Ask Liz Weston

Get smart with your money

Retirement

Q&A: Retirement planning needs expert help

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Dear Liz: I am about to retire and have had to make some very important decisions: How should I receive my company pension, when should we start taking Social Security, should we convert some IRAs to Roths, how to best cover our healthcare needs and what the best ways are to manage our tax bill. I think we are OK and on track, but I worry about people who don’t have a college degree and who have not studied these issues trying to make similar decisions. I think it’s scary and we should do more to help people secure their retirement.

Answer: You’re quite right that retirement involves a number of complex choices, many of which are irreversible. It’s easy to make the wrong decisions, even if you do have a college degree and think you know what you’re doing.

Everyone approaching retirement should realize that they don’t know what they don’t know, and if possible seek out an expert, objective second opinion on their retirement plans to ensure they’re making the best possible choices.

Q&A: Fear of a market meltdown has frozen this retiree’s money decisions

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Dear Liz: I sold my home two years ago and still have not done anything with my gain of $200,000. It’s in a one-year certificate of deposit so at least it’s earning something while I try to figure out what to do with it. I’m 66, retired and have an IRA of $500,000 that’s invested in the market. I get $1,450 from that plus a monthly Social Security check of $1,750.

I know that my hesitation has to do with the crash of 2008. I know that things have recovered nicely but I just don’t want to feel like I did then, watching my money disappear. I don’t know if I’m the only older person who has this fear of riding it out again.

Answer: Few who watched their portfolios plunge in 2008-09 look forward to experiencing that again. But risk is inextricably tied to reward. If you want the reward of inflation-beating returns that stocks offer, you must accept the risk that your portfolio can go down as well as up.

And you probably do want that reward for a big chunk of your investments. Retirees typically need about half of their portfolio in stocks to generate the kinds of returns that will preserve their buying power and help insulate them against running short of money.

That doesn’t mean all your money has to be at risk. You still need to have a good stash of savings sitting in safe, liquid accounts to help you ride out any market downturns or emergencies. Financial planners often recommend that their retired clients keep six months’ worth of expenses in an emergency fund, and some like to see 12 months’ worth. Beyond that, though, your money probably should be working for you, not simply dwindling away to taxes and inflation.

If you find yourself unable to move forward with a plan for this money, consider hiring a fee-only financial planner who can help you review your options.

Q&A: When to merge 401(k) accounts

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Dear Liz: I have $640,000 in a previous employer’s 401(k) and $100,000 in my new employer’s plan. Do you recommend I merge the two? Both funds offer similar investment options. My only motivation is based on simplifying paperwork during retirement, although there may be other advantages I am not aware of.

Answer: The choice of investment options matters less than what you pay for them. If your current plan offers cheaper choices, rolling your previous account into your current one makes sense if your employer allows that.

If the previous employer’s plan is cheaper, though, leaving the money where it is can make more sense. Once you actually reach retirement age you can decide whether to consolidate the plans or roll them into an IRA.

IRAs give you a wider array of investment options, but keeping the money in 401(k) accounts has other advantages. Larger 401(k)s often offer access to cheaper, institutional funds that aren’t available to retail investors in their IRAs. A 401(k) may offer more asset protection, depending on your state’s laws, plus you can begin withdrawals as early as age 55 without penalty if you no longer work for that employer.

Q&A: A surviving spouse gets a pension surprise

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Dear Liz: I have a question about my late husband’s pension. He was with a company for 25 years and retired early with a defined benefit pension of about $3,700 per month. When he died four years ago, the pension stopped. The company said it was a “single life” pension, but when I tried to get records proving that, they said they had no records. Do you think I have any recourse to petition for some kind of pension? Should I find a lawyer and if so, what kind of lawyer handles this type of thing?

Answer: Traditional pensions typically give workers two options: a single life annuity, whose payments are higher but cease when the recipient dies, or a joint-and-survivor annuity that continues for a surviving spouse’s lifetime. When someone is married, the default option is supposed to be the joint-and-survivor annuity unless the spouse signs a waiver giving up rights to lifetime income. If the company can’t or won’t provide proof of such a waiver, then you’d be smart to get legal help to pursue the issue.

You may be able to get free legal assistance through the U.S. Administration on Aging’s Pension Counseling and Information Program, which currently serves 30 states. If you live in one of the states that isn’t served, you may be able to get help by visiting PensionHelp America, a site run by the nonprofit Pension Rights Center.

Q&A: When to keep a mortgage into retirement years and reasons you might want to pay it off

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Dear Liz: My husband and I have no debt other than the mortgage on our home. My husband will retire in three years while I will continue to work. (I will have to pay for healthcare at that time, as I currently receive my benefits through his employer.) My husband insists that we pay our mortgage off before he retires. The mortgage balance is $59,000 now. We are able to do this, however, I am concerned that we will have no tax deduction whatsoever if we do. Who is correct?

Answer: You may have received some tax benefit in the past for your mortgage. After last year’s tax reform, it’s unlikely you’ll get any tax break going forward.

You have to be able to itemize your deductions to write off your mortgage interest. Now that Congress has nearly doubled the standard deduction, few taxpayers will have enough deductions to make itemizing worthwhile.

Even before tax reform, though, many homeowners got little or no tax benefit from their mortgages. They didn’t pay enough mortgage interest to make itemizing worthwhile, or their itemized deductions barely exceeded the standard deduction. The homeowners who got the biggest benefit were the ones with the largest mortgages. Even people with big mortgages tend to pay less interest over time as they pay down their loans.

Keeping a mortgage just for the tax break is kind of shortsighted, in any case, since you’re only getting back a fraction of what you pay out. For example, if you were in the 25% tax bracket, each dollar you paid in interest reduced your taxes by just 25 cents.

The best arguments for keeping a mortgage have to do with liquidity and investment returns. You shouldn’t pay off a mortgage if it means most of your money is tied up in your home, and if you don’t have enough other assets to cover emergencies and to generate future income. Also, some wealthier people opt to keep a mortgage because the loan is cheap, and they can make better returns on their money elsewhere.

Most people are better off without debts in retirement, though, so if you can pay off your home loan without compromising the rest of your financial life, you probably should.

Q&A: Pension annuity beats lump sum

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Dear Liz: I am 63, recently retired and have a choice. I can take a lump sum from my pension at age 65 or a monthly annuity. I am strongly leaning toward the lump sum. I know the pitfalls (I won’t be an aggressive investor, I don’t gamble, I won’t loan to family or friends, etc). My reasoning is that if my spouse and I both die before our early 80s, “they win.”

I do have relatives who live a long time, however. I am financially very careful and believe interest rates in five years will be several points higher and I can invest the lump sum conservatively and get a 5% to 7% return, and that will work for me.

Finally, I could take the monthly annuity now with no survivor benefit and at the same time buy term life insurance to cover my wife if I go. Am I missing anything significant in my favoring the lump sum?

Answer: Yes. Quite a bit.

Calculating break-even points can be an interesting math exercise, but you’re making assumptions about inflation rates and market returns, as well as life expectancies, that you can’t actually know in advance. A better approach might be to consider what could possibly go wrong. The answer: a lot.

Technically, you might do better investing the money than collecting the annuity, but there are so many ways you could wind up losing. You could pick the wrong investments, or the markets could turn south for an extended period. You could be defrauded or become the victim of an unethical advisor.

(Sure, you’ve got all your marbles now, but who says you’ll keep them? Even the smartest people can get fleeced, and any cognitive decline over the years could make you a sitting duck.)

The fact that you have longevity in your family is another big factor in favor of taking the annuity, because you can’t outlive the money. That should be a concern, in any case, because according to the Society of Actuaries there’s a 72% chance that one member of a couple will live to age 85 and a 45% chance that one will live to age 90.

If your spouse is a woman and not several years older than you, she’s likely to outlive you. Does she want to inherit the responsibility of managing this money?
Speaking of your spouse, get an independent, fee-only advisor’s opinion before you consider waiving the survivor’s benefit on any annuity.

A term life insurance policy may not last as long as you need it to, and will be expensive at your age. It will be vastly more expensive if you try to renew it down the road.
If you don’t or can’t renew it, your spouse could face a drastic drop in income at your death as one of your two Social Security checks goes away and the pension income stops. Surely, your partner deserves better than that.