foundation–and if you want to retire someday. But also don’t forget that tomorrow is not guaranteed. Think about what you would regret not doing, not saying, not being if today were your last day. It may not be, probably won’t be, but your life will be richer for living as if it might.

Companies make it easy to hack your identity

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The hackerYou might think breaking into a corporate database would be hard. Not so. A recent report from the Verizon RISK Team found the vast majority of incidents required minimal skills and took place in a few hours. Unfortunately, those breaches often weren’t discovered for months or even years–and it typically wasn’t the company but rather a third party that discovered a breach.

From a Credit.com post on the study:

While one in 10 were so easy the average Internet user could have caused them, another 68 percent were the result of hacking attacks using the most basic methods, requiring relatively few resources to complete. Only one breach suffered in all of 2012 required “advanced skills, significant customizations, and/or extensive resources” to complete.

That is likewise reflected in the amount of time it took to cause most data breaches, the report said. Altogether, 84 percent took hours or even minutes to perpetrate, while these incidents typically took months or even years to discover. Nearly two-thirds of all breaches took at least that long, up from just 56 percent the year before, proving that it’s actually becoming more difficult to spot breaches, as well as contain them. While most were remediated in hours or days, nearly a quarter took months.

The take-away from this is that companies aren’t doing nearly enough to protect the information they collect about you. And the sad truth is that you have little control over what goes into these databases. You can do your best to protect your identity, and still have your information breached.

You should still take steps to reduce your exposure, steps like not giving your Social Security number to companies that don’t need it and refusing to give businesses permission to share your information. You should use tough-to-hack passwords and stop sharing secrets on social media. You also should monitor your credit reports and financial accounts.

Until companies get serious about protecting your data, though, you’re still a target for identity theft.

 

Are too many people on disability?

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DisabledThe number of people getting disability checks from the government has skyrocketed in the past three decades. The federal government spends more on cash payments to disabled workers than on food stamps and welfare combined.

This trend has drawn some media scrutiny lately. You may not have time to read everything that’s been written, so here’s an overview:

As jobs for people without college degrees have disappeared, many people who lose their jobs wind up on disability. Planet Money reporter Chana Joffe-Walt says in the NPR piece “Unfit for Work” that “disability has also become a de facto welfare program for people without a lot of education or job skills.” Qualifying for Social Security disability means you get about $13,000 a year, plus you qualify for Medicare, the government health insurance program for the elderly. For many who qualify, that may beat a minimum wage job with no benefits. “Going on disability means, assuming you rely only on those disability payments, you will be poor for the rest of your life. That’s the deal. And it’s a deal 14 million Americans have signed up for.”

The rise in people on disability, however, isn’t unexpected or solely the result of the lousy economy, according to a response to the NPR report by a group of former commissioners of the Social Security Administration, which oversees the disability programs. “The growth that we’ve seen was predicted by actuaries as early as 1994 and is mostly the result of two factors: baby boomers entering their high- disability years, and women entering the workforce in large numbers in the 1970s and 1980s so that more are now ‘insured’ for DI based on their own prior contributions,” the commissioners wrote. The commissioners point out that it’s not easy to get government disability and that most people who apply are denied. “The statutory standard for approval is very strict, and was made even more so in 1996,” the commissioners wrote.

Few people on government disability ever go back to work. Private disability insurers do a better job than the government programs of returning people to the workforce, according to this story in the Wall Street Journal. That shouldn’t be surprising, since qualifying for government disability is typically a lot tougher than the standards you have to meet to trigger private disability insurance payments. That means the folks getting government disability checks are often a lot sicker (in fact, one in five men and one in seven women die within 5 years of being approved for government disability). Private insurers are also, shall we say, eager to get people back to work (or at least off their benefits). Yet the discrepancy seems to offend the Journal, which also decided to blame people on government disability for at least some of our current economic malaise in “Workers stuck on disability stunt economy.”

As a taxpayer, I don’t want to foot the bill for someone who could work but doesn’t. But I’m also leary of attempts to paint government disability programs as a refuge for loafers.

Clearly, this is a complicated–and emotional–issue. You’ll be hearing more about it as Congress struggles with the budget and social safety net programs, so it would be worth spending a little time researching the facts.

 

 

Are you paying too much for advice?

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Dear Liz: You always mention fee-only financial planners and I’m not sure about the true meaning. My husband and I have a financial planner who charges us $2,200 per year, but we got a summary of transaction fees in the amount of $6,200 for last year. Is this reasonable? We have $625,000 in IRAs and are adding $1,000 a month. In addition we have over $700,000 with current employers, adding the max allowed yearly. The planner gives advice on allocations for these employer funds as well. Are we paying too much for the financial planner? The IRAs seem to be doing well, but the market is doing well (today!).

Answer: It appears you’re paying both fees and commissions, so you’re not dealing with a fee-only planner. Fee-only planners are compensated only by the fees their clients pay, not by commissions or other “transaction fees” for the investments they buy. One big benefit of fee-only planners is that you don’t have to worry that commissions they get are affecting the investment advice they give you.

You’re paying about 1.3% on the portfolio you have invested with this advisor. That’s not shockingly high, but once you add in all the other costs associated with these investments, such as annual expense ratios and any account fees, your relationship with this advisor may be costing you 2% a year or more. That’s getting expensive, unless you’re getting comprehensive financial planning — help with insurance, taxes and estate planning, as well as investment advice — from someone qualified to provide such planning, such as a certified financial planner.

What you pay makes a big difference in what you accumulate. Let’s say your investments return an average of 8% a year over the next 20 years. If your costs average 1% a year, that would leave your IRAs worth about $3 million. If your costs average 2%, you could wind up with $2.5 million, or half a million dollars less.

Keeping your expenses low would mean you stop trying to beat the market with actively traded investments. Instead, you would opt for index funds and exchange-traded funds that seek to match market returns. These funds typically come with low expenses, often a small fraction of 1%. Using a fee-only planner can be another way to reduce what you pay for advice.

At the very least, consider bringing a copy of your portfolio to a fee-only planner for a second opinion. He or she can give you a better idea of whether what you’re paying is worth the results you’re getting.

Inheritance tax may not be worth avoiding

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Dear Liz: My father-in-law’s spouse recently died. He is 89 and not in very good health. He has assets of about $3 million and lives in a state (Pennsylvania) that has an inheritance tax. What can he do to avoid state taxes and make sure his assets go where he wants them to go? He does not like to talk about these things but I’m trying to help. I have no interest in benefits to myself but I would hate to see his assets go to the state.

Answer: It’s one thing to encourage a parent or in-law to set up estate documents that protect them should they become incapacitated. Everyone should have durable powers of attorney drawn up so that someone else can make healthcare and financial decisions for them if they’re unable to do so.

It’s quite another matter to urge a potential benefactor to make sure the maximum amounts possible land in inheritors’ laps, especially if he or she doesn’t want to discuss the matter. You may need to accept that not everyone is interested in minimizing taxes for his heirs. Your father-in-law’s resistance to talk about these things is a good indicator that you should back off.

It’s not as if the majority of his assets will wind up in state coffers anyway.  Although Pennsylvania is one of the few states that has an inheritance tax, the rate isn’t exorbitant for most inheritors. (Unlike estate taxes, which are based on the size of the estate, inheritance taxes are based on who inherits. Your father-in-law doesn’t have to worry about estate taxes, since the federal exemption limit is now over $5 million and Pennsylvania doesn’t have a state estate tax.) In Pennsylvania, property left to “lineal descendants” — which includes parents, grandparents, children and grandchildren — faces tax rates of 4.5%. The tax rate is 12% for the dead person’s siblings and 15% for all others. Surviving spouses are exempt.

If he were interested in reducing future inheritance taxes, your father-in-law could move to one of the many states that doesn’t have such a tax. He also could give assets away before he dies, either outright or through an irrevocable trust. He may not be interested in or comfortable with any of those solutions. If he is, it’s up to him to take action. If he needs help or encouragement, let your wife or one of her siblings provide it. In estate planning matters, it’s usually best for in-laws to take a back seat.