Ask Liz Weston

Get smart with your money

Q&A

Q&A: Can a teacher get Social Security spousal benefits?

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Dear Liz: I’m 54 and will be eligible for a Social Security retirement benefit in eight years but plan to wait at least until age 67 to claim it. My wife is 60 and is a teacher, so she won’t be eligible for a primary benefit. But what about spousal benefits? Would I qualify for one as my wife’s spouse? Would she qualify for a spousal benefit from me?

Answer: You won’t be able to claim a spousal benefit if your wife hasn’t earned her own Social Security benefit. (Many teaching jobs don’t pay into Social Security but instead have their own pension plans.)

Because you’ve paid into Social Security, your wife may qualify for a spousal benefit based on your earnings record, with two important caveats. The first is that you must be receiving your own Social Security benefit before she can apply for a spousal benefit. The other is that if she receives a teacher’s pension, Social Security’s “government pension offset” rules would reduce any spousal or survival benefit she might receive by two-thirds of the amount of her pension. If two-thirds of her pension is greater than the amount of her Social Security benefit, her benefit would be reduced to zero.

Q&A: When buying a car, be strategic with your money. Here’s how

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Dear Liz: My son, 27, has a 2009 car that needs a new engine and is not running. The engine would cost $6,100 to replace, which is money he doesn’t have. He owes $10,000 on his car loan at 6% interest. The car would be worth only about $4,500 if it were running.

Should he sell the car to a junkyard for $200? Should he refinance the car loan for the remaining months he’ll make payments and also try to get the interest rate reduced?

He also wants to buy a 2016 car for around $18,900. He needs the car to get to work every day. Should he buy this car and have two car loans? Or should he look for an older car for now, until he gets the “upside-down” loan paid off?

Answer: It’s unfortunate that your son’s response to overspending on one car is to overspend on a replacement.

Let’s go over some basics of smart vehicle ownership. In general, we should avoid borrowing money to pay for assets that lose value — and a car is pretty much the definition of an asset that loses value. New cars depreciate by about 20% as soon as you drive them off the lot and lose roughly half their value in the first three years. The vast majority continue losing value until they’re sold for scrap. Only a handful of classic cars ever appreciate.

That means paying cash for cars is usually the smart move. Since most people can’t swing that, at least at first, the next best policy is to make large enough down payments so the cars we buy aren’t upside down, or worth less than what we owe.

When people are upside down on vehicles, the best practice is typically to “drive out” of their loans. That means continuing to make payments until they own the cars free and clear. Ideally, they would then keep the cars until they’ve saved enough to make substantial down payments on the replacement vehicles or buy a replacement outright.

Pouring more money into this particular car probably doesn’t make much sense. Your son probably won’t be able to refinance, since he has no equity in the vehicle. He might be able to roll the negative equity into a loan on a new car, but that would leave him in an even worse financial position: more deeply upside down and probably paying a higher interest rate.

Your son should consider getting a personal loan, perhaps from a credit union, to pay off the balance. Instead of spending nearly $20,000 on a 2-year-old replacement, he should aim to spend $3,000 to $5,000 on a good, reliable older car. If he can pay cash, great. If not, he should work to get both loans paid off as quickly as possible and start saving for the next car.

Q&A: Giving a gift with a built-in loss

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Dear Liz: You recently answered a question about the tax implications of gifting stock to children. You mentioned that if the stock had lost value since its purchase, the children could use the loss to offset capital gains or, in the absence of gains, up to $3,000 a year of income, with the ability to carry over that loss to subsequent years until it’s used up.

But if a stock has a built-in loss, why not sell it, realize the loss and give the kids the cash? That way, the loss is sure to be recognized unless the donor dies before fully utilizing the capital loss or the carryover. If the child really wants that particular stock, he or she can use the cash to buy it. The children would have to be mindful of the wash-sale rules that prohibit deducting a loss if a related party buys the same stock, but waiting 31 days would be enough to avoid that.

In my view, there’s rarely a good reason to gift a stock (or most other assets) that has a built-in loss.

Answer: Exactly. Selling the asset and taking the tax benefit usually makes more sense than transferring the shares. The loss essentially evaporates, because the assets get a new value for tax purposes when transferred.

Selling losing stocks is certainly better than bequeathing them to your heirs. The loss essentially evaporates at your death, because the assets get a new value for tax purposes, so no one gets the potential tax break.

Q&A: How to pick a fee-only financial planner when family’s finances suddenly increase?

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Dear Liz: I have had a fairly predictable financial life. I’m a school administrator, and my husband is a nurse.

We now have three properties. Two are income properties, and the third is a home that has sat for eight years in mid-construction. When finished, the home could be rented for $4,500 to $5,000 per month. Altogether the properties could bring in about $200,000 per year.

Additionally, my salary has doubled in the last two years. Bottom line, we will be making about $500,000 a year but are woefully unprepared with low financial IQs. You write about picking a fee-based financial planner, but internet searches leave me still wondering if we would be entering shark-infested waters.

Answer: Plenty of sharks do lurk in the financial advice world. Too many people calling themselves advisors are actually salespeople without the comprehensive financial planning background to give truly good, objective advice. Advisors who call themselves “fee-based” typically charge fees but may also accept commissions, bonuses or other incentives to recommend investments that may profit them more than you.

A true fee-only financial planner accepts compensation only from clients. You’ll want one who has an appropriate credential such as certified financial planner (CFP). The planner should be willing to be a fiduciary and put that in writing. “Fiduciary” means the planner promises to put your best interests first.

In the past, you may have had trouble finding a fee-only financial planner willing to work with you. Although your income is high and you have substantial real estate assets, you may not have a ton of “investable assets,” such as stocks and bonds.

Many of the best fee-only planners used an “assets under management” model, in which they required clients to have a minimum level of investable assets — say, $500,000 or more — and charged them about 1% of those assets in exchange for investment management and advice.

There are still plenty of fee-only planners who use that model, but a growing number now offer different fee structures, including monthly or quarterly retainer fees or hourly fees that aren’t based on investable assets.

For example, the XY Planning Network is a network of CFPs who offer ongoing, flat monthly fees that are typically $100 to $200, with some planners requiring an initial or setup fee of $1,000 to $2,000.

Garrett Planning Network represents planners willing to charge by the hour and who are either CFPs, on track to get the designation or are certified public accountants who have the personal financial specialist credential, which is similar to the CFP. Hourly fees usually range from $150 to $300.

You also can get referrals from the National Assn. of Personal Financial Advisors, the oldest fee-only group of CFPs.

Interview at least three planners before choosing one and make sure to find someone with whom you have a good rapport. If you’re not financially savvy, you’ll want someone willing to take the time to answer your questions clearly and not talk over your head while helping you deal with your increased level of prosperity.

Q&A: Credit alert or phishing scam?

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Dear Liz: I received a notice from one of my credit card companies stating that they had noticed something amiss in my credit, though not related to their card. The notice suggested I check my credit reports, which I did. Nothing showed up on the reports that was of concern. What else should I do to ensure my credit stays secure?

Answer: Vague “alerts” are a hallmark of phishing emails that are trying to get you to reveal personal information.

If you followed a link in an email to view your credit reports or accessed them on any site other than www.annualcreditreport.com, you may well have handed your Social Security number and other vital data to an identity thief.

If that’s the case, you should freeze your credit reports to prevent the thief from opening new accounts in your name. You might want to do that anyway, given the prevalence and severity of recent database breaches.

Q&A: Does a credit freeze hurt your credit scores?

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Dear Liz: I implemented a credit freeze a few months ago. I’m wondering if that could prevent me from having credit scores. I understand that if you don’t use credit, your credit scores can basically go away. I don’t have any loans or a house payment. I do have a few credit cards, used often and paid in full monthly.

Am I at risk of my credit fading away because of neglect with the freeze in place?

Answer: You’ll continue to have credit scores as long as you keep using credit accounts that are reported to the major credit bureaus. The people who are at risk of having their credit die of neglect are the ones who stop using credit.

About 7 million people are considered “credit retired,” which means they no longer actively use credit enough to generate credit scores, according to credit scoring company FICO. Their histories are free from charge-offs and other negative marks that might indicate their lack of credit is involuntary, says Ethan Dornhelm, FICO’s vice president for scores and predictive analytics.

Being credit retired can be costly. People may be shut out of loans they want in the future, or may have to pay higher interest rates. A lack of scores could lead to higher insurance premiums, cellphone costs and utility deposits.

Keeping your credit scores alive is relatively easy — using a single credit card is enough. There’s no need to carry debt or pay interest. Just continue using the card lightly but regularly, and pay it off in full every month.

Your credit freezes will prevent new lenders from seeing your scores and opening new accounts in your name unless you thaw the freezes. Companies where you already have an account, however, will be able to see your reports and scores.