Ask Liz Weston

Get smart with your money

Liz Weston

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.

Don’t start Social Security too soon

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Dear Liz: I am 66-1/2 and eligible to collect my full Social Security benefit now. I am in good health and assume I will live into my 80s. I am still working and don’t need the extra money. Is it better to put off taking my benefit so that it will grow 8% with Uncle Sam, tax free and guaranteed, or should I take the money now, pay taxes on it and invest it? Politically speaking, I think I should take it, but my gut says let it grow. What do you think? Is there a program available to demonstrate the differences?

Answer: Far too many people grab their Social Security checks too early, locking themselves into lower payments for the rest of their lives. Some do so in the mistaken belief that their benefits, or Social Security itself, will go away or be dramatically altered if they don’t “lock in” their checks. It’s true that Congress needs to change the Social Security program if it is to meet all its future obligations. But lawmakers are far more likely to change benefits for young people than they are to mess with promised benefits for people close to retirement age.

As you’ve noted, when left untouched benefits grow about 8% a year, which is a strong incentive to delay filing. You’d be hard-pressed to find an investment with that kind of guaranteed annual return, let alone one that would offer that yield plus enough extra return to offset the taxes you’d pay on those benefits if you took them earlier.

The Social Security site has a benefit estimator that can show you the effects of claiming your benefit at various ages. You’ll find it at http://www.ssa.gov/estimator.

AARP also has an excellent retirement calculator that can help you plan various scenarios using not just Social Security but all of your retirement benefits. It’s at http://www.aarp.org/work/retirement-planning/retirement_calculator.

Finally, you should check out mutual fund company T. Rowe Price’s information about “practice retirement” at troweprice.com/practice, which details the benefits of continuing to work through your 60s while saving less for retirement. The growth in Social Security benefits and retirement accounts is so great during that decade that it often more than offsets a sharp reduction in savings, which would mean you’d have more money to spend on vacations and other fun pursuits even before you retire.

Term or whole life? What you need to know

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Dear Liz: My mother and her insurance agent swear by whole-life insurance policies. I am 45 and have heard from everyone else to only have term life, which is what my husband and I both have. We have a 15-year-old daughter. Can you please put in layman’s terms what a whole-life policy is and what the benefits are?

Answer: Term insurance provides a death benefit if you die during the “term” of the policy. Term insurance provides coverage for a limited time, such as 10, 20 or 30 years. It has no cash value otherwise and you can’t borrow money against it.

Whole-life policies combine a death benefit with an investment component. The investment component is designed to accumulate value over time that the insured person can withdraw or borrow against. Whole-life policies are often called a type of “permanent” life insurance, since they’re designed to cover you for life rather than just a designated period.

If you need life insurance — and with a daughter who is still a minor, you certainly do — the most important thing is to make sure you buy a big enough policy to cover the financial needs of your dependents. This is where whole-life policies can be problematic, since the same amount of coverage can cost up to 10 times what a term policy would cost. Many people find they can’t afford sufficient coverage if they buy permanent insurance. Also, many people don’t have a need for lifetime insurance coverage. Once your kids are grown and the mortgage is paid off, your survivors may not need the coverage a permanent policy would provide.

If you are interested in a whole-life policy, make sure to run it by a fee-only financial planner who can objectively evaluate the coverage to make sure it’s a good fit for your circumstances.

Who pays for tax pro’s mistake?

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Dear Liz: Last year I bought an electric vehicle, motivated in part by the $7,500 federal tax credit. I consulted with my tax preparer, a CPA, to ensure I would generate enough income to fully use the one-time, use-it-or-lose-it credit. In December 2011, I informed her of the exact type of that year’s income (earned income, capital gains, dividends, interest and so on) and detailed all my deductions. She assured me that based on those numbers my tax burden was $8,600, more than sufficient to use the credit. It was enough, in fact, that I could use more deductions and losses, so I made some charitable contributions and sold a losing investment. The final numbers were very close to the estimates she received from me in December. Now that she has completed my federal tax return, however, my tax burden turns out to be far less than she estimated. In fact, it’s zero. Ordinarily I’d be delighted, but I specifically consulted with her to ensure I had a large-enough tax burden to use up the credit. I could have sold some winning investments to generate a bigger tax burden, but have now lost that credit forever. So far she has not responded fully to questions about what happened, and I now suspect she may simply have guessed at the tax burden and not run the numbers through any tax preparation software. I feel that she has in effect cost me $7,500. Am I right to be aggrieved and do I have any recourse?

Answer: Of course you’re right to be aggrieved. One of the reasons to hire a tax professional is to get good advice about managing your tax bill.

Human beings make errors, of course. No one is perfect. But it’s disturbing that your CPA hasn’t told you clearly why she made the mistake she did or, apparently, offered any kind of recompense.

When tax pro mistakes cost you money, it’s typically because the preparer underestimated your tax burden and the IRS catches the error. In that case, your tax pro shouldn’t be expected to pay the extra tax, since you would have owed the money anyway if she’d done the return correctly. But many tax preparers will offer to pay any penalties or interest the taxpayer owes because of their errors, said Eva Rosenberg, an enrolled agent who runs the TaxMama.com site.

In this case, of course, your pro overestimated your tax burden, ultimately costing you a valuable credit. You could always ask her to compensate you for some or all of that lost credit. At the very least, she should be willing to refund any fee she charged you for her advice, Rosenberg said.

You may want to review your own behavior to make sure you didn’t contribute to this situation. Given the amount at stake, you should have called to set up a formal appointment in which the two of you could go over the numbers and your previous year’s tax return, if she didn’t prepare it. That would ensure she had enough information to make a reasonable prediction. If instead you called her up with a “quick question” — tax questions are rarely quick, by the way, and the answers almost never are — then you helped set yourself up for a disappointing outcome.

In any case, you should find another tax pro, since this incident — and her handling of it — indicates she’s not quite up to the job of being your advisor.