Q&A

Q&A: Keeping pace with retirement saving

July 15, 2019 By Liz Weston

Dear Liz: My wife is distressed by your recent column about how many multiples of salary are needed to retire. She interpreted the column as saying you must have the sum total of those numbers. So if you need one times your salary saved at 30, three times by 40, six times at 50 and eight times at 60, she thinks you would need 18 times your salary in total by age 60, or $1.8 million if you earn $100,000. I interpreted it to mean that your target would be $800,000 at age 60. Am I wrong?

Answer: You are interpreting the guidelines correctly: You would need eight times your salary at 60, not 18 times. The numbers, by the way, come from Fidelity Investments and are meant as general guidelines for people hoping to retire at 67 (at which point, Fidelity says they should have 10 times their salaries saved). Your needs may vary; some people will need less, some will need more. People who have large traditional defined benefit pensions, for example, may not need to save as much, while those who want to retire early or indulge in expensive hobbies, such as traveling or supporting adult children, may need to save more.

Guidelines tend to be the most helpful when you’re many years away from retirement and only guessing about how much money you’ll need. Once you’re five to 10 years from your desired retirement age, you should have a better handle on your likely expenses and sources of income. Well before you actually retire, though, you should consider consulting with a fee-only, fiduciary financial planner for a second opinion on your retirement plans. (“Fee only” means the advisor is compensated only by fees paid by clients, rather than through commissions or other arrangements. “Fiduciary” means the advisor is required to put your interests first.)

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.

Q&A: Escaping California’s tax auditors is tough even after leaving the state

July 8, 2019 By Liz Weston

Dear Liz: My husband and I will be trying out several different areas after the sale of our Los Angeles area house, which will be some time this summer. What happens if we end up renting in three different states? I’m under the impression that we need to be able to prove that we resided in a particular state for six months and one day in order to say we are residents of that state. Even though my husband has been retired for many years, he still does a small amount of business through a company based in Southern California. Will we be forced to pay California tax even though we are residing elsewhere?

Answer: California, like other higher-tax states, has residency auditors whose specialty is asserting that affluent people who have left the state are still legal residents and thus are subject to its taxes. The audits can be stunningly thorough, looking at everything from the doctors you visit to where your artwork and other valuable possessions are stored.

If audited, you would need to prove that you have a fixed, permanent residence elsewhere and that it’s truly your home. And yes, it’s up to the taxpayer to prove this — there’s no presumption of innocence in tax audits, says tax attorney Mark Klein, chairman of Hodgson Russ LLP in New York City. (New York is another state with notoriously hard-nosed residency auditors.)

Just leaving the state for six months and registering to vote elsewhere typically won’t be enough. You likely would need to spend substantially more time in your new “home” state than in California. Klein, who recently taught a session on establishing residency at the AICPA’s annual ENGAGE conference, tells his clients to spend at least two months in the new place for every month they spend in the old one.

Also, you should “stick the landing,” in Klein’s words. Let’s say you try to establish residency in Nevada but then move to Florida by the time California’s auditors find you. They may well decide that your Nevada stay was temporary and that you were still subject to California taxes during the time you lived in the Silver State.

Escaping the long arm of California’s tax auditors could be tough while you’re still figuring out where to live next. You’d be smart to consult a CPA experienced with California residency audits for advice on how to cut ties to the state cleanly.

Q&A: Limiting your rate shopping window

July 8, 2019 By Liz Weston

Dear Liz: We’re planning to refinance our mortgage and are concerned about generating multiple credit inquiries which would lower our excellent credit scores. Is there some kind of licensed, bonded ethical middle-agent who could get just one official credit report from each of the three bureaus and then send it to all the lenders I designate? Our FICOs are so good that we want lenders to compete for our refi business but don’t want the process itself to lower FICOs just for inquiries only.

Answer: The FICO formula has you covered. With the FICO scores most lenders use, multiple mortgage inquiries made within a 45-day window are aggregated together and counted as one. Furthermore, any inquiries made within the previous 30 days are ignored entirely. That allows you to rate shop for mortgages without dramatically affecting your scores.

The FICO formula extends this “de-duplication” process to two other types of borrowing: auto loans and student loans. Only similar types of inquiries are grouped together, however. If you shopped for both mortgages and auto loans, then two inquiries eventually would be factored into your credit scores, rather than just one.

Credit cards, personal loans and other types of borrowing don’t get the same treatment. If you apply for two credit cards while shopping for a mortgage, you would have three inquiries — two that are immediately factored into your scores and a third that would be counted after 30 days had passed.

Also, some lenders use older versions of the FICO formula that have a shorter rate-shopping window — 14 days instead of 45. If you want to be absolutely sure your mortgage shopping has a minimal impact on your scores, you can limit your shopping to that two-week period.

Q&A:Ready to retire? If you’ve saved 8 times your salary by age 60, maybe

July 1, 2019 By Liz Weston

Dear Liz: I keep reading about how much money one should have saved at various ages to comfortably retire. These are usually a multiple of your annual salary. Do these projected amounts factor in whether you are single or married with a single income? Or if you still have a mortgage? What about having to take a lower-paying job in future years because of downsizing? Is Social Security included? It’s tough to know what these suggested amounts assume to know, given that each person’s situation is different.

Answer: Exactly. So it’s smart to do a little digging.

Fidelity Investments, for example, has come up with some salary-based rules that suggest you have an amount equal to:

One time your salary by age 30

Three times your salary by age 40

Six times your salary by age 50

Eight times your salary by age 60 and

10 times your salary by age 67.

Fidelity assumes you’ll want your standard of living to continue basically unchanged in retirement. Its rules are based on a number of factors, including a 1.5% real wage growth throughout one’s working life, a 15% savings rate starting at age 25, claiming retirement and Social Security at age 67 and a portfolio invested at least 50% in stocks that replaces 45% of your individual income in retirement. Fidelity used multiple market simulations “to support a 90% confidence level of success.”

Few people’s lives will follow an idealized trajectory. For example, many people who enter their 50s with full-time jobs will lose them, and only 1 in 10 will find a new one that earns as much, according to a study by ProPublica and the Urban Institute. You can’t know for sure how long you’ll live, what investment returns you’ll get, whether you’ll need long-term care (although that’s likely) or even what your fixed expenses will be, at least until you’re relatively close to retirement.

People also will have vastly different needs and interests in retirement. A thrifty homebody will probably need less than a globe-trotting spender. Working at least part time in retirement also can shift the math in your favor because you’ll need to draw less from your retirement funds.

What we do know is that people who save a lot tend to have more options as they age. And once you reach your 50s, you’d be smart to consult a fee-only financial planner who can give you a second opinion on your retirement plans to ensure you’re on track.

Q&A: About the ex’s Social Security

July 1, 2019 By Liz Weston

Dear Liz: I’ve been divorced since 2004. My ex received half of all my pension funds and lives off that and his Social Security. I have not yet drawn Social Security, but I am retired. Am I eligible to receive part of his Social Security? How does that work?

Answer: Yes, if your marriage lasted at least 10 years. If you were born before Jan. 2, 1954, you also have the option of filing a “restricted application” for divorced spousal benefits while allowing your own benefit to continue growing.

Divorced spousal benefits, like regular spousal benefits, allow you to get an amount of up to half your ex’s benefit. The amount would be reduced if you start before your own full retirement age, which is currently 66 and rising to 67 for those born in 1960 and later. If you start at age 62, for example, you would get about one-third of his benefit, rather than half. (Your claim doesn’t take money away from him or any of his current or former spouses, in case you were concerned.)

Regular spousal benefits require that the primary worker has started his or her own retirement benefit. Divorced spousal benefits don’t have that requirement: You both just need to be at least 62. Also, the divorced benefit is based on the primary earner’s benefit at his or her full retirement age. With regular spousal benefits, the amount is typically based on what the primary earner actually receives, which could be less if the primary earner started benefits early.

If you were born on or after Jan. 2, 1954, you can’t file a restricted application. Instead, you’ll be deemed to be applying for both your own benefit and the divorced spousal benefit, and given the larger of the two amounts. You can’t switch to your own benefit later.

If your ex should die before you do, you also would be eligible for a divorced survivor benefit that is up to 100% of his. That has the unfortunate effect of making your ex worth more to you dead than alive.