Ask Liz Weston

Get smart with your money

Q&A

Q&A: How a fee-only financial planner differs from a fee-based one

By

Dear Liz: What is the difference between a fee-based financial planner and a fee-only financial planner? I have had a few complimentary meetings with a fee-based financial planner regarding retirement planning and income-generating strategy. I am 61 and currently have $325,000 in a traditional IRA and a 401(k) from a former employer, with 70% of both accounts held in stocks. The planner suggests that I put the whole $325,000 into a fixed indexed annuity, which he says is no risk. Is this a good idea?

Answer: Someone who is “fee based” typically accepts commissions or other incentives for selling certain investments in addition to charging fees. “Fee only” advisors accept money only from their clients.

Another important word that starts with f: fiduciary. Fiduciary advisors promise to put your interests ahead of their own. A fiduciary advisor, for example, typically wouldn’t recommend putting all your money in a single investment since having all your eggs in one basket is rarely in your best interest.

Most advisors are not fiduciaries, however, and may recommend poorly performing or expensive products to you when better options are available because those lesser options pay them more. Indexed annuities can pay high commissions to the people selling them, for example, and that can be a powerful incentive for your advisor to gloss over their potential disadvantages.

Indexed annuities are sold as a way to benefit from some of the upside of the stock market without the risk of loss if the market falls. But these annuities are complex and insurers can typically change the rules that govern your returns. In addition, you may face surrender charges if you need to take your money out.

The Securities and Exchange Commission has issued investor alerts about indexed annuities. These alerts urge potential investors to thoroughly investigate how the contracts are structured, how returns are figured and how the calculations can change. Anyone who is considering an indexed annuity would be smart to run the purchase past a fee-only, fiduciary financial planner to see whether it really makes sense for their situation.

By the way, there’s no such thing as a no-risk investment. Every investment poses some kind of risk, and a fiduciary advisor will take the time to explain those to you so you can make an informed judgment.

Q&A: When mortgage shopping, does checking your credit scores lower them?

By

Dear Liz: We’re trying to refinance a mortgage. All of the mortgage lenders claim that checking our credit scores will not affect the scores. However, that is not true. What gives? The three credit bureaus all list “too many inquiries” and penalize us. Does calling them do any good or make it even worse?

Answer: Checking your own scores is considered a soft inquiry that has no effect on your scores. When a lender checks your scores, there can be a small ding, but credit scoring formulas also have a feature that reduces the effect when you’re shopping for a mortgage.

Essentially, all the mortgage inquiries made within a certain amount of time are grouped together and counted as one. In addition, the formulas ignore any mortgage inquiries made within the previous 30 days. The amount of time you can shop varies with the credit scoring formula, so it’s generally a good idea to concentrate your shopping into a two-week period.

What you don’t want to do when you’re in the market for a mortgage is to apply for other credit. Those inquiries are not grouped with your mortgage inquiries. The effect of these inquiries fades quickly and is usually pretty small — typically 5 points or less for FICO scores, for example. But even a small ding could cause you to pay more in interest if your scores aren’t already excellent.

Q&A: Social Security windfall elimination provision

By

Dear Liz: I was referred to an answer you wrote in 2017 explaining Social Security’s windfall elimination provision. It was the clearest explanation I have seen. I receive a government pension and a reduced Social Security check from the provision and am now fine with how it came to be, thanks to your post.

Answer: Many people are understandably upset that their Social Security benefits are reduced when they receive a pension from a job that didn’t pay into the Social Security system. Understanding why this happens may help. Here’s a reprint of the question and answer from 2017:

Dear Liz: I am a public school teacher and plan to retire with 25 years of service. I had previously worked and paid into Social Security for about 20 years. My spouse has paid into Social Security for more than 30 years. Will I be penalized because I have not paid Social Security taxes while I’ve been teaching? Should my wife die before me, will I get survivor benefits, or will the windfall elimination act take that away? It’s so confusing!

Answer: It is confusing, but you should understand that the rules about windfall elimination (along with a related provision, the government pension offset) are not designed to take away from you a benefit that others get. Rather, the rules are set up so that people who get government pensions — which are typically more generous than Social Security — don’t wind up with significantly more money from Social Security than those who paid into the system their entire working lives.

Here’s how that can happen.

Social Security benefits are progressive, which means they’re designed to replace a higher percentage of a lower-earner’s income than that of a higher earner. If you don’t pay into the system for many years — because you’re in a job that provides a government pension instead — your annual earnings for Social Security would be reported as zeros in those years. Social Security is based on your 35 highest-earning years, so all those zeros would make it look like you earned a lower (often much lower) lifetime income than you actually did.

Without any adjustments, you would wind up with a bigger check from Social Security than someone who earned the same income in the private sector and paid much more in Social Security taxes. It was that inequity that caused Congress to create the windfall elimination provision several decades ago.

People who earn government pensions also could wind up with significantly more money when a spouse dies. If a couple receives two Social Security checks, the survivor gets the larger of the two when a spouse dies. The household doesn’t continue to receive both checks.

Without the government pension offset, someone like you would get both a pension and a full survivor’s check. Again, that could leave you significantly better off than someone who had paid more into the system.

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.

Q&A: More about Medicare choices

By

Dear Liz: I’ve enjoyed your columns about choices between traditional Medicare and Medicare Advantage. I have a terminology question: What is the difference between a Medigap policy and a supplemental one? I have traditional Medicare and a supplemental plan, which covers the deductibles and copayments that Medicare doesn’t cover. According to your article, it seems a Medigap policy does the same. Please clarify and keep up the good work.

Answer: Medigap and supplemental policy are two terms for the same product: an insurance policy sold by private insurers to cover the “gaps” in Medicare coverage. If you have traditional Medicare (also known as original Medicare), it’s generally advisable to have a Medigap supplemental policy as well.

You can’t get a Medigap policy, however, if you have Medicare Advantage. Medicare Advantage is also provided by private insurers but is meant to be an all-in-one alternative to traditional Medicare, rather than a supplement to it.

Q&A: Two husbands. Which benefit?

By

Dear Liz: I am 66 and recently widowed after a five-year marriage. I was previously married and divorced after more than 20 years. I paid into Social Security as a professional for 20 years. How do I determine how to file for Social Security benefits? Should I just file for my benefits? Should I wait until I am over 70? Should I file for spousal benefits and, if so, for which husband?

Answer: Let’s take that last question first. You’re only eligible for spousal or divorced spousal benefits if the worker on whose record you’d be claiming is still alive. Spousal benefits can be up to half what the worker would get at the worker’s full retirement age. If the worker has died, by contrast, you could be eligible for survivor benefits, which can be up to 100% of the worker’s benefit.

So you may be eligible for three different types of benefits: your own retirement benefit, a divorced spousal benefit based on your ex’s record (because you were married at least 10 years) and a survivor benefit based on your late husband’s record (because you were married for at least nine months at the time of his death). Normally, you lose the ability to claim divorced spousal benefits when you remarry, unless the second marriage ends in divorce, annulment or death, as yours did.

Which one to claim and when will depend on the details of your situation. You can call Social Security at (800) 772-1213 to get estimates of what you’d get on each record. Consider using a paid service such as Social Security Solutions or Maximize My Social Security to help you figure out the best strategy for claiming benefits.

Q&A: Debt relief offers aren’t all equal. Is bankruptcy a good option?

By

Dear Liz: There seems to be an abundance of companies offering debt reduction, debt settlement and debt consolidation programs now. Are there any differences in these programs? Some of these companies offer a program whereby high credit card balances and loans are combined and substantially reduced, and the debtor would make a single payment to said company. What are the pros and cons of this type of program? What would be the effect on the credit history of the debtor?

Answer: If a company is promising to help reduce the total amount you owe, that’s known as debt settlement. Typically, you stop paying your debts and instead make payments to the debt settlement company, which tries to negotiate a deal with your creditors.

Debt settlement can have a substantial negative impact on your credit scores, and you may be sued by creditors that are unwilling to settle. The process can take several years and you may have to pay taxes on any amount of debt that is forgiven, because that’s considered taxable income to you. Once you add in the company’s fees, the amount you save through debt settlement may be less than you expect.

If you’re considering debt settlement, first consult with a bankruptcy attorney (the National Assn. of Consumer Bankruptcy Attorneys offers referrals), because bankruptcy is often a faster, cheaper and safer way to erase overwhelming debt. The most common type of bankruptcy, Chapter 7 liquidation, typically takes three or four months, stops collection actions, legally erases many types of debt and allows you to begin rebuilding your credit immediately.

If a company is promising to lend you money to pay off your loans and credit cards in full, that’s known as debt consolidation. Debt consolidation can make sense if you can get a lower interest rate than what you’re currently paying, the payments are affordable and the loan allows you to get out of debt faster. However, you’ll need to beware of debt consolidation companies that charge large upfront fees or that charge high interest rates. If you have bad credit, you probably would be better off consulting with a nonprofit credit counseling agency than paying high rates for a debt consolidation loan.