Ask Liz Weston

Get smart with your money

Q&A

Q&A: Investment advice websites

By

Dear Liz: I invest in real estate and have a secure pension, but I also have a managed stock account worth about $250,000 and would like to get more involved in investing that.

Can you recommend some good books on how the market works and perhaps a couple of good middle-of-the-road websites? Everything I see is either overly bullish or bearish.

Answer: The principles of sound stock market investing aren’t exactly “click bait” (Web speak for catchy links that generate views and advertising income). So you’d be smart to read a few books that have stood up over time.

Legendary stock picker Warren Buffett says “The Intelligent Investor” by Benjamin Graham is “by far the best book about investing ever written.” Graham is considered the father of value investing, which involves focusing on the underlying performance of companies rather than on speculating in their share prices.

Buffett also says, however, that the vast majority of investors are better off taking a passive approach — one that involves buying and holding low-cost index funds that seek to match the market rather than beat it.

To understand why, you should read “A Random Walk Down Wall Street” by Burton G. Malkiel, which discusses how the active approach to investing typically fails and drives up costs that doom a portfolio to underperform.

Although both books have been updated recently, they were first published in 1949 and 1973, respectively. A must-read book published this century is Jason Zweig’s “Your Money and Your Brain,” which uses discoveries in neuroscience, behavioral finance and psychology to explore how we mess up investing and finance and how we can do better.

If you’re looking for a website with solid investing advice, explore Kiplinger, a personal finance publisher in business since 1920.

Q&A: Filing and Suspending Social Security

By

Dear Liz: I was told by a staff person at our Social Security office that because I am seven years older than my husband (he is 58, I am 65), the “file and suspend” wouldn’t work for me and that because I am waiting until 70 to claim benefits, it was a non-issue.

Is that correct? How does the “lump sum” option figure into the equation? How quickly would I have to file and suspend not to be penalized for the process?

Answer: The “file and suspend” option allows you to file for your Social Security benefit and then immediately suspend that application.

The suspension means your benefit continues to earn delayed retirement credits that boost the amount of your checks 8% each year until age 70, when your benefit reaches its maximum. The file and suspend option is available only once you’ve reached your full retirement age (which is currently 66 but which is rising to 67 for those born in 1960 or later).

There are two main reasons to file and suspend. The first is to allow your spouse to claim spousal benefits based on your work record. The second is to give you the option to change your mind.

If you file and suspend, then discover you need the money, you can either start benefits at the larger amount you’ve earned with delayed retirement credits, or give up those credits and instead receive a lump sum payment of benefits back to the date you suspended your application.

There’s no reason for you to file and suspend for spousal benefits since your husband would have to be 62 before he could file for those checks. By that time, as the Social Security representative points out, you’ll be close to age 70, when you plan to start your benefit anyway.

You could still file and suspend as an insurance strategy — in case you need the money later. If that’s your plan, then doing so at your full retirement age of 66 would give you the option of requesting the largest possible lump sum if you do change your mind.

Decisions about when to start Social Security benefits and how to coordinate benefits when you’re married (or divorced, or widowed) can be extremely complex.

Please read the information the AARP provides on its site about maximizing Social Security benefits and consider using one of the available calculators to explore your options. AARP and T. Rowe Price have free calculators, and you can find more sophisticated options for $40 at sites including MaximizeMySocialSecurity.com and SocialSecurityChoices.com.

Q&A: Living like a student after graduation

By

Dear Liz: Regarding your recent column advising recent college grads to keep living like students: I helped my three children do just that. I had them live at home rent-free for six months after graduation and told them to save money like crazy.

Then when they rented an apartment, they would have the rental deposit saved as well as money for utilities, food and so on. I taught them to cook simple nutritional meals. We had already given each kid a car senior year and covered the insurance. I took home equity lines of credit to pay college tuitions, room and board, so they had no debts and six months to transition to serious responsibilities.

Answer: You’ve given your children a good head start in life at a time when so many others are starting out deeply in debt. Hopefully you didn’t do so at the expense of your own finances.
Home equity lines of credit may seem like cheap money, but the rates are variable and could spike if interest rates rise. If the debt is relatively small and can be paid off in a few years, that’s one thing.

If the debt is large and you can’t pay it off quickly, though, you may have put your home (and your retirement) at risk.

Q&A: Uniform Transfers to Minors Act

By

Dear Liz: My in-laws have gifted stock to our children through the Uniform Transfers to Minors Act (UTMA) to help pay future college expenses. The value of the stock has increased significantly over the past few years.

We would like to sell the shares and move the proceeds into more stable investments for our children. What are our options for those funds? Do you recommend one option over another? I don’t expect them to get much need-based financial aid.

Our household income is approximately $95,000 a year. We have 529 plans for each of our three children and account currently has $6,000 to $9,000.

Answer: If you only have one child in college at a time, then you’re right that you probably won’t get much need-based aid.

If, however, your kids are close enough in age that more than one will attending college simultaneously, you may qualify for more help than you think. One way to find out is to use the EFC Calculator at the College Board website, which can give you an estimate of the amount your family is expected to contribute to higher education costs.

If your kids may get need-based financial aid, then they probably shouldn’t have money in UTMA or other custodial accounts. UTMA accounts and their predecessor, Uniform Gift to Minors Act or UGMA accounts, used to be a good way to save on taxes but changes to the so-called “kiddie tax” rules have made them less appealing.

Income from the accounts above $2,000 a year for children under 19 and full-time college students under 24 is now taxed at the parent’s rate. What’s more, these custodial accounts count heavily against families in financial aid calculations.

Often it’s best to spend down the money by the child’s junior year in high school (by paying for tutoring, a laptop, private school or other expenses that benefit the child.)

Another option is to transfer the proceeds to a 529 college savings plan, since these state-run investment accounts typically are viewed favorably in financial aid formulas. What’s more, the plans offer professional management and diversified portfolios known as “age-weighted” options that grow more conservative as a child approaches college age.

You’ll want to talk to a tax pro about what makes sense in your specific situation, especially since selling the shares all at once may trigger a big tax bill.

Q&A: Delaying Social Security benefits

By

Dear Liz: If I retire at 66 but don’t collect my Social Security until 70, will my benefit increase or stay the same since I wouldn’t be working? I can’t find this answer anywhere! Thanks so much.

Answer: Your benefit will increase eight percent each year you put off starting benefits between your full retirement age (currently 66, but rising to 67) and age 70. You get those “delayed retirement credits” whether or not you continue working.

Many people erroneously think the two decisions—when to quit work and when to start Social Security—have to be linked. In fact, they can be entirely separate.

You can retire years before you start Social Security and vice versa. Given the built-in benefit increase for waiting to begin Social Security checks, it often makes sense to tap other retirement money if you can while you wait for your check to max out.

Q&A: 529 plans vs. education tax breaks

By

Dear Liz: You recently mentioned in your column that you can’t use any of the three education tax breaks — the American Opportunity Credit, the Lifetime Learning Credit or the tuition and fees deduction — for expenses paid with 529 college savings plan money. This has me wondering if those 529 plans are really worth it.

Wouldn’t you have to have a really large amount invested to have enough earnings to make it worth not taking one of the credits?

Answer: If college were cheap, that might be a problem. But most people have far more college expenses than they can write off on their tax returns.

The average net price for one year at a four-year college — the published cost minus free financial aid such as grants and scholarships — was just under $13,000 last year, including tuition, fees, room and board. The average net price was around $6,000 at two-year public colleges and $23,550 at private four-year schools.

Many people pay a lot more, as the sticker prices at colleges continue to rise.

As mentioned in the previous column, the three available tax breaks are mutually exclusive, so you can’t take more than one in any given year.

The most generous credit, the American Opportunity Credit, reduces taxes dollar-for-dollar for the first $2,000 of college expenses and then by 25% of the next $2,000 — for a total of $2,500 per student.

If your qualified education expenses exceed $4,000, as they probably will, those tax-free 529 plan withdrawals will come in handy.