Ask Liz Weston

Get smart with your money

Q&A

Daily money managers can help pay the bills

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Dear Liz: I read with interest your answers about older people who need a trusted gatekeeper to keep others from taking financial advantage. I want to let you know there’s great help out there for seniors: the American Assn. of Daily Money Managers. We daily money managers provide assistance to people who have difficulty managing their personal bill-paying responsibilities and associated personal paperwork. This service offers a cost-effective way for clients to get assistance with organizing, bill paying, balancing checkbooks and reviewing statements from a trusted source. A daily money manager does not replace the services of other professionals — such as CPAs, banks, financial planners and attorneys — but assists clients with daily affairs and helps maintain records and information that is essential for these professionals. People can find more information at the association’s website, http://www.aadmm.com.

Answer: Thanks for pointing out this resource. Many older Americans have trouble with household money management. They may forget to pay bills or keep track of their account balances, leading to bounced checks. Organizing their paperwork and collecting information for tax returns can become an ordeal. Some people have trusted family members who have the time to take over. For others, daily money managers can be the answer.

Daily money managers are distinct from conservators or guardians, however. They aren’t supervised by the courts, so potential clients need to take care in hiring one. In addition to the AADMM’s website, people may be able to get referrals from financial professionals such as a lawyer, financial planner or accountant. The daily money manager should be insured and willing to work with those professionals.

Daily money managers aren’t limited to helping only seniors. They also can help busy executives, travelers and people with attention deficit disorders who have trouble keeping up with daily financial details.

Helping an indigent parent navigate “the system”

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Dear Liz: Our mother just turned 64, and our father is divorcing her. She hasn’t worked in years because of significant physical and mental health issues. My sister and I have been trying to figure out how she’s going to survive on $750 a month, which is the equivalent of half his Social Security. She has always had serious issues with money management, which is why there are no retirement savings or a house. We are now about to embark on the maze of social service benefits that an older woman below the poverty line can receive, partly so we can decide whether she’s better off staying put where she is in Arkansas, moving to my sister’s in Texas, moving to be near me in Maryland, or moving to her childhood home of Chicago, where most of her friends are. For a lot of complicated reasons (mostly related to the mental health issues), we are trying to avoid having her live with either of us full time, and she expresses no desire to do so. So we have to figure out the ins and outs of Medicaid, food stamps, subsidized senior housing and anything else in four different states and then try to explain it to her. If you have any hints about helping an indigent and somewhat incapacitated mother access services, we would love to hear them. We feel a little overwhelmed at the moment and aren’t even sure whom to call in each place.

Answer: It’s understandable that you feel overwhelmed. You have a huge task in front of you.

You can start with the Eldercare Locator, a free service offered by the U.S. Administration on Aging that can connect you to services for older adults and their families. You’ll find it at http://www.eldercare.gov, or you can call (800) 677-1116.

Another resource you might want to consider is a geriatric care manager. These are professionals who help family members care for elderly relatives. The care manager can evaluate your mom, review her options and make recommendations. Their services aren’t cheap, but they can be especially helpful in managing a long-distance situation. You can find referrals at the National Assn. of Geriatric Care Managers’ site, http://www.caregiver.org. And speaking of distance: It might be easier to help your mom if she lives closer to one of you, or to a trustworthy friend who can check in on her and let you know how things are going.

You also should check with an Arkansas family law attorney, since your mother may be eligible for some kind of spousal support and possibly a property division that could help her financially.

Finally, if your father dies before your mother, she still will be eligible for survivor benefits that could bump her Social Security check up to 100% of what your father was receiving. Many people don’t realize that ex-spouses can qualify for survivors’ benefits as long as the marriage lasted 10 years and the person applying for benefits didn’t remarry until after age 60.

Don’t count on plastic to cover big expenses

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Dear Liz: I’m 27 and have no consumer debt, a decent salary and a boatload of student loans. I use my credit cards for most of my expenses to earn rewards points and generally pay off my cards each month. I also take advantage of the 0% introductory rate offered by many credit card companies. This grace period gives me a security blanket so that I can spread large expenses such as insurance or car repairs over several months without derailing my saving plans. Can I apply for these offers without wrecking my excellent scores?

Answer: Occasionally applying for a new card won’t affect your scores much. Typically such applications ding your scores by five points or less.

You should be budgeting and saving for large expenses, however, rather than leaning on your cards. (Car repairs, in particular, aren’t really “emergency” costs — if you have a car, you know they’re coming, and calculators like Edmunds.com’s “True Cost to Own” feature can give you a good idea of what they’re likely to be.) Those 0% offers often come with balance transfer fees or other charges that make the deals a lot less attractive than they seem at first glance.

Also, you should be in the habit of always paying your cards in full — always. “Generally” isn’t good enough, since you could easily be enticed into spending beyond your means, especially as you chase rewards points. Rewards cards are a good deal only if you don’t carry a balance. Otherwise, you can pay frighteningly high interest rates that offset any benefit you may earn.

Restoring credit scores after bankruptcy

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Dear Liz: I had credit scores over 800 with no late payments ever. Unfortunately, a medical issue required me to charge $24,500 to a credit card. That led to a bankruptcy, which was discharged in July 2011. My scores dropped to 672, and they’re currently around 680. I’m paying two unsecured credit cards in full each month plus an auto loan that was reaffirmed in bankruptcy. I would like to continue rehabilitating my scores by applying for another loan. When a company requests my credit scores, does it also see my bankruptcy, and would that prevent me from getting credit?

Answer: Some lenders look just at credit scores, while others request credit reports along with your scores. Your bankruptcy or your scores could cause lenders to charge a higher interest rate or refuse to give you credit.

It’s not clear that the scores you’re seeing are FICO scores, however. A bankruptcy would have dropped your FICOs into the 500s, and it’s unlikely they would return to the high 600s in less than a year. What you may be seeing are VantageScores, which have a different score range: 500 to 990, compared with FICO’s 300 to 850.

If you want to see your FICO scores, which are the ones most lenders use, you can buy them for about $20 each at MyFico.com. Scores offered at other sites typically aren’t FICO scores but may be VantageScores or “consumer education scores” that aren’t widely used by lenders.

You’re doing the right things by using a mix of credit (credit cards and an installment loan) and paying your bills on time. You should know, though, that there’s no way to quickly restore your scores to their old levels. It typically takes seven to 10 years for FICOs to recover from a bankruptcy.

But let’s back up a minute. You almost certainly made a mistake by charging your medical care to a credit card. You may have been able to qualify for a discount on your care if you hadn’t. Many medical providers offer charity programs that cut or eliminate the bill for people making up to 400% of the federal poverty line. A single person could make up to $44,680 and still qualify for a break under many providers’ programs.

If you make too much to qualify for financial aid, you could still have negotiated a discount by asking the provider to charge you the same rate that its largest insurer pays. The uninsured are often charged a much higher “sticker price” for medical care than what insurers pay, but if asked, many providers are willing to provide the same discounts.

If nothing else, you probably could have qualified for an interest-free payment program. Once you charged the bill to your card, however, you lost all your leverage to get a discount.

Is a 3% withdrawal rate too conservative?

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Question: In a recent column you repeat advice I have often read that withdrawing about 3% of my investment capital will reduce the chances of my running out of money in retirement. But that doesn’t make sense to me. I have been retired for over 19 years and I have sufficient data now to extrapolate that I could live for 100 more years with so meager a drawdown because, through good and bad times, my earnings after inflation and taxes always exceed 3%. If I am missing something, I must be extraordinarily lucky because it hasn’t hurt me yet, and at age 77 I think it unlikely to do so in my remaining years. Can you explain this discrepancy between my experience and the consequences of your advice?

Answer: Sure. You got extraordinarily lucky.

You retired during a massive bull market, which is the best possible scenario for someone who hopes to live off investments. You were drawing from an expanding pool of money. Your stocks probably were growing at an astonishing clip of 20% or more a year for several years. Although later market downturns probably affected your portfolio, those initial years of good returns kept you comfortably ahead of the game.

Contrast that with someone who retires into a bear market. She’s drawing from a shrinking pool of money as her investments swoon. The money she takes out can’t participate in the inevitable rebound, so she loses out on those gains as well. All that dramatically increases the risks that she’ll run out of money before she runs out of breath.

It’s the first five years of retirement that are crucial, according to analyses by mutual fund company T. Rowe Price, which has done extensive research on sustainable withdrawal rates. Bad markets and losses in the first five years after withdrawals begin significantly increase the chances that a person will run out of money during a 30-year retirement.

Some advisors contend that a 3% initial withdrawal rate, adjusted each subsequent year for inflation, is too conservative. If you retire into a long-lasting bull market, it may well be. But none of us knows what the future holds, which is why so many advisors stick with the 3%-to-4% rule.

What’s a “safe” withdrawal rate?

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Dear Liz: After working all out for 28 years in a small business, I have put away $2.6 million in stocks, bonds and some cash. (I am a reasonably smart investor.) I’m 58 and want to be done at 60. I’m not tired of my business, just tired of working. How much do you think I could draw out and not get myself into trouble? I’m in great health, so I could last 30 more years. Our house is paid off, and my wife gets about $40,000 a year from a nice pension. Any ideas?

Answer: Financial planners typically recommend an initial withdrawal rate of 3% to 4% of your portfolio. With $2.6 million, your first year’s withdrawal would be $78,000 to $104,000. The idea is that you could adjust the withdrawal upward by the inflation rate each year and still be reasonably confident you won’t run out of money after 30 years.

Some studies indicate you can start with a higher withdrawal rate, as long as you’re willing to cut back in bad markets.

There is still some risk of going broke, though, even with a 3% withdrawal rate. Particularly poor stock market returns at the beginning of your retirement, for example, could increase the chances your nest egg will give out before you do.

This is an issue you really should discuss with a fee-only financial planner who can review your investments and your spending to make personalized recommendations. (You can get referrals from the National Assn. of Personal Financial Advisors or the Garrett Planning Network.) If you’ve chosen especially risky stocks or have too much of your portfolio in bonds, for example, your retirement plan could fail even if you choose a conservative initial withdrawal rate.

You’ll also want to talk about how you’re going to get health insurance, and how much it’s likely to cost. If you’ve been arranging coverage through your business, you might face some sticker shock when you have to buy a policy on your own. But it’s essential to have this coverage, since you won’t qualify for Medicare until you’re 65.

If you’re not tired of your business, you might consider phasing in retirement, if that’s possible in your situation. That would mean starting to take some long breaks to travel or pursue the interests you plan to indulge in retirement. Delaying retirement even a few years can dramatically increase the chances your nest egg will last.