January 6, 2020 By

Q&A: Credit scores measure Dad’s accounts, too

Dear Liz: I recently added myself onto my 95-year-old father’s two credit card accounts as an authorized user. I am his agent under a power of attorney and handle his finances. I noticed that after being added to those accounts, my credit scores increased. When he passes on, I plan to close those accounts. Will my credit score be negatively affected?

Answer: Possibly. Closing accounts doesn’t help your scores and may hurt them. Scoring formulas are sensitive to the amount of credit you have versus how much you’re using. Closing an account shrinks your available credit, and the formulas don’t like that.

If you have good scores and plenty of other open accounts, though, the damage from closing these accounts probably will be minor and short-lived.

Filed Under: Credit Scoring, Q&A Tagged With: , ,
January 6, 2020 By

Q&A: When to claim a survivor benefit

Dear Liz: As a widower who just turned 60, what are the pros and cons of starting my survivor benefit now? My wife passed away at 55, after 20 years of marriage. My lifetime earnings are higher than hers. I am in good health and have not remarried (though I’m open to doing so). Finances are not an issue. I’m debating how long to continue to work. It seems my best Social Security approach is to claim the survivor benefit now, then later (perhaps at age 67 or 70) claim my own benefit. Your thoughts, please?

Answer: If you start any Social Security benefit before your own full retirement age, you will be subject to the earnings test that reduces your checks by $1 for every $2 you earn over a certain limit ($18,240 in 2020). So if you continue to work, it’s often best to delay starting benefits.

Your full retirement age is 66 years and 10 months if you were born in 1959. (It’s 67 for people born in 1960 and later.) Once you reach full retirement age, the earnings test disappears. You could collect the survivor benefit and leave your own alone to grow. Once your benefit maxes out at age 70, you could switch.

Filed Under: Q&A, Social Security Tagged With: , ,
December 30, 2019 By

Q&A: How deposit insurance limits work

Dear Liz: My parents, who are in their 80s, just moved and are about to sell their former home. Their net gain from the sale will be approximately $400,000. I am advocating they put this money in a high-yield savings account as capital preservation is key. I know an individual account is insured by the FDIC for up to $250,000. But if we set it up so they are joint account holders, would the FDIC insurance limit on that one account rise to $500,000?

Answer: Yes. The FDIC insures up to $250,000 per depositor, per institution and per ownership category. Ownership categories include single accounts, joint accounts, certain retirement accounts such as IRAs, revocable trust accounts and irrevocable trust accounts, among others. Each depositor in a joint savings account is covered up to $250,000, so a couple would have $500,000 of coverage.

Filed Under: Banking, Q&A Tagged With: , , ,
December 30, 2019 By

Q&A:Getting bum info from Social Security

Dear Liz: After taking Social Security early at 62, I have called, written and visited in person asking to have my benefit suspended so it can earn delayed retirement credits. Nothing has worked. Social Security representatives say I cannot change anything after the first 12 months.

I turn 66 this month and wanted to get this done.

Answer: The employees you’re talking to are confusing benefit suspension with application withdrawal.

As you know, Social Security benefits grow by 5% to 8% each year you delay between 62 and 70. Starting early can be an expensive mistake that permanently reduces the amount you receive over your lifetime.

There are two potential ways to fix the mistake. One is a withdrawal, where you rescind your application and pay back the money you’ve received. Withdrawals are a “do over” that resets the clock entirely on your benefit so that it’s as if you never applied. Withdrawals are only allowed in the first 12 months after your application.

A suspension, on the other hand, is when you ask Social Security to halt your benefit so that it can earn delayed retirement credits. You don’t have to pay any money back, but you also don’t get to reset the clock. Instead, the benefit you’re currently receiving is allowed to earn delayed retirement credits. You can only suspend your benefit once you’ve reached full retirement age. If you were born between 1943 and 1954, your full retirement age is 66.

Social Security explains how suspension works online in the retirement section. You might want to print that out and take it with you to the Social Security office. If someone again tries to tell you that suspension isn’t allowed, ask to speak to a manager. This is your right, and it could make a big difference in providing you a more comfortable retirement.

Filed Under: Q&A, Social Security Tagged With: , ,
December 30, 2019 By

Q&A: Here’s why one donation of $1,000 beats 10 donations of $100

Dear Liz: I want to support about 10 charities and nonprofits but have a limited budget of $1,000. I’ve been dividing it among those charities, but would I have a bigger impact contributing the full amount to just one?

Answer: Absolutely, for a number of reasons.

Each charity spends a certain amount to process your donation. The smaller the donation, the more of it is eaten up by these costs. If it costs $5 to process a donation, for example, the costs represent 5% of each $100 donation. If $1,000 went to one charity, just one fee would be incurred and it would represent just 0.5% of the total.

Any donation you give can trigger more appeals from the charity, so you’re potentially incurring 10 times the junk mail.

Wise donors also research charities using services such as GuideStar or Charity Navigator to make sure the bulk of their contributions go to the cause, rather than to executive salaries, fundraising and overhead. Monitoring 10 charities is a lot more work than keeping track of one or two.

You might also consider making monthly contributions, rather than waiting until the end of the year, since that helps charities budget. A direct debit from your checking account is often the best way to set this up, because using a credit card incurs transaction fees that reduce your contribution.

Filed Under: Q&A Tagged With: ,
December 23, 2019 By

Q&A: Setting up nieces and nephews for success

Dear Liz: This is a little unorthodox, but I’m hoping you can help. I have six nieces and nephews from my various brothers and sisters. They range in age from babies to teenagers. When they get older, I want to be able to assist them with therapy sessions — not because I think their parents will mess them up, but because I believe mental health is important to success. I imagine telling them about this fund when they are about 18 or so, so I’d need money I can access in five to 10 years. How should I start saving for this? What accounts should I use? Should I open one account for each of them, and how can I manage this the best way for my taxes?

Answer: Custodial accounts could save money on taxes, but the money would become entirely theirs at a certain point (typically age 18 or 21) and you would lose control over what they did with it. You could hire an attorney to draft trusts that would have more restrictions, but that will cost hundreds or even thousands of dollars to set up and administer.

The simplest solution would be to set up one or more accounts in your own name that you’ve earmarked for this purpose. You would pay taxes on any interest, dividends and capital gains accrued, but you would maintain control of the money and it wouldn’t affect the children’s ability to get financial aid in college.

Keeping control also gives you the flexibility to use the money for another purpose, in case your young relatives don’t need or want therapy. Mental health challenges — although widespread — aren’t universal. A survey funded by the National Institute of Mental Health found 46% of adults had a psychiatric disorder at some time in the past, and one-quarter had experienced a problem in the previous year. The most common disorders were major depression (17%), alcohol abuse (13%) and social anxiety disorder (12%).

If you’re concerned about their success and want to help with money they’re even more likely to need, consider funding 529 college savings plans. The money can grow tax-deferred and be used tax-free at virtually any post-secondary school in the U.S., as well as some abroad. You can maintain control and have the flexibility to move money to other beneficiaries, or to withdraw it at any time (although you’d pay penalties and taxes on any earnings).

Filed Under: Banking, Kids & Money, Q&A Tagged With: ,
December 23, 2019 By

Q&A: Social Security for a child

Dear Liz: I will be 65 next year and have an 8-year-old son. I have been told by various people that I can receive an extra Social Security allowance for him until he is 18. These same people also said it would reduce my benefit permanently. Is that correct?

Answer: Yes, plus your benefit would be subject to the Social Security earnings test if you continue to work. The earnings test applies when you start Social Security before your full retirement age, which is 66 and 2 months, and could temporarily reduce or even eliminate your benefit.

The earnings test disappears at full retirement age, which is why it’s usually good to wait until then to apply if you continue to work. Most people benefit from delaying the start of Social Security even longer, but your situation may be one of the exceptions because the child benefit can be a valuable, if temporary, addition to the family finances.

A child can receive up to half the parent’s full retirement benefit, typically until the child turns 18. (Benefits can continue as late as age 19 if the child is still in high school.) The parent must apply for his or her own benefit to trigger a child benefit. Also, there’s a limit to how much a family can receive based on one worker’s earnings record. This family maximum varies but can be from 150% to 180% of the parent’s full benefit amount.

Free Social Security claiming calculators typically aren’t set up to handle the possibility of child benefits, so you may want to use one of the paid versions such as Maximize My Social Security or Social Security Solutions to determine your best course.

Filed Under: Q&A, Social Security Tagged With: , ,
December 16, 2019 By

Q&A: Rising insurance premiums

Dear Liz: I’m an insurance agent specializing in long-term-care policies and just read your advice to the woman who was upset about how much her premiums had risen. Her premiums were $2,400 annually starting when she was 55 but are $4,470 now that she’s 77. First, thank you for noting that these premium increases are because insurance companies didn’t expect people to live so long and nursing home rates to increase so much. Please also tell your reader that, at her age, her premium for the coverage she has now would be well over $12,000! She bought early and she’s definitely getting a ridiculously low premium for the coverage she has. I’m sorry that she’s on a fixed income, but ask her how she’ll pay for a $60,000-per-year stay in a nursing home. If she can’t afford her premium, she should reduce her amount of time covered, not the amount of dollars covered.

Answer: Let’s be clear about who’s at fault here. It’s not the people who bought long-term-care insurance policies and expected them to remain affordable.

Insurers are supposed to be experts at predicting risk, but they made incorrect assumptions about how many people would drop their policies (known as the lapse rate), how many would file claims and how long those claims would last. Insurers also overestimated the returns they could get on their bond investments, which also help determine premiums.

All these stumbles have led to repeated premium increases that have threatened to make coverage unaffordable right when people need their coverage the most.

This woman is well aware of the high costs of long-term care; that’s why she bought the policy in the first place and kept paying it all these years. Her premium might seem “ridiculously low” to you, but anyone with an ounce of empathy could understand that $4,470 is a huge chunk of change for most seniors.

Keeping her coverage means giving up some of the benefits she was promised and had been counting on. Reducing the number of years the policy protects her, for example, could make her premium more affordable but leave her exposed to devastating costs if she needs many years of care.

This is a crappy situation for people who were trying to do the right thing. They don’t deserve to be sneered at for being upset about it.

Filed Under: Insurance, Q&A Tagged With: , , ,
December 16, 2019 By

Q&A: When savings are meager, it might be time to unretire

Dear Liz: I’m 67, retired and have $83,000 in a 401(k) that I left with my employer. Should I see a certified financial planner? Based on my current income, I either need a job, or I have to start pulling $10,000 from my 401(k) each year, which will clean out my account in eight years.

Answer: You definitely need a job.

You could burn through your nest egg even faster than you expect if the stock market drops or an unexpected expense crops up. And retirement is loaded with surprise expenses, from healthcare bills to home repairs to long-term care. Even in a best-case scenario, you’re likely to run short of money long before you run out of breath.

A planner could have warned you about this and suggested that a few more years of working, saving and delaying Social Security could have given you a far more comfortable retirement.

It may not be too late.

If you can return to work full-time, you could suspend your Social Security benefit. That would allow it to grow by 8% each year until you turn 70. If you’re married and the higher earner, that also would increase the survivor benefit that one of you will have to live on once the other dies.

Even if you can’t work full time, a part-time job could ease the drain on your 401(k). If you’re a homeowner, you also could consider a reverse mortgage that would allow you to turn your home equity into a lifetime stream of monthly checks, a line of credit or a lump sum.

A fee-only advisor — one who is paid only by clients’ fees, rather than by commission — could help you review your options. The Garrett Planning Network offers referrals to fee-only planners who charge by the hour.

Another option for people on a budget: accredited financial counselors or financial fitness coaches. These folks aren’t certified financial planners, but they can help with budgeting, debt management and retirement planning. You can get referrals from the Assn. for Financial Counseling & Planning Education.

Filed Under: Q&A, Retirement Tagged With: , , ,
December 9, 2019 By

Q&A: This generous gift has no tax effects

Dear Liz: If I give $15,000 to my grandson, do I report it on my tax return? Is it deductible? Does my grandson report the gift on his tax return and does he owe tax on it? What if three sets of grandparents (parents and stepparents of his parents) do the same?

Answer: No, no, no, no and it doesn’t matter for tax purposes (although obviously your grandson should be delighted he has such generous grandparents).

Gifts to individuals aren’t tax deductible, but neither are they taxable to the recipient.

People can give a certain amount each year to as many recipients as they like without having to report the gifts via a gift tax return. In 2019 and 2020, the limit is $15,000. Each grandparent could give up to that amount to your grandson; he wouldn’t have to report the income on his tax returns, and it wouldn’t cause any of you to have to file gift tax returns.

There’s no limit to the number of people who can give $15,000 to your grandson this way.

You wouldn’t owe gift taxes until the amount you’d given away above the annual exemption limit exceeded $11.4 million.

Filed Under: Q&A, Taxes Tagged With: , ,