Ask Liz Weston

Get smart with your money

Q&A

Q&A: The payments aren’t late, but the debt collectors are calling. What does it mean?

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Dear Liz: In the last few months, I have received collection calls and emails for payment, sometimes before I even got the invoice and in every case before payment was due. For example, on Sept. 25 I was emailed for the second time for payment on an invoice with an Oct. 17 due date. Some but not all of these communications relate to medical bills. Is this legal?

Answer: Probably. Most companies wait until a bill is seriously overdue before turning it over to collections. Some hire collection agencies much sooner, however, and a few — including some medical providers — turn over their whole accounts receivable process. That means the collectors are responsible for regular billing, not just debt collection.

It’s unpleasant to hear from collectors, especially on an account that isn’t overdue, but you’re not likely to face credit score damage as long as the bill gets paid on time. Even if it’s past due, there is now a 180-day waiting period before unpaid medical debts can show up on people’s credit reports. (The clock starts on the bill’s first due date.)

Collectors may justify their “outreach” calls and emails by saying many people are confused by medical billing and put off paying because they think insurance will take care of the bill. That doesn’t make such contacts less annoying for those who pay on time.

Consider letting the medical providers and other companies know that you don’t approve of these tactics. Some may care enough about customer service to change their billing approach, or require the collection company to stop the premature contacts.

Q&A: A reader’s college funding rules

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Dear Liz: I’d like to share with other parents how my husband and I paid for college for our two daughters. We had three rules. 1. If an out-of-state or private college was chosen, then they would be required to pay us back the difference compared to an in-state public school. They both did opt for that and both paid us back every cent. 2. We would only pay for four years and not one more day. Get in, get out. Go to summer school and work jobs. 3. They would receive a monthly allowance of $100 only. Both daughters got a fabulous education, are grateful and felt they had invested in their future well. So did we and we are very proud of them.

Answer: As well you should be! Obviously, many parents can’t afford to be nearly as generous with their kids, but those who can be should think about putting limits on their generosity to make sure their progeny are motivated to get the most out of their education. One caveat: Getting a degree in four years has become increasingly difficult at many public colleges because of budget cuts. You don’t say when your daughters graduated, but today’s parents may need to keep that in mind when figuring out how much to contribute.

Q&A: Medicare Part B allows an eight-month grace period

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Dear Liz: I have a question after reading your column about avoiding costly Medicare mistakes. My husband and I have both reached 65 this past year. We both signed up for Medicare Part A hospital coverage, which is free. I retired two years ago, but am covered by my husband’s employer’s health insurance. I’m now confused about whether I should have signed up for Medicare Part B, which covers doctors visits but requires monthly premiums. His employer explained to him that he would avoid penalties if he signed up for Part B within eight months of his retirement, but no one has mentioned his wife.

Answer: You’re covered under the same rules. As long as your spouse is still working and you’re covered by that employer’s health insurance, you don’t have to sign up for Medicare Part B. But, as your husband’s employer noted, when that employment ends you both should enroll in Part B within eight months to avoid future penalties.

Q&A: When to keep a mortgage into retirement years and reasons you might want to pay it off

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Dear Liz: My husband and I have no debt other than the mortgage on our home. My husband will retire in three years while I will continue to work. (I will have to pay for healthcare at that time, as I currently receive my benefits through his employer.) My husband insists that we pay our mortgage off before he retires. The mortgage balance is $59,000 now. We are able to do this, however, I am concerned that we will have no tax deduction whatsoever if we do. Who is correct?

Answer: You may have received some tax benefit in the past for your mortgage. After last year’s tax reform, it’s unlikely you’ll get any tax break going forward.

You have to be able to itemize your deductions to write off your mortgage interest. Now that Congress has nearly doubled the standard deduction, few taxpayers will have enough deductions to make itemizing worthwhile.

Even before tax reform, though, many homeowners got little or no tax benefit from their mortgages. They didn’t pay enough mortgage interest to make itemizing worthwhile, or their itemized deductions barely exceeded the standard deduction. The homeowners who got the biggest benefit were the ones with the largest mortgages. Even people with big mortgages tend to pay less interest over time as they pay down their loans.

Keeping a mortgage just for the tax break is kind of shortsighted, in any case, since you’re only getting back a fraction of what you pay out. For example, if you were in the 25% tax bracket, each dollar you paid in interest reduced your taxes by just 25 cents.

The best arguments for keeping a mortgage have to do with liquidity and investment returns. You shouldn’t pay off a mortgage if it means most of your money is tied up in your home, and if you don’t have enough other assets to cover emergencies and to generate future income. Also, some wealthier people opt to keep a mortgage because the loan is cheap, and they can make better returns on their money elsewhere.

Most people are better off without debts in retirement, though, so if you can pay off your home loan without compromising the rest of your financial life, you probably should.

Q&A: Here’s why two siblings who inherited mom’s house should prepare for an ugly family feud

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Dear Liz: My mother left her house to my brother and me. He wants to use it as a rental property. I have no interest in being a landlord or in ownership. He doesn’t want to buy me out, so I’d like to sell my half interest. What are the tax issues I need to prepare for, and does my brother need to sign any documents?

Answer: You should first prepare for an ugly family feud. If the property hasn’t been distributed yet, you’ll face a probate or trust contest over the house, says Jennifer Sawday, an estate planning attorney in Long Beach. If you’ve already inherited the home, you would need to go to court to file a real estate partition action. Either way, a court action typically forces a sale or arranges for your brother to buy you out before dividing the proceeds — minus all the attorneys’ fees, of course. (This is not a do-it-yourself situation, so you’ll both need to hire lawyers.)

That may be the best of bad options if your brother won’t see reason. Being a landlord involves considerable hassle and liability. You shouldn’t be forced into such a business — or any business — with a family member.

You can use the threat of legal action as a bargaining chip, since you both will net a lot less from your inheritance once the court gets involved. It makes much more sense for your brother to agree to a sale or get a mortgage to buy you out. Let’s hope he comes to that conclusion as soon as possible.

Q&A: Pension annuity beats lump sum

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Dear Liz: I am 63, recently retired and have a choice. I can take a lump sum from my pension at age 65 or a monthly annuity. I am strongly leaning toward the lump sum. I know the pitfalls (I won’t be an aggressive investor, I don’t gamble, I won’t loan to family or friends, etc). My reasoning is that if my spouse and I both die before our early 80s, “they win.”

I do have relatives who live a long time, however. I am financially very careful and believe interest rates in five years will be several points higher and I can invest the lump sum conservatively and get a 5% to 7% return, and that will work for me.

Finally, I could take the monthly annuity now with no survivor benefit and at the same time buy term life insurance to cover my wife if I go. Am I missing anything significant in my favoring the lump sum?

Answer: Yes. Quite a bit.

Calculating break-even points can be an interesting math exercise, but you’re making assumptions about inflation rates and market returns, as well as life expectancies, that you can’t actually know in advance. A better approach might be to consider what could possibly go wrong. The answer: a lot.

Technically, you might do better investing the money than collecting the annuity, but there are so many ways you could wind up losing. You could pick the wrong investments, or the markets could turn south for an extended period. You could be defrauded or become the victim of an unethical advisor.

(Sure, you’ve got all your marbles now, but who says you’ll keep them? Even the smartest people can get fleeced, and any cognitive decline over the years could make you a sitting duck.)

The fact that you have longevity in your family is another big factor in favor of taking the annuity, because you can’t outlive the money. That should be a concern, in any case, because according to the Society of Actuaries there’s a 72% chance that one member of a couple will live to age 85 and a 45% chance that one will live to age 90.

If your spouse is a woman and not several years older than you, she’s likely to outlive you. Does she want to inherit the responsibility of managing this money?
Speaking of your spouse, get an independent, fee-only advisor’s opinion before you consider waiving the survivor’s benefit on any annuity.

A term life insurance policy may not last as long as you need it to, and will be expensive at your age. It will be vastly more expensive if you try to renew it down the road.
If you don’t or can’t renew it, your spouse could face a drastic drop in income at your death as one of your two Social Security checks goes away and the pension income stops. Surely, your partner deserves better than that.