Ask Liz Weston

Get smart with your money

Q&A

Income matters more than assets in financial aid formulas

By

Dear Liz: You write about it not being a good idea in many cases to pay off your mortgage, but does it make sense to do so to reduce savings so that we can be in a better position to help our high school junior get financial aid for college in a year? We also have a 529 and some investments and are savers.

Answer: Your income matters far more to financial aid calculations than your savings, said Lynn O’Shaughnessy, author of “The College Solution: A Guide for Everyone Looking for the Right School at the Right Price (2nd Edition).” Another important factor is how many children you have in college at the same time. If you have a high income and only one child in college, you may not get much or any help, regardless of how your assets are arranged.

Many schools ignore home equity when figuring financial need, however, so it might be worth running some numbers. You can do that by using the net price calculators included on every college website. Pick the schools your junior might want to attend and run two scenarios on each calculator: one with your current financial situation and another in which you’ve paid off your mortgage with your savings.

Many parents are overly worried about how their savings will affect potential aid, O’Shaughnessy said. Parental assets, including 529 accounts, receive favorable treatment in financial aid formulas. Your retirement assets aren’t included in the federal formula at all, and your non-retirement assets are somewhat shielded as well thanks to an “asset protection allowance.” The older you are, the more of an asset protection allowance you get. The allowance will be somewhere around $45,000 for a married couple in their late 40s, the typical age for college parents. For those over 65, the allowance is $71,000. Beyond that, you’re typically asked to contribute less than 6% of eligible assets toward your offspring’s education each year.

 

How to shoot yourself in the foot

By

Dear Liz: I want to stop contributing to my 401(k). How do I cancel it and withdraw my funds?

Answer: You can stop contributing to most workplace retirement funds by contacting your human resources department. You typically won’t be able to withdraw the money, however, unless you can prove a hardship or you leave your job.

You should think long and hard before you discontinue your contributions, in any case. For many workers, contributing to a 401(k) is their best shot at a comfortable retirement. You may be unsettled by volatile investment markets now, but over time a diversified mixture of stocks and bonds should give you the returns you’ll need to overcome inflation and have a reasonable nest egg.

Not contributing to your 401(k) could mean giving up free money in the form of a company match and could trigger a larger tax bill, since your contributions usually are tax-deductible. Money saved within retirement accounts, including 401(k)s and IRAs, is also protected from creditors should you ever be sued or have to file for bankruptcy.

If you’re disgruntled with your plan because you think the fees are too high, ask your employer to look for a more reasonable-priced option. Now that 401(k) administrators must fully disclose their fees, many companies will be looking for better deals.

What I learned from our “almost free” vacation

By

Back in June I wrote a post about “How to get free summer travel.” I’d arranged a 5-day trip with my daughter to the Pacific Northwest using a variety of rewards programs. The trip, which we took over Labor Day weekend, was a heck of a lot of fun. Like most vacations, it wound up costing a bit more than planned but I also learned a few things.

Including:

Re-price your reservations before you go. I checked both hotel and car reservations a few days beforehand to see if prices had dropped. They hadn’t at the Doubletree in Portland, which was in fact sold out. But the rates at Enterprise car rental fell like a rock. Plus, Enterprise emailed me a last-minute 10% off coupon for being part of its frequent traveler program. My cost for the two-day car rental went from over $100 to just $37. I love that.

Don’t try to make a same-day connection on Amtrak. We took the sleeper car up from Los Angeles, and the train fell waaaaay behind schedule–five hours, in fact. That was good news for us, since we got to see some gorgeous scenery around the California-Oregon border that would normally pass by in the dark. Passengers who were trying to make a connection to the Empire Builder, the train that goes from Portland to Chicago, weren’t so happy. They had to get off in Klamath Falls and ride several hours on a bus to meet the other train. If I were to book an Amtrak trip that involved a connection, I’d try to arrange it so that we had an overnight stay in between.

Portland’s public transportation is awesome. There was a light-rail MAX station right outside our hotel, and it took us everywhere we wanted to go while we were in town, including the Saturday Market and the zoo. A day pass for an adult was just $5. Parking at the zoo alone would have been $4, and a hassle, since there are limited spaces. When it was time to leave, I took the red line out to the airport to pick up our rental car–easy peasy.

Check out the artist/farmers markets. Speaking of the Saturday Market: I was blown away by many of the vendors there. This weekend market along the river features some really skilled craftsman offering handmade stuff at reasonable prices. I stocked up for Christmas.

Splurge a little. My daughter’s a huge fan of the Great Wolf Resort and its indoor water park south of Olympia. The rates in the summer can be steep, but my sister and I decided to split the cost of a Kid Cabin room with bunk beds. That way, we got to spend more time together, our kids had a ball and we were each out of pocket $160 rather than $320.

Peach fritter with cream cheese? Might want to skip that. My friend Michelle Rafter suggested we meet at VooDoo Donuts for a treat. Yes, the long wait was worth it, but no, I don’t think I’d order the peach fritter again–it was almost as big as my head. Next time it’ll be the maple bacon donut, for sure.

Don’t expect surviving spouse to “do the right thing”

By

Dear Liz: My parents were married for 50 years. When my mother died, my father didn’t inherit a large monetary fortune, but he did get a houseful of family treasures (photos, knickknacks, mementos, documents) that had been cherished and saved for me and my children (I was an only child). Immediately after my mom died, my father found a lady friend and cut off all ties with me and his past. I tried but could not get through.

I know it would not have been my grandparents’ or my mother’s wishes that 150 years of family memories be lost, but unfortunately that is how it turned out. Please encourage aging parents to plan ahead for many potential outcomes so that their wishes and the wishes of past and future generations are honored. I shudder to think of what has happened to my great-grandmother’s journal that I read aloud as a child.

Answer: The German fairy tale about Hansel and Gretel resonates with many people in your situation. If you remember, in that tale a poor woodcutter acquiesces to his second wife’s demand that he abandon his children to die in the woods.

Of course, that tale ends happily. The children kill the evil witch who imprisons them. They steal her jewels and return to share the wealth with their once-again-widowed father. (Children can be remarkably forgiving.)

It’s sad that you’ve lost access to the heirlooms, but it’s much sadder that you’ve lost access to your father. If he’s still alive, though, so is the possibility of rapprochement. If you keep in touch, he may eventually thaw. If not, you’ll at least know you did all you could.

Your mother may not have been able to imagine your father cutting you off the way he has. But expecting a surviving spouse to “do the right thing” in distributing heirlooms may be expecting too much. Dementia could rob the survivor of good judgment, or he could be influenced by a subsequent relationship, as your father was.

So your point is well taken. Anyone who has heirlooms to pass along should make sure to do so — either in a will or, better yet, while still alive to enjoy the next generation’s appreciation.

Anyone who’s lost access to an heirloom should remember that while precious, it’s still a thing — and a thing that could have been lost in many other ways, from a house fire to negligence. Focusing on the loss won’t bring the thing back or restore a troubled relationship. It will just make you unhappy, and life’s too short for that.

Will your pension hurt your Social Security benefit?

By

Dear Liz: Could you please address the issue of Social Security for those with pensions? I understand that if you have a pension, you won’t get 100% of the standard monthly Social Security benefit. I believe that this happens even if you only have a defined contribution account. But I’ve never seen this discussed in news reports. Many people are surprised when I tell them this.

Answer: Perhaps they’re surprised because what you’re saying isn’t true.

Defined contribution plans, such as 401(k)s, don’t affect your Social Security benefit at all. Neither do most pensions. The time that a pension might affect your benefit is if you didn’t pay into Social Security while you were earning the pension.

Here’s how the Social Security website puts it: “A pension based on work that is not covered by Social Security (for example, federal civil service and some state or local government agencies, such as police officers and some teachers) may cause the amount of your Social Security benefit to be reduced.”

The reduction can come under one of two provisions. The first, called government pension offset, applies if you get a government pension not covered by Social Security and are eligible for Social Security benefits as a spouse or survivor. The spousal or survivor benefit may be reduced in that case. You can learn more at http://www.socialsecurity.gov/retire2/gpo.htm.

The second provision is the windfall elimination provision, which may reduce your Social Security or retirement benefit if you receive a pension from a job not covered by Social Security. You can learn more at http://www.socialsecurity.gov/retire2/wep.htm.

These provisions were put into place because some people with a pension from a job that didn’t pay into Social Security were getting more Social Security benefits than the system intended. If they worked mainly in the job with the pension, but also had jobs that paid Social Security taxes, their Social Security benefits were often calculated as if they were long-term, low-wage workers. Since Social Security is designed to replace a larger percentage of earnings for low-paid workers — and a smaller percentage for higher-paid workers — these folks wound up with a bigger benefit than their earnings actually justified.

Now available: My new book!

By

Do you have questions about money? Here’s a secret: we all do, and sometimes finding the right answers can be tough. My new book, “There Are No Dumb Questions About Money,” can make it easier for you to figure out your financial world.

I’ve taken your toughest questions about money and answered them in a clear, easy-to-read format. This book can help you manage your spending, improve your credit and find the best way to pay off debt. It can help you make the right choices when you’re investing, paying for your children’s education and prioritizing your financial goals. I’ve also tackled the difficult, emotional side of money: how to get on the same page with your partner, cope with spendthrift children (or parents!) and talk about end-of-life issues that can be so difficult to discuss. (And if you think your family is dysfunctional about money, read Chapter 5…you’ll either find answers to your problems, or be grateful that your situation isn’t as bad as some of the ones described there!)

Interested? You can buy this ebook on iTunes or on Amazon.