Ask Liz Weston

Get smart with your money

Liz Weston

Restoring credit scores after bankruptcy

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Dear Liz: I had credit scores over 800 with no late payments ever. Unfortunately, a medical issue required me to charge $24,500 to a credit card. That led to a bankruptcy, which was discharged in July 2011. My scores dropped to 672, and they’re currently around 680. I’m paying two unsecured credit cards in full each month plus an auto loan that was reaffirmed in bankruptcy. I would like to continue rehabilitating my scores by applying for another loan. When a company requests my credit scores, does it also see my bankruptcy, and would that prevent me from getting credit?

Answer: Some lenders look just at credit scores, while others request credit reports along with your scores. Your bankruptcy or your scores could cause lenders to charge a higher interest rate or refuse to give you credit.

It’s not clear that the scores you’re seeing are FICO scores, however. A bankruptcy would have dropped your FICOs into the 500s, and it’s unlikely they would return to the high 600s in less than a year. What you may be seeing are VantageScores, which have a different score range: 500 to 990, compared with FICO’s 300 to 850.

If you want to see your FICO scores, which are the ones most lenders use, you can buy them for about $20 each at MyFico.com. Scores offered at other sites typically aren’t FICO scores but may be VantageScores or “consumer education scores” that aren’t widely used by lenders.

You’re doing the right things by using a mix of credit (credit cards and an installment loan) and paying your bills on time. You should know, though, that there’s no way to quickly restore your scores to their old levels. It typically takes seven to 10 years for FICOs to recover from a bankruptcy.

But let’s back up a minute. You almost certainly made a mistake by charging your medical care to a credit card. You may have been able to qualify for a discount on your care if you hadn’t. Many medical providers offer charity programs that cut or eliminate the bill for people making up to 400% of the federal poverty line. A single person could make up to $44,680 and still qualify for a break under many providers’ programs.

If you make too much to qualify for financial aid, you could still have negotiated a discount by asking the provider to charge you the same rate that its largest insurer pays. The uninsured are often charged a much higher “sticker price” for medical care than what insurers pay, but if asked, many providers are willing to provide the same discounts.

If nothing else, you probably could have qualified for an interest-free payment program. Once you charged the bill to your card, however, you lost all your leverage to get a discount.

Is a 3% withdrawal rate too conservative?

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Question: In a recent column you repeat advice I have often read that withdrawing about 3% of my investment capital will reduce the chances of my running out of money in retirement. But that doesn’t make sense to me. I have been retired for over 19 years and I have sufficient data now to extrapolate that I could live for 100 more years with so meager a drawdown because, through good and bad times, my earnings after inflation and taxes always exceed 3%. If I am missing something, I must be extraordinarily lucky because it hasn’t hurt me yet, and at age 77 I think it unlikely to do so in my remaining years. Can you explain this discrepancy between my experience and the consequences of your advice?

Answer: Sure. You got extraordinarily lucky.

You retired during a massive bull market, which is the best possible scenario for someone who hopes to live off investments. You were drawing from an expanding pool of money. Your stocks probably were growing at an astonishing clip of 20% or more a year for several years. Although later market downturns probably affected your portfolio, those initial years of good returns kept you comfortably ahead of the game.

Contrast that with someone who retires into a bear market. She’s drawing from a shrinking pool of money as her investments swoon. The money she takes out can’t participate in the inevitable rebound, so she loses out on those gains as well. All that dramatically increases the risks that she’ll run out of money before she runs out of breath.

It’s the first five years of retirement that are crucial, according to analyses by mutual fund company T. Rowe Price, which has done extensive research on sustainable withdrawal rates. Bad markets and losses in the first five years after withdrawals begin significantly increase the chances that a person will run out of money during a 30-year retirement.

Some advisors contend that a 3% initial withdrawal rate, adjusted each subsequent year for inflation, is too conservative. If you retire into a long-lasting bull market, it may well be. But none of us knows what the future holds, which is why so many advisors stick with the 3%-to-4% rule.

Your Social Security questions answered

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My column about getting your parents a bigger Social Security check, “More Social Security for mom,”  triggered a boatload of questions from readers–and confirmed what experts had told me, which is that a lot of people seem to be missing out on benefits for which they qualify.

Here are some of the questions that came in via my Facebook page, email and this blog. I’ve edited the questions for clarity and expanded some of my answers. (If you have questions about how Social Security works in general, and its likely future, check out “5 myths about Social Security.”)

Question: I just read your article. My mom and dad lived off his Social Security of approximately $1,600 per month. After he died at age 70 in 1994, my mom, also aged 70, only collected $600 per month from his Social Security. She had been a stay-at-home mom most of her life. Eighteen years later, she is still only receiving a little over $800 a month. How did this happen if she was entitled to his full benefit? Can you suggest help for her?

Answer: You mom definitely should talk with Social Security to see if she’s getting the correct amount. Her survivor benefits would have been reduced if she started them before full retirement age, but that doesn’t appear to be the case here. What might have happened is that they were living on his benefit plus her spousal benefit. When he died, she would have been switched to a survivor benefit that equaled his benefit alone. But it does seem like her benefit would be higher, in that case. She should call Social Security at 1-800-772-1213 and ask them to review her records to make sure she’s getting what she deserves.

Q: If I’m 64 now. If I waited until full retirement age (I’m a housewife with no Social Security benefit for myself) to get half of my husband’s retirement, would it change to his full benefit when he passes? Or will I be stuck with just 1/2 forever?

A: You should be able to step up to 100% of his benefit if he dies after you hit full retirement age (which is 66 for you). I’m not sure if the survivor benefit is affected if you should opt to start your spousal benefit earlier than that. But your spousal benefit would be reduced by up to 30%, so it’s generally worth waiting if you can.

Q: Read your article and enjoyed it but you had nothing for us who unfortunately had to stop work because of our health. I’m 62 and will be drawing my long-term disability till I’m 65 then it will stop. I also draw Social Security disability. How will this effect my Social Security when I reach age 65? Will my Social Security benefit go up? And what is this about drawing my social security but not till I’m 66? My husband is 15 years younger than I, so does that mean I will never be able to draw off of him? Where can I find out all I need to know about all this social security stuff that I just don’t understand? Any information would be greatly appreciated.

A: If you’re 62 now, then your full retirement age is 66, not 65. The full retirement age has gradually been increasing, and it will be 67 for those of us born after 1959. (You can check your full retirement age here.) As far as your Social Security disability benefits, when you hit full retirement age they’ll become your retirement benefits. You won’t need to take any action. You can find more details here.  Spousal benefits won’t be of much use to you, since your husband is so much younger. But starting at age 62, he should qualify for an amount equal to half your benefit if that’s more than his retirement benefit at the time.

Q: I am 60 and work full time. My husband passed 4 years ago at age 59. I thought that I can’t apply for his Social Security until I am 62 because I work.

A: You can get Social Security benefits if you continue to work. However, those benefits may be reduced significantly, or even eliminated, if you apply before your full retirement age. This is because of what’s called the “earnings test.” Basically, you lose $1 in Social Security benefits for every $2 you earn over a certain amount, which in 2012 is $14,680. (You get a break in the year you actually turn your full retirement age: the earnings test reduces your benefit by $1 for every $3 you earn over $38,880.) The earnings test disappears after you reach full retirement age.

If you earn enough money, the earnings test could wipe out any survivor’s benefit. That may be why you were told you should wait. You can apply for reduced survivor’s benefits as early as age 60 (50 if you’re disabled, and there’s no age limit if you have dependent children).

At age 62 you can switch to your own retirement benefit if you want, although your checks will be reduced because you’re getting the money before your full retirement age. Your benefit will be reduced further if you continue to work. That’s why it can make sense to wait until your full retirement age. This area is pretty complex, so it would be worthwhile to talk to an SSA rep.

Q: After my ex died, I applied for Social Security at age 62 1/2. The Social Security specialist I talked to used some formula, adding half of my benefits to half of my deceased husband’s, without giving me an explanation or a choice. I had been a low part-time earner. How can I find out if she acted in my best interest?

A: What I think happened is that the SSA specialist compared your (age-reduced) retirement benefits to the (age-reduced) survivor benefits based on your ex’s record and gave you the larger of the two. But the best way to check may be to call Social Security back and ask if you’re getting the maximum benefit for which you qualify. Also, if you’ve been getting survivor benefits, you may be able to switch to your own benefit at full retirement age, if that’s larger. (It may not be, if you were a low earner and your ex was a higher earner, but it’s worth checking.)

Q: I retired at age 59 on disability. Can I receive full retirement benefits now? I’m 70 now.

A: When you hit full retirement age (which for you would have been 66 years, 10 months), your Social Security disability benefits became retirement benefits. You can read more here, and call Social Security to confirm.

Q: If a person draws a benefit based on a divorced spouse’s earnings record, does the spouse have to be 62 years of age? Or does just the mom have to be 62?

A: Both parties have to be old enough to qualify for at least early retirement benefits, meaning age 62. If the dad in this scenario is old enough to apply for benefits but hasn’t applied, the mom can still do so as long as they’ve been divorced at least two years. Here’s a link to the rules. Remember that applying early permanently reduces your benefit, so it’s often better to wait until your full retirement age if you can.

Q: My sister is 63 and lives in North Carolina. She was on Social Security disability and lost all of her work benefits, including any insurance benefits. She received a small insurance claim for a car accident and the federal government is stating that because she received this settlement and still collected the SS benefit, she now owes them $13,000 and cannot collect another dime until that is all paid off. She lives on a very small amount of money each month, she is a diabetic and cannot get her medicine. Do you have any suggestions? Thanks so much

A: I’m not an expert in disability benefits, but I believe windfalls and earnings can reduce what you get. She may want to talk to a lawyer who specializes in Social Security disability to see what her options are. She can start with North Carolina’s Legal Aid.

Q: Someone I know is retiring after working for most of her life as a public service employee where they didn’t take Social Security out of their paychecks. For the last 15 years, though, she has been working in a retail job and has paid in her 40 hours into Social Security. She is 68 years old, is she eligible for Social security benefits?

A: If she’s got her 40 credits (not hours–you earn credits based on earnings and years worked, and you typically need to work 10 years to qualify for Social Security retirement benefits), then she should be eligible for some kind of check from Social Security. The amount will be based on her 35 highest-earning years, though, so she might have a lot of zero-earning years because she wasn’t covered by Social Security in her previous job. Also, since her previous job didn’t pay into Social Security, she’s probably eligible for some kind of benefit from that which also may reduce her Social Security benefits. She needs to call the SSA and find out what she might be entitled to. Click here to learn more about credits.

Q: My dad died before he started to receive Social Security. He was receiving disability due to cancer. My mom is disabled and receiving disability benefits, but has not yet reach full retirement age. Is it still possible for her to receive my dad’s Social Security benefit?

A: If your mom is disabled, she probably was eligible for reduced survivor benefits as early as age 50. (The age limit is 60 otherwise, if there are no dependent children at home.) Your mom should call Social Security and find out.

Q: My husband has been dead two years the 15th of this month. I work a full time job and make about $39,000 a year. Can I claim the $1,160 monthly benefit he used to get? I will be 64 in August.

A: You can’t get 100% of his full benefit if you claim it before your own full retirement age, but you should be able to get a reduced amount. The monthly benefit you could get depend on your age and the type of benefit you qualify for. You can call start your research here.

Q: My mom is retired and recently widowed, is she entitled to any of my father’s social security? They were married 49 years.

A: She may be able to receive up to 100% of his benefit, depending on her age and other factors. She wouldn’t be entitled to both a survivor’s benefit and her own retirement benefit, however. You can read more about the rules here.

Our credit cards worked in Europe. Mostly.

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We just returned from 10 days in Italy, with a plane change in Zurich. After writing about the troubles some U.S. travelers faced using their credit cards overseas, I’m happy to report that we were able to use ours in most places with no problem at all.

Of course, we visited tourist-centric locales (Venice and Florence) where the merchants are used to seeing our old-fashioned magnetic stripe credit cards. Our U.S.-style cards are less secure than the “chip and PIN” model embraced by other countries, but restaurant staffs and shop clerks accepted them without a fuss.

There were a few exceptions:

  • We were out of luck when it came to the automated kiosks at most vaporetto (water bus) stops. As I wrote in my column, such kiosks require the more secure cards. We brought our British Airways card, which is a “chip and signature card,” but that proved useless. Without a PIN, the card wouldn’t work at automated kiosks. (U.S. debit cards wouldn’t work, either.)
  • A few merchants insisted on cash. I ended up withdrawing more money than I expected from ATMs, and ran into a glitch there—turns out the 250 euros I kept trying to withdraw equaled more than my daily limit. Once I got the currency math right, I was able to get cash when I needed it at a decent exchange rate—which was somewhat offset by the $5-a-pop transaction fee.
  • The bad guys in Europe were quick to exploit our less-secure technology. Two days after we returned, somebody used our Capital One card to make three fraudulent charges of $442.58 each in the Netherlands. Fortunately, users aren’t responsible for fraud on their credit cards. For exactly that reason, I wouldn’t use our less-secure debit cards anywhere but an ATM attached to a bank branch. I don’t want to give the scamsters access to my bank account.

For our next trip, I might arrange to get a true chip-and-PIN card, like the one Diners Club now offers its members. Another option is the prepaid Cash Passport card. Or maybe, by then, U.S. issuers will get with the program and make true chip-and-PIN cards available here. I can dream, can’t I?

What’s a “safe” withdrawal rate?

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Dear Liz: After working all out for 28 years in a small business, I have put away $2.6 million in stocks, bonds and some cash. (I am a reasonably smart investor.) I’m 58 and want to be done at 60. I’m not tired of my business, just tired of working. How much do you think I could draw out and not get myself into trouble? I’m in great health, so I could last 30 more years. Our house is paid off, and my wife gets about $40,000 a year from a nice pension. Any ideas?

Answer: Financial planners typically recommend an initial withdrawal rate of 3% to 4% of your portfolio. With $2.6 million, your first year’s withdrawal would be $78,000 to $104,000. The idea is that you could adjust the withdrawal upward by the inflation rate each year and still be reasonably confident you won’t run out of money after 30 years.

Some studies indicate you can start with a higher withdrawal rate, as long as you’re willing to cut back in bad markets.

There is still some risk of going broke, though, even with a 3% withdrawal rate. Particularly poor stock market returns at the beginning of your retirement, for example, could increase the chances your nest egg will give out before you do.

This is an issue you really should discuss with a fee-only financial planner who can review your investments and your spending to make personalized recommendations. (You can get referrals from the National Assn. of Personal Financial Advisors or the Garrett Planning Network.) If you’ve chosen especially risky stocks or have too much of your portfolio in bonds, for example, your retirement plan could fail even if you choose a conservative initial withdrawal rate.

You’ll also want to talk about how you’re going to get health insurance, and how much it’s likely to cost. If you’ve been arranging coverage through your business, you might face some sticker shock when you have to buy a policy on your own. But it’s essential to have this coverage, since you won’t qualify for Medicare until you’re 65.

If you’re not tired of your business, you might consider phasing in retirement, if that’s possible in your situation. That would mean starting to take some long breaks to travel or pursue the interests you plan to indulge in retirement. Delaying retirement even a few years can dramatically increase the chances your nest egg will last.

Protecting a parent from financial opportunists

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Dear Liz: I liked your answer to the elderly couple who were being badgered for money by their daughter and her husband. I agree that involving the other daughter can help.

I managed to combat the tendency of family and caregivers to pester my 90-something mom for money by convincing her to give me electronic access to her bank accounts. We did this so that I could pay her bills if she got sick unexpectedly. The other benefit is that I see the small larcenies as they begin to happen. Then I can quickly step in and stop them before they escalate. It is a lot easier having a conversation with someone who has sleazed $100 from her than to deal with the $5,000 theft that motivated me to set this in motion.

She is deeply grateful that she doesn’t have to be the heavy with the people she loves and depends on. You can’t make greed disappear, but it can be managed. I continue to be amazed by how easy it is for people to think that her money (which gives her a sublime sense of security in the midst of physical frailty) is their money because they need it and she is too kind (and dithery) to say no.

Answer: Installing a trusted gatekeeper can be an effective way to keep elderly people from being financially abused. The elderly person can refer all requests for money to the gatekeeper, which in itself is likely to reduce the begging. If a relative can’t perform this function, sometimes an advisor can. Ideally, the advisor would have a fiduciary relationship with the client, meaning that the advisor is legally obligated to put the client’s needs ahead of his or her own. Attorneys and CPAs are fiduciaries, and some financial planners are willing to be, as well.