November 25, 2019 By

Q&A: A surprise pension creates investment concerns

Dear Liz: Before my husband died, I encouraged him to find out if he had a pension. He worked for his company for more than 10 years and was vested, but he didn’t think he qualified. A few months after he died, I found an unopened letter stating he would receive a pension after he reached his retirement date. I contacted the benefit plan service center and submitted the required documents. I now have two options for receiving the money as his beneficiary: a lump sum or a single-life annuity that would pay a monthly benefit for my lifetime only. The lump sum could be rolled over into an eligible employer plan or traditional IRA, neither of which I have, or paid directly to me, in which case the whole amount is taxable. I am 65 and my only income is his Social Security survivor benefit and a small pension from my company when I retired. So what is the best thing for me to do?

Answer: Thank goodness you found that letter. It’s unfortunate your husband didn’t understand that “vested” meant qualified to receive a pension.

You don’t have to have an employer plan or an existing IRA to keep the lump sum from being taxed right away. You can open an IRA for the sole purpose of receiving the rollover. A bank or brokerage can help you set this up.

Any withdrawals would be taxed, but you wouldn’t be required to start taking withdrawals until you turn 70½. Even then, you would be required to withdraw only a small portion each year (a little less than 4% to start). You can always take more if you want.

Your income is low enough that taxes shouldn’t be driving your decision. Instead, consider whether you’d rather be able to tap the money at will or have more guaranteed income for the rest of your life.

If you don’t have other savings, you may want to have this pool of money standing by to use for emergencies and other spending. On the other hand, an annuity is money that you don’t have to manage and that you can’t outlive or lose to fraud, bad investments or bad decisions. If you have enough emergency savings, adding more guaranteed income could help you live a bit more comfortably.

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October 15, 2019 By

Q&A: Weighing investment choices

Dear Liz: I felt your advice about using an inherited IRA to pay off a mortgage was spot on, but I would add one suggestion. The person could use their required minimum distribution (or a little extra) from the inherited IRA each year to pay down the principal on the mortgage. Then they could see what the remaining loan balance is when they are approaching retirement in 10 years.

Answer: That could be a good alternative if being debt free is more important than maximizing their returns. Using just the distributions to pay down the mortgage would allow the bulk of the money to continue earning tax-free returns as long as possible, while reducing the mortgage balance over time.

The letter writer might do better financially by investing the distributions, but using them to pay down the mortgage could get them closer to their desired goal of being mortgage free.

Filed Under: Investing, Q&A Tagged With: ,
October 15, 2019 By

Q&A: Inherited Roth IRA distributions

Dear Liz: You recently answered a question about whether someone should use a Roth IRA to pay off a mortgage. In your answer, you mentioned the requirement to take minimum distributions from the account. One of the huge advantages of a Roth, besides tax-free distributions, is that there are no required minimum withdrawals. Did I miss something?

Answer: You did. You missed the word “inherited.”

The letter writer was asking whether to use an inherited Roth IRA to pay off the mortgage. (Specifically, an inherited non-spousal Roth IRA.) Although the original Roth IRA owner was not required to take distributions, the heirs must. Money can’t be kept in tax-deferred retirement accounts indefinitely.

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September 3, 2019 By

Q&A: Strategies for overcoming a spouse’s bad investment decisions

Dear Liz: I tell people we lost a huge chunk of money in the Great Recession, but it wasn’t the downturn that did us in. My husband made some incredibly poor choices. I’m embarrassed to admit that he absolutely refused to listen to me and stop the financial self-destruction until I grew a backbone. I told him I’d divorce him unless he stopped. He has mended his ways and we’re still together (which is really for the best; we’ve been married almost 47 years).

He’s now being very transparent and prudent about investing, but we’re still looking at an underfunded retirement and I’d like to maximize what we have. We’re both 71 and still working (we’re self employed). Our home is worth about $800,000 and we owe $160,000. We have a rental nearby with about $100,000 in equity that pays for itself, but there’s no extra income from it. We have $210,000 in investments and $25,000 in savings with no debt.

I think more real estate would be a good investment vehicle for us, but we’d have to cash out some of our limited portfolio in order to purchase more. So instead, I make an extra principal payment equal to half the regular mortgage payment on each of the properties each month. I’m not sure if that’s the wisest thing to do, but I figure it’s still investing in real estate and will help us when we finally retire, sell and downsize.

Answer: Right now, the vast majority of your wealth is tied up in two properties in the same geographic area. A financial planner would want you to diversify, not double down by putting even more money into real estate.

And a fee-only financial planner is what you need to help you map out your future while easing the investment reins out of your husband’s hands. As we get older, we’re more vulnerable to fraud, exploitation and just plain bad choices. Your husband may have been scared straight for now, but he easily could make future decisions that could again imperil your finances. That’s especially true if his prior behavior was related to a gambling addiction. Not all problem gamblers choose casinos or horse tracks; some are day traders.

Given all that, you may want to consider purchasing a single premium immediate annuity when you retire. These annuities offer a guaranteed stream of income for life, in exchange for a lump sum. This would be income that can’t be lost to stock market downturns, real estate recessions, bad investments or fraud.

That’s something to discuss with your planner, along with ways you can use your businesses to maximize your retirement savings. (The self employed have many options, including a basic Simplified Employee Pension or SEP, solo 401(k) plans and traditional defined benefit pension plans.)

You can get referrals to fee-only planners at the National Assn. of Personal Financial Advisors, the XY Planning Network, the Alliance of Comprehensive Planners and the Garrett Planning Network.

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August 26, 2019 By

Q&A: Can this marriage’s finances be saved?

Dear Liz: I am 64 and my husband is 63. I retired five years ago after a 30-year professional career. My husband is an executive and plans to work until 70. We own two homes and one is a rental property. Both our boys are successfully launched. Currently, 67% of our retirement money is in stocks and stock index funds. The rest is cash and IRAs or 401(k)s. I am working on re-allocating that 67% to safer investments, but our two investment advisors don’t even agree on what that would look like. And my husband does not want to leave potential stock market gains. Help! I think it is time to switch to more conservative investments. What do you think?

Answer: Many financial planners would say you should only take as much risk as required to in order to reach your goals. Exactly what that looks like depends on how much you’ve saved, how much you spend and how much guaranteed income you expect to receive from Social Security, pensions and annuities, among other factors.

Most people need a hefty exposure to stocks in retirement to get the returns they’ll need to beat inflation, but whether that proportion is 30% or 60% depends on their individual circumstances. Your current allocation could be fine if your basic expenses are entirely covered by guaranteed sources (Social Security, pensions, annuities) and you want to leave a substantial legacy for your sons. Or you could be way overexposed to stocks and vulnerable to a downturn if you’ll need that money for living expenses soon.

Your IRAs and 401(k)s are not investments, by the way. They’re tax-deferred buckets to hold investments. How that money is allocated among stocks, bonds and cash matters as much as how your other investments are allocated and should be included when calculating how much of your portfolio should be in stocks.

If neither of your investment advisors is a certified financial planner, consider seeking one out to create a comprehensive financial plan for you and your husband. The plan should consider all aspects of your finances and give you a road map for investing and tapping your retirement savings. You can find fee-only financial advisors through the National Assn. of Personal Financial Advisors, the XY Planning Network, the Alliance of Comprehensive Planners and the Garrett Planning Network.

Filed Under: Couples & Money, Investing, Q&A Tagged With: , ,
June 17, 2019 By

Q&A: Investing books for beginners

Dear Liz: What are the best books for a beginning adult investor?

Answer: “The Little Book of Common Sense Investing,” by the late John Bogle, is a terrific explanation of why low-cost index funds are the best choice for most people (a sentiment shared by legendary investor Warren Buffett, who also endorsed the book). If you want to venture beyond index funds, or even if you don’t, “Investing for Dummies” by Eric Tyson, “Investing 101” by Kathy Kristof and “Broke Millennial Takes on Investing” by Erin Lowry are other good reads.

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March 4, 2019 By

Q&A: When is it time to take the money and run to a new investment advisor?

Dear Liz: My wife and I are in our early 30s. She has a stock portfolio that has positions in 20 blue chip stocks purchased primarily in the last 20 years. It was set up by her family and managed by a family friend at a large brokerage. Recently, the family friend retired and transitioned the portfolio to a new team at this brokerage. They basically told us that our portfolio underperformed and only saw an average of 3% growth per year over the last 20 years.

The new brokerage team is recommending we gradually transition our 20 positions into a portfolio of 300 stocks that will mirror an index. They would harvest any tax losses to offset the capital gains tax that would otherwise be due. They will charge a 1% fee, and after several years, we will probably have a portfolio that is entirely small positions in a huge number of companies.

My gut reaction was that if they want to mirror an index, why not just buy an index fund with cash freed up from tax-loss harvesting? My wife really feels most comfortable doing whatever her parents recommend and is overwhelmed by what I call advanced investing but wants us to make this decision together.

Answer: If your wife is being charged a 1% annual fee, she should be getting a heck of a lot more than investment management. One percent is the typical fee charged by comprehensive financial planners who offer a wide array of services including retirement, tax, investment, insurance and estate planning. If her portfolio is more than $1 million, the fee probably would be even lower.

Another, larger problem is that the new team of stockbrokers probably does not have a fiduciary duty to your wife. In other words, they’re allowed to recommend a course of action that is more profitable for them, even if there are better-performing and less-expensive options available. That, more than anything else, should be motivating her to find a new advisor who is willing to be a fiduciary.

You can help in a number of ways, starting with the advisor search. The National Assn. of Personal Financial Advisors, the XY Planning Network and the Garrett Planning Network all represent fee-only planners and can offer referrals.

You also can encourage your wife to educate herself about investing, since (as you know) it’s not rocket science and she needs to know the basics to responsibly handle her money. Relying on her family’s influence has left her with an undiversified, underperforming portfolio — and delivered her into the hands of people who probably don’t have her best interests at heart. It’s time to grow up and take charge.

Finally, you can stop referring to it as “our” portfolio. It’s lovely that she wants to share it with you, but the money is hers and she needs to take ownership.

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December 31, 2018 By

Q&A: Fear of a market meltdown has frozen this retiree’s money decisions

Dear Liz: I sold my home two years ago and still have not done anything with my gain of $200,000. It’s in a one-year certificate of deposit so at least it’s earning something while I try to figure out what to do with it. I’m 66, retired and have an IRA of $500,000 that’s invested in the market. I get $1,450 from that plus a monthly Social Security check of $1,750.

I know that my hesitation has to do with the crash of 2008. I know that things have recovered nicely but I just don’t want to feel like I did then, watching my money disappear. I don’t know if I’m the only older person who has this fear of riding it out again.

Answer: Few who watched their portfolios plunge in 2008-09 look forward to experiencing that again. But risk is inextricably tied to reward. If you want the reward of inflation-beating returns that stocks offer, you must accept the risk that your portfolio can go down as well as up.

And you probably do want that reward for a big chunk of your investments. Retirees typically need about half of their portfolio in stocks to generate the kinds of returns that will preserve their buying power and help insulate them against running short of money.

That doesn’t mean all your money has to be at risk. You still need to have a good stash of savings sitting in safe, liquid accounts to help you ride out any market downturns or emergencies. Financial planners often recommend that their retired clients keep six months’ worth of expenses in an emergency fund, and some like to see 12 months’ worth. Beyond that, though, your money probably should be working for you, not simply dwindling away to taxes and inflation.

If you find yourself unable to move forward with a plan for this money, consider hiring a fee-only financial planner who can help you review your options.

Filed Under: Investing, Q&A, Retirement Tagged With: , , ,
November 19, 2018 By

Q&A: When to merge 401(k) accounts

Dear Liz: I have $640,000 in a previous employer’s 401(k) and $100,000 in my new employer’s plan. Do you recommend I merge the two? Both funds offer similar investment options. My only motivation is based on simplifying paperwork during retirement, although there may be other advantages I am not aware of.

Answer: The choice of investment options matters less than what you pay for them. If your current plan offers cheaper choices, rolling your previous account into your current one makes sense if your employer allows that.

If the previous employer’s plan is cheaper, though, leaving the money where it is can make more sense. Once you actually reach retirement age you can decide whether to consolidate the plans or roll them into an IRA.

IRAs give you a wider array of investment options, but keeping the money in 401(k) accounts has other advantages. Larger 401(k)s often offer access to cheaper, institutional funds that aren’t available to retail investors in their IRAs. A 401(k) may offer more asset protection, depending on your state’s laws, plus you can begin withdrawals as early as age 55 without penalty if you no longer work for that employer.

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October 29, 2018 By

Q&A: Here’s why timeshares are a bad investment

Dear Liz: About two years ago, I lost my timeshare because of financial hardship. I paid off the mortgage but after my divorce I missed paying the annual fees. Is there any way I can regain it, or can the company just take it like they did? Also, is it worth it to try to get it back? I think so because it is the only thing I own.

Answer: Please consider investing your money in an asset that can gain value over time. Timeshares don’t.

Timeshares give you the right to use a vacation property for one week each year. They aren’t an investment. In most cases, timeshare owners are lucky to get 10 cents on the dollar when they try to sell their interests.

Sites such as Timeshare Users Group and RedWeek are filled with ads from people trying to sell their timeshares for $1, and some will even pay others to take timeshares off their hands, perhaps by prepaying a year or two of maintenance fees. Those fees average about $900 a year but can top $3,000 on high-end properties. Resorts damaged by natural disasters or older properties that are being improved also may charge “special assessments” that can be hundreds or thousands of dollars more.

As you discovered, timeshare resorts can take back your interest if you don’t keep up with those fees. You also could have lost your timeshare if you hadn’t been able to pay the mortgage. (In general, it’s not a good idea to borrow money to pay for vacations or other luxuries, and that includes timeshares. The high interest rates charged by most timeshare resort developers make borrowing an even worse idea.)

In addition to taking your timeshare, the developers may have sold your delinquent account to a collection agency that reports to the credit bureaus. Those collections could damage your credit scores.

You could ask the resort developer if you can get the timeshare back, but you could just face the same problem again down the road. One of the biggest problems with timeshares is that there typically is no easy exit. Those annual fees and special assessments are due as long as you own the timeshare. You may not be able to find a buyer if money is tight or you’re no longer able to use it.

If you really loved vacationing at that particular resort, you probably still can. Owners who can’t use or trade their timeshare weeks often rent them out on the sites mentioned above, sometimes for less than the annual maintenance fee. Renting could be a much better deal than tying yourself to a timeshare that could become unaffordable.

Filed Under: Investing, Q&A, Real Estate Tagged With: ,