Q&A

Q&A: More on Saving for Retirement

May 23, 2016 By Liz Weston

Dear Liz: Here is another take on your response to the reader who questioned whether retirement calculators were a hoax that promoted excessive savings rates. You mentioned that current retirees had enough pensions, Social Security and savings to replace nearly 100% of their working income, while younger people likely would have only enough to replace 50%. You closed your advice by asking if the letter writer would be comfortable living on 50% of that person’s income. For a non-saver, that is a fair question. But for a saver, it isn’t an accurate comparison.

If one is presently saving, say, 10%, then that person is already living on 90% of current income. If saving 15%, then that person is already living on 85%. When you analyze the expected impact of having the compounded savings at retirement, the true “step down” in income is really the difference between the current 90% or 85% figure and what you will have with Social Security, part-time job income, pension (if you work for the government) and savings. The gap becomes much more manageable, because you already are used to living on 10% to 15% less than your current income.

The point? Savers are already accustomed to living on less — in some cases, significantly less — than current income. Between the already lowered current disposable income and the benefit from the accumulated savings and investments, the “step down” gap is made manageable. Saving helps on both ends.

Answer: That’s an excellent point. Taxes are another factor to consider. Working people pay nearly 8% of their wages in Social Security and Medicare taxes, an expense that disappears when work ends. Income tax brackets often drop in retirement as well.

Still, there are good reasons to shoot for a higher replacement rate than you think you may need. Investment markets don’t always cooperate and give you the returns you expect. Inflation can kick up and erode the value of what you’ve saved. Careers can be disrupted, leading to lower wages or an earlier retirement than you planned. People who have “oversaved” will be in a better position to deal with these setbacks than those who save only enough to scrape by.

Q&A: Defaults on a co-signed student loan

May 16, 2016 By Liz Weston

Dear readers: A recent column about private student loans prompted financial aid expert Mark Kantrowitz to reach out with some additional advice for people who co-signed student loans for someone who has stopped paying. Although private student loans don’t have the same rehabilitation options as federal student loans, Kantrowitz encourages anyone in this situation to ask the lender, “What are my options?” and “Can you remove the default?”

“I’ve seen lenders not only remove the default from the co-signer’s credit history, but even reduce the interest rate if the co-signer agrees to make the payments by auto-debit,” said Kantrowitz, coauthor of the book “File the FAFSA.”

Someone who agrees to make payments may get a better deal than someone who pays off the loan in a lump sum, Kantrowitz said, because lenders want to be paid interest. But there would be nothing to stop a co-signer who makes payment arrangements to pay off the debt in full after a few months.

“This way he potentially can have the default entirely removed from his credit history, restoring him to his previous credit score,” Kantrowitz said. “It also leaves the account open, so that he can pressure the [borrower] into making payments.”

Q&A: Retirement calculators are a wake-up call for undersavers

May 16, 2016 By Liz Weston

Dear Liz: Are retirement calculators a hoax? It seems that the published estimates for the amount of savings required are insanely high. If most U.S. citizens haven’t saved much and have a decent standard of living in retirement, where is the misperception? Let’s say an individual is resolved to choose hospice over intensive care — so we can reduce healthcare from the equation — and is no longer paying for a mortgage or college. How could someone really need to replace a high percentage of salary? Do we really need to save millions to retire? Even if we just spend the principal in the calculated estimates, we are truly old before we run out. I have got to be missing something.

Answer: You’re missing quite a few things.

People born between 1936 and 1945 — those aged 71 to 80 now — typically had enough savings, home equity, pension income and Social Security benefits to replace 99% of their annual incomes in retirement, according to a Pew Charitable Trust study. This generation benefited from steadily rising incomes and wealth levels through most of their working lives.

Early boomers, born between 1946 and 1955, aren’t quite as well off but typically can replace a comfortable 82% of their incomes.

They’re the last generation, though, that’s expected to be truly secure on average in retirement. Younger people are much less likely to have pensions. Stagnant incomes, rising costs and falling wealth levels further undermine their financial security.

Late boomers, born between 1956 and 1965, are on track to replace 59% of their incomes. GenX, born between 1966 and 1975, could see their incomes cut in half in retirement.

Imagine living on 50% of what you make now. If that would be easy — and if you’re really resolved to choose death over medical treatment — maybe you don’t have to worry about retirement calculations.

If the thought of eking by on half your current income makes you break out in a cold sweat, though, then you better start saving.

Americans Are Pissed — This Chart Might Explain Why

May 11, 2016 By Liz Weston

iStock_000087400741_Small People are angry. Voters demanding change have helped make Donald Trump the presumptive Republican nominee for president and fueled Bernie Sanders’ ferocious challenge to Democrat Hillary Clinton.

But what are they angry about? Ask and you’ll hear about Washington gridlock, Wall Street greed, trade, stagnant pay, immigration. In my latest for NerdWallet, the one huge factor that’s making this election especially unique.

Q&A: The pitfalls of renting a house to relatives

May 9, 2016 By Liz Weston

Dear Liz: My son and his family are having trouble with money. I see him stepping up since he had my lovely granddaughter. I am getting ready to retire from teaching. I have my teacher’s retirement and a nest egg set aside. I was thinking of buying him a place where he could pay me rent and when the time happens, move to find his future. I was told, though, that I would have to live in the home after purchase or I cannot get a loan. I just want to see where I can stand in this endeavor.

Answer: People get loans to buy rentals and other investment property all the time. But that doesn’t mean you should be one of them.

Taking on a mortgage in retirement is risky, to say the least, and you’d be putting your financial future in the hands of a young man who has “trouble with money” and who hasn’t always been responsible, given your comment about “stepping up.” When his family hits a rough patch, how hard would it be for him to justify skipping a rent payment, or six, to Dear Old Dad? And what would you do about that — evict him and your lovely granddaughter?

If you were wealthy enough to pay cash for this house, take care of all the ongoing costs and not care if he ever paid you a dime, then maybe this scheme would make sense. In your case, you’re inviting financial distress and family trouble at a time in your life when you should be reducing the odds of both.