Ask Liz Weston

Get smart with your money

Retirement

Q&A: Home remodel

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Dear Liz: I would like to add on and remodel so my home will be nice for me when I retire in a few years (probably around age 65).

I have a recently refinanced 30-year mortgage at 4.1%, but I’ve been making additional principal payments on a 20-year schedule. I think I can do what I want for around $200,000. (But of course it may be more.)

Post-construction, I’m estimating that the house would have a market value of $800,000 to $900,000, but the real motivation is to have new heating and air conditioning, new windows and floors, and electrical wiring.

I think I deserve it, despite the major disruption that remodeling provides. My question is: Do I do this with cash, or should I finance it?

If things work out as planned, I’ll have a pension of around $7,000 a month that should take care of my living expenses (including the ability to pay a bit of a higher mortgage), and I have about $350,000 in post-tax savings.

I additionally have about $500,000 in pretax retirement accounts that I plan to draw off of for inflation as the years go by.

I have never been comfortable with a lot of risk — I’ve never even had a car payment — but I probably could have amassed more if I hadn’t been so financially conservative.

Answer: You’re contemplating adding a considerable amount of debt at a time in life when most people are eager to pay theirs off.

They want to reduce their living expenses and the amount they have to pull from retirement funds. Being debt-free is one way to reduce the chances of running short of money after you quit working.

That’s not to say debt in retirement is always bad — especially for people like you, who have enough pension income to cover living expenses plus a good amount of other savings.

Your investments, if properly deployed, are likely to earn a better return than the after-tax cost of your debt. That said, your conservative nature could make it hard for you to sleep at night if you face significant house payments after you stop working.

You should discuss your options with a fee-only financial planner who can evaluate your entire financial situation.

You can discuss tapping your savings for the remodel, taking on more debt, changing the scope of what you want or moving. If what you’re after is a more modern home, it may make more sense to move than to endure the expense and disruption of a major remodel.

If you do remodel, consider adding features that will allow you to age in place more safely, such as installing grab bars, widening hallways and doorways, improving lighting and eliminating steps where possible.

The National Assn. of Home Builders has an Aging-in-Place Remodeling Checklist on its site, at www.nahb.org.

Q&A: Social Security benefits

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Dear Liz: My husband and I will be retiring at the end of 2016. He will be 70 and will start taking his Social Security; I will be 65 soon after.

Thanks to your advice, I plan to sign up to get 50% of his Social Security benefit when I’m 66 (my full retirement age) and switch to my own benefit later.

But will my own Social Security be less because I won’t be earning any money between age 66 and 70? If so, would I be just as well off taking my own benefit at 66 or should I still wait until I’m 70? Money needs will not be an issue.

Answer: Your benefit will grow 8% every year you put off filing for your own retirement checks between age 66 and age 70. That’s a powerful incentive to delay, especially when you can get spousal benefits in the meantime.

If you did work after age 66, your benefit might increase a bit more depending on how much you earned.

Your Social Security benefit is based on your 35 highest-earning years, so a higher-earning year late in life could replace a lower-earning year earlier in life.

Your continued employment would have the biggest effect if those lower-earning years showed no or very little income.

Q&A: Homeowners association fees

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Dear Liz: I am a single woman 10 to 15 years away from retirement. My town home will be paid off next month. Does it make better financial sense to sell my town home to avoid significant monthly homeowners association fees and invest in a single-family home?

Answer: It depends. Many single-family homes, particularly in newer developments, also have sizable HOA fees. Even when that’s not the case, you can face significantly higher repair and maintenance costs with a single-family home compared to a town home.

You also need to factor in the costs of selling your home and moving. Real estate commissions can eat up 5% to 7% of the value of your home, and moving expenses can add thousands of dollars to your costs.

Now would be an excellent time to consult a fee-only financial planner who can review your plans for retirement and discuss your alternatives.

Mistakes you make in the years immediately before and after retirement can be particularly devastating, so make sure you have an objective second opinion.

Q&A: How to get millennials to save for retirement

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Dear Liz: We have 90 employees, many of them millennials, and only about 30% take advantage of our retirement plan. What resources and advice can I use to get our employees to take control of their retirement future?

Answer: The youngest generation of adults and near-adults vividly remembers the stock market crash and financial turmoil of 2008-09. So they’re understandably wary of investing, plus more of them are dealing with student loan debt than previous generations. Getting them to focus on investing in their futures can be difficult.

That said, employers have discovered that one of the most effective ways of getting this and other generations into retirement plans is to enroll them automatically. Status quo bias — the human tendency to accept the current situation rather than struggle to change — pays off in this case, since once in the plan few people decide to opt out. You can take further advantage of this inertia by offering an auto-escalation feature that increases employees’ contributions 1% or so each year.

Company matches, simpler investment choices such as target-date funds and access to advice (human or computerized) also can increase participation. If your plan provider isn’t offering you suggestions for increasing enrollment, it may be time to look for a new one that can.

Q&A: Social Security eligibility

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Dear Liz: I have a few Social Security credits but not enough for full Social Security benefits. My husband receives a check monthly. He is 79 and I am 75. Am I eligible for any benefits at this time?

Answer: You’ve been eligible for full spousal benefits since you turned 65. You could have gotten a reduced amount as early as age 62. You’ve missed out on thousands of dollars of benefits that were yours to claim.

People need 40 credits with Social Security to apply for their own retirement benefits. Typically that means working a minimum of 10 years. But you didn’t have to work at all to receive spousal benefits based on your husband’s employment record. At your own full retirement age (which is now 66, but was 65 until recently), you could have received a monthly check equal to 50% of your husband’s benefit.

Once you file, you only can get six months of retroactive benefits. There’s nothing that can be done about the rest of the benefits you’ve missed, but perhaps this letter will alert other spouses that they may qualify for Social Security even if they haven’t worked much outside the home.

Q&A: Thrift Savings Plan

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Dear Liz: I am a federal government retiree with a very small retirement account in the Thrift Savings Plan. Where can I invest my small savings so it can safely grow? The balance has not changed for over six months now. If I keep it in the Thrift Savings Plan, what fund is the safest?

Answer: “Safe growth” is an oxymoron. If your balance isn’t changing, then you’re probably in the safest option — which means you won’t see much if any growth in the future, either.

You probably chose TSP’s G Fund, which invests in Treasury securities. You won’t lose money, but you probably won’t earn enough to offset inflation. If you want your money to grow, you need to have at least some of your retirement account in stocks.

Fortunately, the plan offers several “L” or lifestyle funds geared to when you expect to begin withdrawals. L funds offer professional management and a mix of investments that grow more conservative as that date approaches. Retirees who are tapping their accounts typically invest in the L Income fund, which has about 20% of its balance in stocks. If you are five years or more away from using the funds, the next most conservative lifestyle option is L 2020, which has half of its total invested in stocks.