Ask Liz Weston

Get smart with your money

Q&A

Q&A: Why co-signing a loan, especially a student loan, can be a costly move

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Dear Liz: I co-signed a student loan to help a 31-year-old woman complete her schooling to become a nurse. I know this was something I should not have done, but I just could not refuse her. I did not realize that because no payments had to be made until after the student’s graduation, the loan amount would double. I am looking into a life insurance policy on the student to protect my interest.

Is there any advice you can provide me other than paying off the loan? I know the student can complete a form to take me off this loan, but she will not qualify on her own.

Answer: She may not be able to take you off the loan now, but hopefully she can within a few years of graduation. Most private lenders will allow a co-signer to be removed from a student loan after a certain number of on-time monthly payments, typically 12 to 48. If she has good credit and a decent income, she also may be able to refinance this loan with another lender to get you off the note.

In the meantime, you’ll want to protect your credit, because a single missed payment can damage your credit scores. Contact the lender to find out what notice, if any, you’ll get if she falls behind on payments. Discuss with her the importance of making payments on time, every time, and ask her to contact you immediately if there’s any chance that won’t happen.

Just as many people don’t realize that they’re putting their good credit in the other person’s hands when they co-sign a loan, many also don’t realize what can happen if they take a lender up on its offer to defer payments until graduation.

The loan amount swelled because of something known as capitalization. Because payments aren’t being made, the unpaid interest is being added to the loan amount and dramatically increasing what the two of you owe.

If the loan were a subsidized federal loan, the government would pay the interest while the student was in school. With unsubsidized federal loans and private student loans like the one you signed, it’s smart to start making payments immediately to avoid capitalization and having to pay interest on interest.

Q&A: Social Security’s widespread benefits

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Dear Liz: I encourage you to educate your readers about the real intention of Social Security, as well as the real problem facing it. Social Security was designed as a safety net to keep the elderly, disabled and orphaned from abject poverty. It was not intended to provide decades of benefits to individuals who are not at risk of living in poverty. It does no good to further the inaccurate notion that everyone is entitled to “their share” from a social safety net meant for the poor.

Answer: You’ve misunderstood Social Security’s structure and its history.

Social Security was deliberately created as a social insurance program, not as welfare assistance. Workers fund the system themselves through payroll taxes. They have to pay into the system a certain number of years to qualify for benefits. In return, they receive inflation-adjusted income that they can’t outlive and that isn’t vulnerable to market downturns.

Social Security benefits are progressive, which means they’re designed to replace more income for a lower-paid worker than a higher-paid one. But people who pay more into the system get larger benefits than those who pay less, and benefits are not means-tested.

Programs for the poor tend to be easy targets for politicians, but Social Security’s universal nature contributes to its widespread support. More than 1 out of every 6 U.S. residents, or about 62 million people, collected Social Security benefits in June 2018.

Q&A: Stop judging that overspending friend

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Dear Liz: My friend is not good with money. He has always lived above his means. He lived in a fancy apartment, leases a BMW and goes out to eat often. To make matters worse, he lost his job a year ago and had to move in with a mutual friend. He continues to spend money he doesn’t have. I tried to help him with his finances and setting a budget, but he lost interest after one conversation. He’s 41 with no savings and more than $10,000 in credit card debt.

My question: Should I feel guilty about inviting him to things? When he was unemployed, I suggested doing things that don’t cost money, but he never seemed interested. I’m planning a trip for my 40th birthday and I’d like to invite him, but I don’t think he has the self-control to say, “No, I can’t go, I can’t afford it” because it will add $2,000 or more to his debt. How do you deal with someone when you’re more concerned with his financial well-being than he is?

Answer: You let go of the idea that you’re responsible for another person’s behavior.

Financial planners often encounter clients who, despite the planners’ best efforts, sail blissfully on toward economic disaster. And those clients paid for the advice that could save them. You’re not being paid. Your friend may not have even asked for your help. So you can stop offering it.

This will be hard for you. You understand how important it is to avoid credit card debt and save for the future. You may be thinking that if you could come up with the right words, you could persuade him to change his ways. Give up that fantasy, because he won’t change — if he ever does — one second before he’s ready.

There are a number of things you can do to prepare for that moment, if it ever comes. The first is to let go of any judgmental attitudes and feelings you might have about his situation. He may already feel a lot of shame about his circumstances. Even if he doesn’t, he’s unlikely to seek you out if he feels judged and blamed.

The next is to look for other resources that might help him, such as a financial counselor or coach. You can get referrals from the Assn. for Financial Counseling & Planning Education. He may find it easier to work with a professional than a friend.

Finally, resist the urge to offer opinions or observations about his situation. He knows you’re there to help if he ever wants it, so wait to be asked.

Q&A: Get help claiming Social Security

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Dear Liz: I read your column about the disabled woman who was asking about survivor benefits. I am 60 and my husband died when he was 65, but he was not receiving Social Security. We both paid into Social Security for our entire working careers and maxed out every year. I have been told that I can receive his benefits when I am 65. I wonder why I cannot collect his benefits now.

Answer: You can, but you may not want to if you’re still working and earning the kind of six-figure income needed to “max out” your Social Security taxes.

People who start Social Security benefits early are subject to an earnings test that withholds $1 in benefits for every $2 they earn above a certain amount, which in 2019 is $17,640. Social Security has a calculator to help you determine the effect on your benefit at https://www.ssa.gov/oact/cola/RTeffect.html. Your survivor’s benefit also will be reduced if you start it before your own full retirement age, which in your case is either 66 years and 8 months (if you were born in 1958) or 66 years and 10 months (if you were born in 1959).

Once you’ve reached full retirement age, however, the earnings test goes away, as does the reduction for starting benefits early. At that point, you could apply for full survivor benefits and leave your own retirement benefit alone to grow 8% each year until it maxes out at age 70. You can continue to work and receive benefits without facing any reductions.

Social Security can be astoundingly complex, and claiming decisions can be affected by a number of factors. AARP has a free Social Security claiming calculator, but it can’t deal with some situations such as survivor’s benefits, child benefits (for retirement-age people who have minor children) or the offsets associated with pensions that don’t pay into Social Security. For those, you would need to pay about $40 to use a more sophisticated calculator such as the one at MaximizeMySocialSecurity.com, or to consult a fee-only financial planner with experience in this area.

Q&A: Separated spouse is entitled to survivor benefits

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Dear Liz: I am a 57-year-old disabled woman whose only income is $500 a month in Supplemental Security Income. I was legally separated from my husband when he died at age 59. Can I collect Social Security from his account?

Answer: Most likely, yes.

To generate a survivor’s benefit, your husband would have had to pay into the Social Security system for a certain number of years. Younger people need to have worked fewer years than older ones to provide benefits for survivors, but no one needs to have paid in for more than 10 years.

Because your husband died before reaching retirement age, your survivor benefit would be based on what his retirement check would have been at his full retirement age (which would be 67, if he was born in 1960).

You could get 100% of that benefit if you wait until your own full retirement age to collect. Reduced benefits are typically available when a widow or widower turns 60. Survivors who are disabled can start benefits as early as age 50, if the disability started before the death or within seven years.

If your marriage had ended in divorce, you could still have qualified for survivor’s benefits as long as the marriage lasted at least 10 years. (If a marriage lasted that long and the ex is still alive, a divorced spouse can qualify for spousal benefits, which are up to half the ex’s benefit.)

With survivor benefits, you have the option of switching to your own retirement benefit later, if it’s larger, or of switching from your own benefit to a survivor’s benefit, should that be the better deal.

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

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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.