Ask Liz Weston

Get smart with your money

Liz Weston

Are sons plotting–or genuine?

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Dear Liz: I read your response with interest regarding the two sons in their 60s who were pressuring their parents into taking a reverse mortgage, according to a neighbor who wrote to you about the situation. You may be correct that the sons are trying to get an early inheritance, but you may also be very wrong. The sons may feel well off enough that they don’t need an inheritance and that the money would be better spent by the parents to enjoy their remaining years.

As a reverse mortgage loan officer, I’ve had seniors who are not cash-poor and house-rich go on extended vacations, purchase income properties, buy long-term healthcare policies and fund a research and development project for an invention, to name a few uses. I even know someone who bought a Ferrari, which had been a lifelong desire.

Reverse mortgages are no longer considered to be a loan of last resort. They are, in fact, a source of tax-free cash used in a variety of ways such as preserving and prolonging taxable cash assets, and for seniors who don’t need cash to live on, they may be used by their financial planners for arbitrage purposes.

By the way, I did like your reference to elder care attorneys. Many seniors think it’s a waste of time or way too expensive, but I frequently refer my clients to them as well. They are almost always able to justify the expense in the savings they produce for their clients.

Answer: While there can be many reasonable uses of reverse mortgages, remember that the parents in this case are in their 90s. This may not be a time in their lives when they’re longing for adventure travel, hot cars and investment real estate. It’s certainly not a time in life when they could buy affordable long-term care policies.

There could, however, be another explanation, as the following reader outlines:

Dear Liz: I just read your column about the neighbor’s concern that an elderly couple was being pressured by their sons to get a reverse mortgage. I am glad you mentioned the possibility of fraud by the sons. The elderly are vulnerable and need advocates.

The concerned writer needs to consider another option. Maybe the elderly couple is not doing as well financially as they portray. I was once a concerned neighbor to an elderly widow. As a ploy to remain independent, she was not always upfront about how well (or not well) she was doing. In her case it was health issues that she would hide or downplay (money was not an issue). Though all the neighbors cared and looked out for her, we did not have all the facts that the family had and the family was not aware of all we knew. The concerned neighbor should reach out to the sons. Hopefully the sons are looking out for their parents’ best interests and the neighbor can assist the sons in that common goal.

Answer: Your neighborhood is to be commended for trying to help an elderly person in poor health. Intervening in a financial matter, however, could be fraught with peril and lead to an ugly confrontation with the sons. That’s why directing the parents to an elder law attorney — one affiliated with the National Academy of Elder Law Attorneys at http://www.naela.org — probably would be a better course. The attorney could better protect the parents against potential financial abuse while assessing whether they might need more help than they’re letting on.

When “the basics” eat up too much of your income

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Dear Liz: My husband and I are recovering from a job loss four years ago. We used up all our savings and home equity. My husband is now employed, but we are struggling to keep ahead even with a salary of about $100,000. I was a stay-at-home mom for the first 10 years of our kids’ lives and now I work two part-time jobs to help with our expenses. We are trying to follow the 50/30/20 budget plan you recommend, but can’t seem to get our “must haves” — which are supposed to be no more than 50% of our after-tax income — down from 80% to 90%. Most of the rest goes for “wants,” such as the kids’ dance classes and soccer teams and for cellphones. We’re not saving anything although we’re trying to whittle down our credit card debt. I have tried several times to refinance our first and second mortgages and home equity line of credit but have found we don’t qualify because too much is owed on our modest three-bedroom, one-bath house, which has gone down significantly in value. We also have two car loans that are worth more than the cars, and the insurance is killing us. Amazingly enough, we have never been late on a payment. We just can’t get ahead. Did I mention that both kids need braces?

Answer: You clearly can’t afford your life, and things will only get worse if you don’t get your spending in line with your income.

Your first step should be to consult with a HUD-approved housing counselor, who can advise you of your mortgage options. You can get referrals from http://www.hud.gov. If your first mortgage is held by Fannie Mae or Freddie Mac, you may be able to refinance it through the federal government’s Home Affordable Refinance Program. Recent changes in the program have helped more underwater homeowners refinance. Even if you’ve been turned down by one lender, you can try with another. One way to search for HARP quotes is through Zillow’s online mortgage quote service at http://www.zillow.com/mortgage-rates/.

The Federal Housing Administration and the Veterans Administration also have streamlined refinancing programs for their underwater loans.

Government programs usually define an “affordable” payment as one that’s 31% or less of your gross income, but that may be too high for many families to comfortably handle. Ideally, your housing costs — including mortgage, property taxes and insurance — would consume no more than about 25% of your gross (pre-tax) income.

If you exhaust your options and can’t get your mortgage payments down to an affordable level, you should consider a short sale of your home. Moving is terribly disruptive and expensive but it’s better than letting a house sink your finances.

Then take a look at your cars. The average annual cost of owning a car is $8,946, according to AAA. You can make the argument that one car is a necessity, but having two is typically more of a convenience than a “must have.” Getting rid of one could dramatically lower your insurance and transportation costs.

Since you’re underwater on both, you’ll need to look at which is cheapest to operate and which is closest to being paid off. If they’re the same, then your choice is easier — you can work toward paying that car off faster so you can sell it. Otherwise, you’ll have to weigh which loan to target first.

Another way to get your budget balanced is to make more money. That may mean asking for more hours at your jobs or looking for opportunities that pay better.

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.