Ask Liz Weston

Get smart with your money

Q&A

Q&A: Paying off student loans vs saving for retirement

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Dear Liz: I’m engaged to be married and need your advice on getting started in the world of shared finances.

My fiance is 43, I’m 31. He’s debt free, with a savings account but no retirement fund. I have $34,000 in student loans (consolidated at 4.25%) and it weighs heavily on my mind as I’m desperate to become debt free. I’m debt free otherwise with $10,000 in savings.

We both make good money but my income as a freelancer is sporadic, while his is steady with periodic bursts of additional income.

We want to be debt free as a couple, save up a solid emergency fund and start making up for lost time on retirement savings, all while being aware that a family and a house might not be far away.

He’s very supportive and wants to pay off my student loans. Should I let him and pay “us” back to the emergency fund or maybe a house down-payment fund? What’s our best course of action to start on a solid financial footing?

Answer: You’re already behind on retirement savings, which should have started with your first job. Your fiance is even farther behind.

Don’t let your zeal to repay your debt blind you to the very real risk that you might not be able to save enough for a comfortable retirement if you don’t get started now.

If your education debt consists of federal student loans, then your low rate is fixed. The interest probably is tax deductible, which means the effective rate you’re paying is just a little over the inflation rate. It isn’t quite free money, but it’s pretty cheap.

You don’t need to be in a rush to pay it off, particularly with all your other financial priorities looming.

Instead, get going on some retirement accounts. Your fiance should take advantage of his workplace plan, if he has access to one.

Most employer-sponsored workplace plans have company matches, which really is free money you shouldn’t leave on the table. An individual retirement account or Roth IRA can supplement the plan or be a substitute if he doesn’t have access to a workplace plan.

As a freelancer, you have numerous options for setting aside money for retirement, including Simplified Employee Pensions (SEP), Savings Incentive Match for Employees (SIMPLE) and solo 401(k)s that would allow you to contribute more than the standard $5,500 annual limit for an IRA.

Ideally, you would be saving around 15% of your income and your fiance 20% or more.

If you can’t hit those targets just yet, start saving what you can and increase your contributions regularly. Work your other goals around the primary goal of being able to afford a decent retirement.

Q&A: Delaying Social Security benefits

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Dear Liz: I’d like to get something straightened out. Between things that you and other columnists have said, we laymen have been told that if we wait until we’re 70 to start taking Social Security, we’ll get 8% more for each year we delay, and a total of 40% more than if we start taking it at our retirement age.

But the retirement age is 66, not 65. So there’s a four-year difference, which would produce an increase of only 32%. Even if the yearly increase is exponential (compounded), the total increase after four years would be 36%. So where does that 40% figure come from?

Answer: It didn’t come from this column, so it probably came from someone who was writing when 65 was the full retirement age.

As you note, the full retirement age is now 66 and will move up to 67 for people born in 1960 and later.

Delayed Social Security benefits max out at age 70, so there are fewer years in which a benefit can earn a guaranteed 8% annual return for each year it’s put off. Delayed retirement credits aren’t compounded, but the return is still better than you could get guaranteed anywhere else.

That doesn’t mean delaying Social Security past full retirement age is always the right choice. Social Security claiming strategies are complex, with a lot of moving parts, particularly if you’re married.

Before filing your application, you should use at least one of the free calculators (AARP has a good one on its site) and consider using a paid version, such as MaximizeMySocialSecurity.com, if you want to tweak some of the assumptions or if you have a particularly complicated situation.

Q&A: Social Security death benefits for a divorced spouse

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Dear Liz: I have heard conflicting information about Social Security death benefits for a divorced spouse. We divorced after 18 years and I have not remarried. What percent of his benefit is available to me?

My own Social Security is low as it started as a disability payment and then converted to regular Social Security when I turned 65.

To the best of my knowledge, my former spouse was getting the maximum Social Security benefit. He was a very high wage earner. Can you provide a simple-to-understand answer? I have received conflicting information from numerous sources including three separate people at the Social Security Administration.

Answer: It’s concerning that you would get varying answers from Social Security representatives, since the answer is simple given the facts you describe.

You should be entitled to a survivor’s benefit that equals 100% of what your ex was getting when he died, said economist Laurence Kotlikoff, a Social Security expert who co-wrote “Get What’s Yours: The Secrets to Maxing Out Your Social Security.”

Your marriage lasted the required 10 years, and you would be starting survivor benefits after your own full retirement age, so the amount would not be reduced to reflect an early start.

The fact that you’re unmarried is irrelevant in this case. Survivors’ benefits are available even to those who remarry, as long as the subsequent marriage happens after the recipient reached age 60.

That’s different from spousal benefits for the divorced, which aren’t available after remarriage at any age unless the subsequent marriage ends.

It’s possible that some or all of the people you queried didn’t understand your question or thought you were asking about spousal rather than survivor benefits. Another possibility is that they just don’t know the rules.

That’s not unusual, Kotlikoff said. Social Security regulations are complex, and not all of its employees are experienced. Kotlikoff said he often hears from people who have been told things that are “outright wrong, partially wrong, incomplete or confused.”

Educating yourself with Kotlikoff’s book and the Social Security’s own site may be a better solution than relying on its employees for answers.

Q&A: Personal loan debt vs credit card debt

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Dear Liz: I need to understand how credit reporting agencies treat personal unsecured loan debt versus credit card debt.

I am considering getting a personal loan from a reputable lender to pay down my credit card debt. The amount of my overall debt will still be the same, just in a different category. How will my credit score be affected?

Answer: What you need to understand is how credit scoring formulas treat installment debt (loans) versus revolving debt (credit cards). Credit reporting agencies maintain the credit reports used to create scores — but don’t bless (or curse) particular types of debt.

The personal loan’s overall effect on your credit scores is likely to be positive if you pay the loan on time. What you owe on an installment loan is typically treated more favorably than a similar balance on a credit card.

Installment loans have other advantages: You typically get a fixed rate, rather than the variable one charged on most credit cards, and your balance will be paid off over the term of the loan, which is usually three years. If you stop carrying balances on your credit cards, you should be in much better shape: free of debt with potentially higher scores.

Often the best place to get installment loans is from credit unions, which are member-owned financial institutions that may offer lower interest rates.

Avoid any lender that gives you a high-pressure sales pitch, that offers you a loan if you have bad credit or that pitches debt settlement, which is far more dangerous to your finances than a personal loan.

If the lender tries to tell you about a new “government program” that wipes out credit card debt or tries to collect big upfront fees, you’ve stumbled onto a scam.

Q&A: Co-signing student loans

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Dear Liz: I have two kids heading to college. Both need co-signers for their student loans. Will me co-signing have a negative effect on my credit? The kids have no choice. I’m middle class, having made enough to get myself by as a divorcee, but there’s no college savings. To make matters worse, I make just over the base for them to get a Pell Grant. I’m concerned about my credit, but my kids need to go to college.

Answer: Your children probably do need to go to college if they want to maintain a middle-class lifestyle in the 21st century. They probably don’t need to finance that education with private student loans, which are the kind that require a co-signer.

Co-signing means the loans show up on your credit reports. Your credit scores can be trashed if your children miss a single payment. If they stop paying, the lender will come after you for the balance.

Federal student loans are a much better option. They have fixed rates, numerous repayment options and the possibility of forgiveness.

Private student loans typically have none of those attributes. Quite the opposite: There are horror stories of private lenders that refused to forgive the balance of borrowers who died, leaving co-signers on the hook.

The big problem with federal student loans is that the amount your children can borrow is limited.

A first-year student typically can borrow just $5,500 and usually no more than $31,000 for an undergraduate degree. The average net cost of a public four-year university — the sticker price for tuition, fees, room and board minus grants and scholarships — was just under $13,000 in 2014-15.

That leaves a fairly substantial gap to cover, especially with no savings and two children.

If you can’t cover the gap out of your current income, your family needs to consider some options. Finding more generous colleges might be one.

Institutions vary tremendously in their willingness to meet families’ financial need. While few meet 100% of a typical student’s need, the more generous shoot for 90% or more. Some meet less than 70%. (You can find these need statistics, and many others, at the College Board’s Big Future site, at http://bigfuture.collegeboard.org.)

You also could consider a couple of years at a community college. There are some one- and two-year technical degrees, typically in the health and science fields that pay more than the average four-year degree.

Or your children could attend community college to get some requirements out of the way cheaply before transferring to a four-year school, but be aware that the dropout rate at two-year schools is high, even for students who start fully intending to complete a bachelor’s degree.

Another option is for you to borrow, but you shouldn’t consider doing so unless you’re saving adequately for retirement and can continue to do so while paying off the loans. Federal PLUS loans offer fixed rates, but if you can pay the loan off quickly, a home equity loan or line of credit may be a less expensive option.

Q&A: IRS Electronic Payment System

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Dear Liz: I was intrigued by your answer to the question about paying taxes through the IRS Electronic Tax Payment System. I went to the website you mentioned (www.irs.gov/payments) and found that there was a fee.

You didn’t point this out, and I think it is relevant. My quarterly estimated payment would be $1,726 and the fee for a Visa payment would be 2.29%, which equals $39.55. If my math is correct, that is quite a significant amount. Did I reach the correct interpretation of fees being charged?

Answer: If you return to www.irs.gov/payments, you’ll see two big blue buttons. The one on the left, IRS Direct Pay, takes you to the IRS’ free payment system for individuals. Directly below that button is a link for the Electronic Federal Tax Payment System, which offers a free method for businesses to pay their taxes.

Only if you choose the button on the right that says “Pay by Card” will you be taken to various payment processors that charge a fee. Those fees can be significant, which is why it’s worthwhile to take the time to explore the free options.