Ask Liz Weston

Get smart with your money

Q&A

Q&A: The Social Security waiting game

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Dear Liz: I am 66 and had always planned to delay starting Social Security until I was 70. I do not need the income at this point of my life. I am no longer working as my husband has health issues and I do not expect to have any earned income.

But the latest statement I received from Social Security told me that the projected higher amount I would receive at age 70 is based on taxable earnings similar to what I was making before I retired. Now I have concerns that my lack of income will lower the amount of my benefit. Is it best for me to just start Social Security now?

Answer: No. You won’t increase your benefit. In fact, you’d be giving up the guaranteed 8% annual boost you would otherwise get.

Knowing how Social Security calculates your benefit can help you understand why this is true. Social Security bases your check on your 35 highest earning years. If you worked this year, then your 2019 wages could conceivably become one of those highest earning years, displacing a year when you earned less. That typically results in a slight increase to your benefit.

If you don’t work, however — or do work and don’t earn more than you did in one of those 35 highest earning years — your benefit remains the same.

Social Security projections assume you work until you claim benefits, so its estimates may slightly overstate the check you’ll actually get. But you will still receive the delayed retirement credit that boosts your check by 8% for each year you delay starting Social Security after your full retirement age of 66. That’s a 32% increase if you wait until age 70, when your benefits max out, to start. And that is definitely worth waiting for.

Q&A: Cash is king when it comes to home improvements

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Dear Liz: My husband and I are squabbling over how to pay for the pool we may get. We have a line of credit on the house, and rates are still low. I say we use that, make it part of the mortgage and pass the cost on to the next owner (assuming that, someday, we sell this house). He wants to pay cash, which seems insane to me. I don’t pay cash to buy a car — why wouldn’t I finance a pool?

Answer: You probably should pay cash for your cars. Borrowing money is usually advisable only when you’re buying something that can increase your wealth, such as an education that helps you make more money or a home that can appreciate in value. Paying interest to buy something that declines in value generally isn’t a great idea.

Whether a pool can add value to your home depends a lot on where you live. If pools aren’t common in your neighborhood, adding one may not add much if any value. A pool could even place you at a disadvantage by turning off potential buyers who might not want to deal with the hassle and expense of pool maintenance. Parents with young children also may shy away from pools because of the drowning risk.

Adding a pool could increase your home’s value if you live in a warm climate and most of your neighbors have pools. But even then, it’s unlikely that your pool will add as much value as it would cost to install. (Home improvements rarely result in a profit — even the best-considered upgrades typically cost more than the value they add.)

A reasonable compromise might be to finance half the cost and pay cash for the rest. You’ll still want to pay off the line of credit relatively quickly, though. Lines of credit typically have variable interest rates that can make this debt more expensive over time.

You won’t be passing on the cost to the next owner in any case. Any money you borrow against your home has to be paid off when you sell, reducing your net proceeds. That’s yet another reason not to borrow indiscriminately.

Q&A: There can be legal pitfalls in DIY estate planning

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Dear Liz: You answered a letter from a reader who was asked to be the executor of a friend’s estate. The reader was worried about being pulled into a lawsuit because the friend planned to disinherit a brother. You mentioned that the friend’s estate will pay the legal fees and other expenses if the brother contests the will and that executors can be compensated for their time. You also should have mentioned the importance of hiring an experienced attorney when disinheriting someone because there are a lot of ways this can go wrong.

Answer: Even Nolo, the self-help legal publisher, warns people that they need to hire an attorney if their estate plans are likely to be contested. A do-it-yourself estate plan can wind up costing far more than it saves if the parties wind up in court.

Q&A: Social Security survivor benefits complications

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Dear Liz: My husband started collecting Social Security benefits at age 62. I was still working at the time. When I reached my full retirement age of 66, I started collecting spousal benefits, or 50% of the benefit he received. After I reached age 70 and retired, I switched over to my own benefit as it was a larger amount.

If my husband should die first, can I switch back to a survivor benefit based on his earnings record or do I have to continue collecting my own? As I understand it, the survivor benefit would be 100% of his benefit, which is more than I currently receive.

Answer: When one of you dies, the survivor will get one check instead of two, and the amount will be the larger of the two benefits you’re receiving now. So if he dies first, you’ll essentially stop getting your check and start collecting a survivor’s benefit equal to his.

You were lucky that you were able to file what’s known as a “restricted application” to get spousal benefits first, so that your own benefit could continue to grow. That option is not available to people born on or after Jan. 2, 1954.

But it’s unfortunate that your husband started benefits early because that permanently reduces the amount the survivor will receive in the future. Typically it’s best for the higher earner in a couple to delay receiving Social Security benefits as long as possible to maximize what’s left for the survivor.

Q&A: Independent contractors face a wealth of tax consequences

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Dear Liz: My son was recently hired in his dream job, but his employer has classified him as an independent contractor rather than as an employee. This would be his first time drawing pay without all the taxes, benefits, insurance and so on taken out. I’m afraid he’s only seeing the good wage and not the flip side.

He’s a newlywed and doesn’t need his mama telling him what’s what. I thought if I sent him this “anonymous” letter that appeared in your column, that advice would be coming from you and he might just listen!

Answer: If your son doesn’t listen, that dream job could turn into a tax nightmare.

Tax pros often suggest their self-employed clients put aside half of what they earn to cover taxes and other obligations. Independent contractors have to pay both the employer and employee portion of Social Security and Medicare taxes, or roughly 15.3% instead of the 7.65% regular workers pay. That’s in addition to whatever federal, state and local income taxes he’ll owe.

He’s now required to make quarterly estimated tax payments because ours is a “pay as you go” system. Employees typically have those taxes withheld, but independent contractors must make quarterly estimated tax payments by Jan. 15, April 15, June 15 and Sept. 15. (The deadlines are moved to the following Monday if those dates fall on a weekend.) If he waits until he files his annual tax return to pay, he’ll probably owe penalties.

He also may need to register his business with his city or county and get a tax registration certificate.

If he doesn’t get health insurance through his spouse, he’ll need to find a policy, probably through an Affordable Care Act exchange. He also should save at least something for retirement. Although the self-employed have several good options for retirement savings, including SEP IRAs and solo 401(k)s, he’ll have to do without the “free money” that company 401(k) matches represent.

Business insurance may be another concern. He may need coverage to protect against lawsuits, disabilities and other potential setbacks.

Your son would be smart to hire a tax pro, such as an enrolled agent or CPA, to help him navigate this brave new-to-him world of self-employment.

Q&A: Claiming Social Security can get complicated

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Dear Liz: I am 63 years old, born in November 1955. My husband and I divorced five years ago after 37 years of marriage. I work full time and plan to continue until age 70 at least. Am I eligible for the option of applying for restricted benefits under my ex-husband’s Social Security when I turn 66 and then switching to my maximum benefit at age 70? He was always a much higher wage earner than I was, and I’m confused about whether I qualify for any of his Social Security benefits.

Answer: You’re not eligible to file a restricted application for spousal benefits, which would allow you to claim a benefit based on a husband’s or ex-husband’s benefit while allowing your own benefit to grow. Congress eliminated the restricted application option for people born on or after Jan. 2, 1954. Instead, when you apply for benefits, you’ll be “deemed” to be applying for both your own retirement benefit and any spousal or divorced spousal benefit to which you might be entitled, and will essentially get the larger of the two. You can’t switch later.

Something you should keep in mind: Although your own benefit can grow 8% each year you delay, between ages 66 and 70, spousal benefits don’t earn such delayed-retirement credits. There’s no incentive, in other words, for you to wait beyond age 66 to claim Social Security if the spousal benefit is going to be the larger of the two benefits you could receive.

Social Security claiming rules can be complicated. If you don’t have a trusted financial advisor who is well versed in claiming strategies, consider spending $40 or so for a service such as MaximizeMySocialSecurity.com, which can analyze your particular situation and suggest the smartest option.