August 14, 2012 By

Working longer means more money overall

Dear Liz: You’ve been answering several questions about when to start Social Security benefits. Most people who talk about the break-even point seem to fixate on when you’ll end up with the most money, but they’re only considering Social Security money. It’s worth pointing out that if one continues to work until full retirement those wages, for most of us, will add up to much more than the reduced Social Security payments for those first four or five years. So unless a person really hates his or her job, or poor health makes the person no longer able to do that job, working until age 66 or 67 will give a person the highest total.

Answer: That’s a good point, and it’s not just the wages you earn that are important. It’s the fact that you can delay tapping your retirement savings, so that those can continue to grow tax deferred. The effect of delaying retirement even a few years is so powerful that people who have saved substantially over their working lives can actually stop saving in their 60s — and use the extra cash for fun stuff like travel — without increasing their risk of running out of money, according to research by mutual fund company T. Rowe Price. The company has dubbed this approach “practice retirement,” and you can read more about it at http://www.troweprice.com/practice.

Filed Under: Q&A, Retirement Tagged With: , , ,
August 9, 2012 By

Got money? Save some of it for college

“If you can save for college, you probably should.”

That’s the mantra I’ve chanted in columns, speeches and interviews over the years. An article in today’s Wall Street Journal shows a lot of upper middle income parents aren’t listening, gauging by the amount of student loan debt they’re taking on. What the Journal found:

  • Among households with annual incomes of $94,535 to $205,335 (80th to 95th percentile of all households), 25.6% had student-loan debt in 2010, compared to  19.5% in 2007. Among all households, 19.1% had education debt in 2010 compared to 15.2% three years earlier.
  • The amount borrowed by upper middle income households rose to $32,869 from $26,639, after adjusting for inflation.
  • Fat student loan bills are no longer an anomaly. More than three million households have a student loan balance of $50,000 or more. That compares to about 794,000 in 2001 and less than than 300,000 in 1989, after adjusting for inflation.

The Journal threw in another statistic: More than one in three households with incomes of $95,000 to $125,000 who had a child entering college in 2011 didn’t save or invest for that child’s education, according to a survey by Human Capital Research.

Here’s the deal: A child’s financial aid package will be based in large part on what the parents earn. If they have a six-figure income, or close to it, the kid won’t get much help. Colleges expect that if you have that much income, you should have been saving some of it for education–whether or not you actually did.

Even families with lesser means could find they’re getting a lot less help than they expected, with much of it coming in the form of loans rather than grants.

Either way, that means the parents, the kid or both could be taking on a lot of debt.

The Journal suggested that this burgeoning debt may lead more families to more carefully consider cost and value when considering colleges, something that “could make it difficult for all but the most selective schools to keep pushing through large tuition increases.”

We’ll see about that. In the meantime, if you’re lucky enough to have a decent income, consider putting at least some of it aside for your kids’ educations. Do it even if you won’t be able to pay for everything, or you want your kid to be mostly responsible for the cost. Every dollar you save is a dollar your child–or you–won’t have to borrow later.

 

Filed Under: College, College Savings, Liz's Blog, Student Loans
August 7, 2012 By

Don’t throw that away!

Please welcome Jeff Yeager, one of my favorite cheapskates and an all-around good guy. I asked him to write the very first guest post for AskLizWeston.com based on advice from his latest book, “Don’t Throw That Away!” The book, and this post, focus on the middle part of the “reduce, reuse, recycle” mantra, with creative ways to get more mileage from what you already have. Here’s what Jeff has to say:

By getting a little creative and reusing would-be throwaway items, you’ll not only help save the Earth’s resources and live lighter on the planet, but you can also save some money at the same time.  Here are a few examples of creative repurposing:

Fruit and vegetable peels:  Of course you can compost them (and I give readers all the rotten details about composting in the book), but the skins of many types of fruits and veggies have a multitude of other uses as well, including: banana peels can be used to shine shoes (I call it a “banana split shine”) as well as fertilize your prize rose bushes and protect them from insects;  papaya peels contain vitamin A and papain, which makes them great for softening skin and soothing cracked heels, and peach skins work similar magic; scrub copper pots and pans with lemon peels or other citrus rinds and a little baking soda for a bright and shiny finish; you can even naturally darken greying hair using potato peels!
Old cellphones: Did you know that under FCC regulations, you can call 911 in case of an emergency using any cell phone, even phones with expired service contracts?  So don’t throw away your old cells when you get a new ones, just keep them powered up and scattered around the house, car, office, everywhere in case of a true emergency.
Refashioning:  Restyling old clothing into new apparel (aka “refashioning”) is becoming a hot new trend, to the point where some designers are now coming out with lines that are simply made to look like refashioned garments– I guess that would be faux repurposing?  Many of the projects are simple, like making “tee-skirts”– fun little skirts made out of old t-shirts – requiring little in the way of sewing skills or equipment.
Cheapskate-soap-on-a-rope:  Save those little slivers of soap from the shower, put them in the heel of an old pair of pantyhose, and keep it tied to the outside water spigot to wash up after working in the garden.  The mesh lets you get every last bit of suds out soap slivers.
Eggcellent reuses for eggshells:  Crumble them up and sprinkle them around the garden to fertilize the soil and deter slugs, deer and other pests; add some along with the coffee in the filter for a less bitter cup of java; or make adorable “egg shell candles,” a chance to repurpose both eggshells and leftover candle stubs.
And whatever you do, don’t throw away that dryer lint!  Stuff it inside an empty toilet paper tube and use it to light a fire in the fireplace.  Dryer lint is highly flammable, so it’ll really light your fire, so to speak.
Remember:  “Reduce – Reuse, Reuse, Reuse, and Reuse Again – Then Recycle.
# # #
Don’t Throw That Away! is only available in e-book formats, so you won’t have to worry about how to reuse it after you’ve read it. It is published by Three Rivers Press and is available wherever e-books are sold.  Jeff Yeager is also the author of The Ultimate Cheapskate’s Road Map to True Riches and The Cheapskate Next Door. You’ll find him at The Ultimate Cheapskate.

Filed Under: Saving Money Tagged With: , , ,
August 6, 2012 By

Will her bad credit prevent him from getting a mortgage?

Dear Liz: Is it possible for me to buy a home without having my wife on the mortgage? She lost her business because of the recession. I do not want to deal with her creditors.

 Answer: You can apply for a mortgage based solely on your own income, credit scores and debt-to-income ratio, if those are sufficient to buy the house you want. Your wife’s income and credit does not have to be considered.

If you can’t swing the purchase without her income, though, you’ll both need to spend some time improving her credit scores. That might include adding her as an authorized user to your credit cards. Another option is to negotiate settlements with her creditors in return for their deleting the collection accounts from her credit reports. You’d want to be cautious in these negotiations, especially if the statute of limitations on the debts hasn’t expired and your wife could be sued. Consider visiting DebtCollectionAnswers.com for help in negotiating with creditors.

Filed Under: Couples & Money, Credit & Debt, Q&A, Real Estate Tagged With: , , , ,
August 6, 2012 By

Live it up now, or insure against longevity

Dear Liz: I was born in 1960 and plan to retire with reduced Social Security benefits at 62. I’ve read in many places that taking reduced benefits isn’t a good idea because you are locked into a lower amount for life. While this is true on a monthly basis, what about on a cumulative basis? I have figured out that on a cumulative basis I can collect to about the age of 78 and be even with collecting full benefits at 67, and this doesn’t include cost-of-living increases that would add a few more years before full benefits exceed reduced benefits on a cumulative basis.

This means I would be collecting my benefits while I am younger and healthier so I can enjoy it as opposed to delaying it on the presumption I will live well into my 80s when who knows what the future holds. Social Security will not be my main source of income as I will have a sizable amount saved by then. Would taking reduced benefits make sense for me, or am I missing something?

 Answer: You’re right that the break-even period — the point where waiting for full benefits gets you more than taking benefits early — is typically in your late 70s. A male at age 62 is expected to live 19 more years on average, while a woman the same age is expected to live 22 more years. If you’re in poor health and don’t expect to live long after you retire, however, that can tip the scales toward taking benefits early.

Wanting to claim your benefit early, while you’re “young enough to enjoy it,” is certainly understandable. But you might also want to look at Social Security as a kind of longevity insurance. If you live into your 80s and beyond, you may well exhaust your savings and wind up relying more than you think on your Social Security check. In that case, you might appreciate the larger benefit you’d get from waiting until your full retirement age.

AARP has a free Social Security benefits calculator that can help you determine the best time to claim benefits.

Filed Under: Q&A, Retirement Tagged With: , , ,
August 6, 2012 By

How the “earnings test” works

Dear Liz: Hi. I learned the hard way about taking early Social Security benefits. I kept working and wound up losing $1 of Social Security benefits for every $2 I earned over a certain low threshold. Do I get this money back at some point or is it a penalty?

 Answer: It’s considered a penalty, but you also get the money back. This so-called “earnings test” is one of several ways the Social Security system tries to discourage people from taking benefits early. The threshold for exempt earnings in 2012 is $14,640. After that point, your Social Security checks will be reduced $1 for every $2 you earn until you reach full retirement age. Once you reach that age, your checks will be increased to reflect the withheld amounts.

Filed Under: Q&A, Retirement Tagged With: , ,
August 6, 2012 By

Why some debtors don’t get sued

Dear Liz: You recently answered a question from a business owner who defaulted on some credit card accounts and wanted to know how to pay these old debts. How is it that this person has not been subjected to numerous judgments on the cards in question? In fact, how could he or she have proceeded in business without being subjected to garnishment of accounts?

Answer: To get a judgment and a garnishment, the credit card company or a subsequent collector typically must sue the borrower in court. Different collectors have different policies about when to file such lawsuits. Sometimes they decide it’s not worth the hassle given the slim chances of collecting. However, many collectors also regularly check’ credit reports to see if a debtor’s financial circumstances seem to be improving. If they see signs of such improvement, they may renew collection attempts, including lawsuits.

Filed Under: Credit & Debt, Q&A Tagged With: , , , , ,
July 30, 2012 By

Parents’ estate plan triggers IRA tax bill

Dear Liz: My sister and I are in the middle of distributing our parents’ estate. The beneficiary of the estate is a trust. Part of the estate consists of a traditional IRA, which will be split between my sister and me. The problem is that because the IRA will be distributed from the trust and is considered a non-spouse distribution, I’m told that we’ll have to pay taxes on the entire distribution. It’s a good chunk of change. I’m almost 60. Is there any way that I can roll the IRA into my own and take minimum distributions? I’d rather not pay the tax all upfront.

Answer: That’s understandable, since it’s typically much better to stretch distributions out as long as possible so that the money can continue to grow (and you can replace one big tax bill with smaller ones as you take distributions).

Unfortunately, the way your parents structured their estate ties your hands, although perhaps not to the extent you’ve been told.

It appears from your question that the IRA either failed to name a beneficiary or named the estate as the beneficiary, said Mark Luscombe, principal federal tax analyst for tax research firm CCH.

“Assuming that is the case, since estates do not have life expectancies, the IRA cannot be distributed over a beneficiary life expectancy as it could have been had an individual been named the IRA beneficiary,” Luscombe said. “Instead, it must be distributed under the terms of the IRA document over a period that cannot exceed five years.”

The exception is if the IRA owner before dying had already reached the age of 701/2 and begun distributions, Luscombe said. In that case, distributions can continue to the estate over the IRA owner’s life expectancy. If the IRA owner was quite elderly when he or she died, this might not give you much time to stretch out the distributions, but it probably would be better than paying all the taxes at once.

Another exception, which doesn’t appear to apply in your case, is if the IRA named the trust as the beneficiary. If that were true, “it is possible that the distributions could be based on the life expectancy of the oldest trust beneficiary,” Luscombe noted.

As you can see, this is a complicated area of estate planning and taxation. Getting good advice about how to name beneficiaries for your accounts can save your heirs a lot of money.

Filed Under: Estate planning, Q&A, Retirement Tagged With: , , , , ,
July 30, 2012 By

Old debts don’t disappear

Dear Liz: I am astonished you would counsel someone to try to negotiate a settlement of credit card debts from 2003 that were written off in 2007. Why? The statute of limitations is no more than six years in California and can be much shorter in many other states. If a reader of your column begins to negotiate over debts that are that old, they risk creating a new debt or resurrecting the old one, thereby becoming liable for repayment of a debt that is not collectible. When there is a stale claim, the response to the collection agency needs to be: “This is a stale claim, the statute of limitations has expired. I do not owe this debt to you or to my original creditor. Please stop contacting me.”

Answer: Statutes of limitations limit how long a creditor is supposed to be able to sue a borrower in court. The statutes vary by state and the type of debt, but range from three to 15 years. The expiration of that limit doesn’t make the debt somehow disappear or prohibit a creditor from continuing collection efforts.

Many people feel a moral obligation to pay their debts when they can. Others want to negotiate to remove collections from their credit reports in return for payment. (Time limits for reporting negative items on credit reports are different from state statutes of limitations; in most cases, the limit is seven years and 180 days from the time the account first went delinquent.) If someone wants to get a mortgage, for example, a lender may require payment of an open collections account regardless of the state statute of limitations.

You’re correct that anyone who wants to negotiate a settlement of an old debt should be aware of the statute of limitations affecting that debt. If the limitation hasn’t passed, the borrower needs to be aware of the danger of getting sued. If the limitation has passed, the borrower needs to avoid restarting it by making a small payment. Instead, the best approach is to settle for a lump sum and to get the collector’s assurance, in advance and in writing, that the remaining debt will be forgiven rather than resold.

Filed Under: Credit & Debt, Q&A Tagged With: , , , , , ,
July 23, 2012 By

Short sales, foreclosures have similar effect on credit scores

Dear Liz: I went through a divorce in the last year after being separated for two years. During our separation, we closed credit cards with high balances to make sure neither party would spend more on credit. We also had to short sell our home. So, as a single woman in her mid-30s, I have credit that’s somewhat shot for now. How many months should I expect the short sale to affect my credit scores? And was closing the credit card accounts good or bad for my credit?

Answer: Closing credit accounts can’t help your credit scores and may hurt them. In a divorce, however, it’s usually wise to close all joint accounts. Otherwise, your credit rating is in the hands of your ex-spouse, who could trash your scores by paying accounts late or maxing out credit lines.

In any case, the short sale probably had a much greater effect on your credit than the account closures. Short sales typically damage your credit as much as a foreclosure, according to the company that created the leading FICO credit score. Recovery times are measured in years, not months. If your scores weren’t that high to begin with — say 680 in the 300-to-850 FICO scale — it would take about three years for your numbers to return to their old levels. If your scores were high, say 780, it would take about seven years to restore them to their old peaks.

These recovery times assume you handle credit responsibly from now on. That means having and lightly using a credit card or two, making all payments on time and ensuring no account goes to collections.

Filed Under: Credit & Debt, Credit Scoring, Divorce & Money, Q&A, Real Estate Tagged With: , , , , , , , , ,