Q&A: Emergency fund: How big?

Dear Liz: You recently advised a teacher who was inquiring about paying down student debt. You suggested among other things to “have a substantial emergency fund before you make extra payments on education debt (or a mortgage, for that matter). ‘Substantial’ means having three to six months’ worth of expenses saved. If your job is anything less than rock solid, you may want to set aside even more.” Granted, this is in the context of the student debt question, but is that emergency fund advice still valid in light of studies showing the liquidity needs of lower-income households to be much lower?

Answer: The usual advice about emergency funds is often unrealistic and sometimes absurd for most low- or even moderate-income households.

The advice is usually given by financial planners who typically work with higher-income clients. The higher your income, the more likely it is that you have the free cash flow to quickly build a large emergency fund.

An analysis in the New York Times found that a household with income over $200,000 would need about two months to save one month’s worth of expenses. A household with income of $70,000 to $99,999 would need seven to eight months to save one month’s worth. A typical household with two or more people and income of $50,000 to $69,999 would need more than two years to save a single month’s worth of expenses.

As you’ve noted, though, various studies have found that much smaller emergency funds can help households avoid catastrophe.

A 2015 study by Pew Charitable Trusts found the most expensive financial shock suffered by the typical household amounted to $2,000. But as little as $250 can reduce the odds that a low-income household will suffer serious financial setbacks such as eviction, according to a 2016 Urban Institute study.

A three-month emergency fund could be a long-term goal, but it’s not something that should be prioritized over more important tasks such as saving for retirement or paying off high-rate debt.

Such a fund should be a priority, however, over paying off lower-rate, potentially tax-deductible debt. That’s especially true when you’d be making extra payments on student loans. Paying down credit cards can free up additional credit to be used in an emergency, but payments sent to student loan lenders are gone for good.

Q&A: A young mother died in a car accident. Can her widower get survivor benefits?

Dear Liz: My grandson’s wife, 22, was killed in a motor vehicle accident just after her birthday. My grandson, 26, was left with a 2-year-old and 9-month-old. Due to COVID-19, he was staying home with the children, and she was working at a fast-food restaurant. We thought there would be Social Security survivor benefits, but he has been denied because she did not have 10 quarters of payroll. Is there an appeal for this denial? She was too young to have the required quarters.

Answer: Given her age, the family could be out of luck if she only recently started working. But there is a special rule that applies if she was working at jobs that paid into Social Security for at least a year and a half before her death.

With survivor benefits, the length of time someone needs to work typically varies according to age. To generate survivor benefits, the number of years you need to work at a job that pays into Social Security is — at most — 10 years. Each quarter of work typically generates one credit, and no more than 40 credits are needed. The younger someone is when they die, the fewer credits are needed. People, however, generally need at least six credits, and only credits earned after someone turns 22 count toward the total.

But there’s an exception. Survivor benefits can be paid if the worker earned at least six credits in the three years before death. So if your grandson’s wife worked at least 18 months before her terribly premature death, survivor benefits could be paid to her minor children and to the surviving spouse who is caring for them, said William Meyer, chief executive of Social Security Solutions, a claiming strategy site.

The benefits would be based on her earnings history, so the amounts are unlikely to be substantial, Meyer noted. Still, something would be better than nothing.

All Social Security decisions can be appealed. If your grandson already filed an application and was denied, the denial letter would explain his appeal rights, Meyer said. If he just received a verbal denial, he should go ahead and file a formal application to start the process. If his wife had earnings that might not yet have been reported, he can provide her last pay stubs or W-2 forms when filing the application.

“With there being a concern about her having enough qualifying quarters, as well as low earnings, that could be pretty important,” Meyer said.

Q&A: Age minimum for survivor benefits

Dear Liz: I am 53 and Social Security is giving me a hold time for my widow support. What should I do?

Answer: The only thing you probably can do is wait.

Survivor benefits are normally only available once you turn 60. You can start as early as age 50 if you are disabled or at any age if you are caring for the deceased worker’s minor children.

Q&A: Dementia and financial accounts

Dear Liz: You recently discussed the importance of adding spouses to financial accounts before one of them dies to make it easier for the surviving spouse. I wholeheartedly agree. I would add that this needs to be done sooner rather than later. If one of the spouses is diagnosed with dementia, the bank will likely not make changes to accounts. People have to be able to understand what they are signing.

Answer: That’s an excellent point. Another important task is to create powers of attorney for healthcare and finances. These allow someone else to make decisions for you if you are incapacitated. Someone in the early stages of dementia could sign such a document if they understand what it is, but otherwise the family might have to go to court to get a conservatorship, which can be an expensive process.

Q&A: Paying down your mortgage

Dear Liz: You’re not a fan of prepaying student loans in most cases because the extra money sent to lenders is “gone for good” — it’s not like credit cards, where paying down a balance can free up some of the credit line to be used again. But what’s wrong with paying down a primary mortgage? That can create more equity that people could borrow against.

Answer: Perhaps. To tap that equity without selling the home, though, you need a lender’s cooperation, which isn’t always forthcoming when you’re experiencing a financial emergency. If you lose your job, for example, a lender may be reluctant to offer you a cash-out refinance or allow you to establish or expand a home equity line of credit.

Contrast that with paying down a credit card, which typically opens up available credit as soon as the transaction is processed. That’s not guaranteed, of course, because lenders can lower credit limits or even close accounts if your credit scores drop or if bad economic times make lenders more cautious. But for the most part, credit cards are a much more flexible and accessible source of credit than mortgages.

That’s not to say you should never make extra payments on a mortgage. If you’re on track with saving for retirement, you’ve paid off higher rate debt and you have a sufficient emergency fund, then prepaying a mortgage can make sense.

Q&A: How to find an accountant and a financial planner

Dear Liz: Can you offer advice on finding the right accountant for someone doing taxes for the first time after divorce? My husband always handled this. Also, same question for a financial planner for a newly divorced person? It’s all so overwhelming.

Answer: It is, and you’re smart to reach out for help.

You might consider hiring a personal financial specialist. This is a designation earned by CPAs who handle not just taxes but financial planning as well.

A CPA-PFS is a fiduciary, which means they’re committed to putting your best interests first. Also, many are working virtually now because of the pandemic, so you should be able to find several candidates to interview even if you live in a more remote area. You can start your search at the website of the American Institute of Certified Public Accountants.

Q&A: More about spousal benefits

Dear Liz: You recently wrote that a wife could apply for Social Security at 62 and then switch later to her spousal benefit. I do not believe this is accurate. Once the wife starts drawing, she is committed.

Answer: Typically, that’s true. When someone applies for Social Security, their retirement benefit is compared with their potential spousal benefit and they would get the larger of the two amounts. If the spousal benefit is larger, they would technically get their own benefit plus a supplemental amount.

Because they had already started getting their own benefit either way, they couldn’t switch later — there’s nothing else to switch to. (In the past, someone could start a spousal benefit and leave their own benefit to grow, but that’s no longer an option.)

For a spousal benefit to be available, however, the husband must have already started his retirement benefit. In this case, he would not have done so. That means the only benefit the wife could qualify for when she applies is her own. Once he applies at age 70, a spousal benefit would be triggered. If that amount is larger than what she was getting, she would get a supplement on top of her retirement benefit, as described above.

Q&A: Couples and their accounts

Dear Liz: You’ve been writing about things people should do after a spouse dies. May I recommend that before your spouse dies, be sure every account is in both your names.

It took six months to cancel my landline phone after my husband died and I moved out of our home. Apparently when we moved in 30 years ago, the service was in just my husband’s name. (I finally reached someone who said, “I don’t know why you’re having so much trouble with this!” and fixed it.)

Also, it took 1½ years, plus hundreds in lawyer fees, to get access to the safe deposit box that he’d had with his parents. This is despite a trust and will leaving everything to me. I was told that “banks don’t care about wills.”

Answer: That’s an excellent suggestion. It’s a lot easier to add a spouse to an account while you’re both alive. It’s a good idea to review all your accounts periodically to make sure the right people are on them, either as joint account holders or as beneficiaries.

Not every account can or should be in both spouses’ names, of course.

Modern credit card accounts, for example, typically aren’t jointly held but instead have a primary cardholder and an authorized user. Also, retirement accounts are in one person’s name alone, although the spouse typically is the beneficiary.

Banks aren’t the only entities that can ignore wills. Typically a payable-on-death account will go to the beneficiary, regardless of what a will or trust says. And speaking of estates, sometimes accounts will be held separately for estate planning purposes.

If you have an estate planning attorney, check with that person before changing how accounts are held.

Q&A: Here’s why trying to time the stock market is a really bad idea

Dear Liz: I confess that I am one of those people who panicked and sold a portion of my portfolio in March, against the advice of many who said, “Hold, don’t fold.” Thus, when the market bounced back, I was left standing out in the cold.

I am filled with a tremendous sense of stupidity. I have no idea what I should do with the cash, which remains in a money market account.

Do I wait for a 5% or 10% market correction to reenter the market? Do I leave the money in a money market account, where it earns 0.01% interest, and wait for interest rates to rise?

Answer: You tried to time the market once, with painful results. Why would you want to make the same mistake again?

That’s what you’re doing when you wait for a correction to enter the market. Many people think they’ll have the discipline to do this, but the reality can be quite different.

Once the market drops 5% to 10%, what’s to keep it from dropping further? Would you be able to jump in as others are bailing out? And what if the correction is manageably small but happens after the market has climbed considerably? You would still have missed out on a substantial amount of growth.

You may have panicked because you were taking too much risk with your portfolio. Perhaps you were trying for maximum returns or the proportion devoted to stocks had increased during the previous bull market.

The solution is to craft an asset allocation that reflects your goals and risk tolerance. Then you regularly rebalance back to that asset allocation.

Having such a plan can help you resist the urge to cash out in a downturn. So too can having an advisor who can help you craft a plan and talk you down when anxiety has you climbing the walls.

Q&A: Survivor vs. retirement benefits

Dear Liz: I was 21 and my husband was 69 when we got married. He died in 1992 after 13 years of marriage. Our young son and I received survivor benefits for years. I got remarried in 2000 and divorced in 2008. When I reach my full retirement age of 66 years and 8 months, could I still claim survivor benefits from my first husband?

Answer: Yes, although you may want to start them sooner.

If your second marriage had lasted, you wouldn’t have been eligible for survivor benefits based on your first husband’s earnings record. Widows and widowers who remarry before age 60 aren’t eligible for survivor benefits.

Since that marriage ended, though, you were eligible to begin benefits at age 60. You are also free to remarry at 60 or later without losing those benefits.

Starting before your full retirement age for survivor benefits, however, means your check would be reduced and also subject to the earnings test, which reduces your benefit by $1 for every $2 you earn over a certain amount ($18,960 in 2021).

As mentioned in a previous column, your full retirement age for survivor benefits is different from your full retirement age for retirement benefits. Since you were born in 1958, your full retirement age for survivor benefits is four months earlier, or 66 years and 4 months.

In most cases, starting a Social Security benefit early locks you into a smaller check permanently. With survivor benefits, though, you also have the option of switching to your own retirement benefit later, if it’s larger. The ability to switch benefits is severely limited with Social Security, but survivor benefits remain the exception.

Being eligible for survivor benefits complicates claiming decisions, so consider using a more sophisticated claiming calculator such as Maximize My Social Security or Social Security Solutions to determine how best to file.