Ask Liz Weston

Get smart with your money

Retirement

Was letter writer blaming her parents?

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Dear Liz: In your answer about filial responsibility, your statement that the letter writer’s financial situation is the result of her own choices and that she needs to stop blaming her parents is completely misjudged and inappropriate. Clearly, the writer is not blaming the parents and seems amazingly strong and clear thinking for one with her early background.

Answer: Here’s what the writer wrote about her situation:

“I am an only child in my late 30s and received no financial help from [my mother] from the age of 18. In addition, my father died when I was very young, leaving us fairly destitute with no life insurance. I feel that both of these legacies have contributed to my less-than-optimal financial situation.”

The writer goes on to say that she’s trying to catch up financially but she feels it would be futile because she may have to support her mother in the future.

The writer started her adult life at a financial disadvantage compared with people whose parents helped them pay for college. She may now regret the choices she made — perhaps she took on too much student loan debt or spent more than she earned to make up for early deprivation. Those were her choices, however, and at some point she needs to take responsibility for them. Twenty years later, it’s time to let go of the idea that her financial situation is her parents’ fault.

You may be held responsible for a parent who fails to save

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Dear Liz: My mother is 65 and refuses to plan for retirement. She has worked for the same organization for almost 20 years and, despite my begging her over the last decade, has not contributed a dime to her 403(b).

I am an only child in my late 30s and received no financial help from her from the age of 18. In addition, my father died when I was very young, leaving us fairly destitute with no life insurance. I feel that both of these legacies have contributed to my less-than-optimal financial situation.

I have had to work very hard on my own for everything, with very little support from anyone. I am now trying to catch up financially but am afraid that all of my efforts will be futile as I will be required to take care of my mother.

She says she expects to be able to live on Social Security and the $70,000 her company contributed to her 403(b) over the years. I’ve been advised by friends that I have no legal obligations to provide for her. I certainly have social ones though. What are her options once she becomes too old to work and doesn’t have enough money to cover her expenses?

Answer: Your friends may be wrong about your legal obligations, because 29 states — including California — have what are called “filial responsibility” laws. These laws create a legal duty for adult children to support indigent parents.

Most states don’t enforce these laws currently, but that doesn’t mean they won’t in the future, said elder-law attorney Michael Amoruso, a past president of the New York chapter of the National Academy of Elder Law Attorneys. States struggling with money issues may be tempted to step up enforcement, he said.

According to Katherine Pearson of Penn State‘s Dickinson School of Law, who has studied such statutes, the states with filial-responsibility laws are Alaska, Arkansas, California, Connecticut, Delaware, Georgia, Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Montana, Nevada, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia and West Virginia.

Your mother isn’t indigent yet, but she may be soon if she thinks Social Security and a five-figure retirement account will sustain her.

The good news is that you may still have time to influence her decision-making, because she hasn’t quit work yet. You should tell her, gently, that you can’t afford to support her if she runs out of money, and suggest that together you consult a fee-only financial planner about her future.

The planner can review your mother’s financial situation and offer suggestions — which are likely to include delaying retirement and considering part-time work in retirement. The planner also can explain that her $70,000 nest egg will provide only about $200 a month if she withdraws 4% initially. Four percent is considered a sustainable withdrawal rate by many financial planners.

You can tell her that consulting a planner is a good idea for anyone considering retirement — since that’s quite true. If you like the planner, you can book a session for yourself and learn some concrete strategies for getting your own finances on track. This may require an attitude adjustment.

You’re still blaming your parents for your financial situation, but your father’s been dead for decades and you’ve been on your own since age 18. In other words, the statute of limitations on blaming your folks has long since expired.

Your finances are the result of the choices you’ve made, just as your mother’s situation reflects the choices she’s made. Let’s hope you both make better choices in the future.

Retirement advice you wouldn’t expect: stop saving (so much)

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Dear Liz: I’m in my late 60s and plan to retire in about two years. I have a pension that will pay close to my current take-home income. I also have about $500,000 in annuities and IRAs. These plus Social Security make retirement look good. But right now finances are tight. Should I continue to put $1,300 a month into my retirement plan or use that money for expenses and travel now — while we’re still relatively young?

Answer: You appear to be in the fortunate position of being able to try a “practice retirement.”

The term was created by mutual fund company T. Rowe Price after it discovered that people who have saved substantial amounts for retirement by age 60 may not have to save much more to have a comfortable retirement. Just putting off the day when they take Social Security and tap their retirement funds may be enough. That’s because Social Security benefits grow about 7% to 8% a year, plus inflation adjustments, for each year you delay starting your checks. Not starting retirement plan distributions also allows your nest egg to grow, and the delay shortens the length of retirement you’ll need to cover.

T. Rowe Price found that people who have saved four to eight times their annual income by their early 60s may be able to crank back on their retirement contributions. Instead, they could use the money to “practice retirement” by taking some trips and doing some of the other things they had planned for golden years while continuing to work.

The company recommends practice retirees continue to contribute enough to employer retirement plans to get any available match (it’s free money, after all), while delaying the start of Social Security to age 70 if possible.

T. Rowe Price researchers assumed that its practice retirees would live only on their savings and Social Security. The fact that you have such a generous pension means you may not need as much saved as they recommend. In any case, if this idea appeals to you, run it past a fee-only financial planner who can review your situation and ensure the plan is viable for you.

Divorced spousal benefits cause confusion

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Dear Liz: You’ve been writing about Social Security and how people can qualify for benefits based on a spouse’s or ex-spouse’s earnings record. Please add that given the parameters you already cite, a divorced spouse may remarry after the age of 60 and collect Social Security from the ex. However, if a person is collecting a public pension, any Social Security, whether one’s own or that of the former spouse, will be offset, possibly to the extent that one cannot collect anything from that former spouse. It is important to have all of the information.

Answer: It is indeed — but you’re incorrect about the availability of divorced spouse benefits after remarriage.

Only spouses or ex-spouses who are receiving survivors’ benefits may remarry after 60 without worrying about losing their checks. If the primary earner is still alive, the rules are different. Here’s what Social Security has to say on its website: “Generally, we cannot pay benefits if the divorced spouse remarries someone other than the former spouse, unless the latter marriage ends (whether by death, divorce or annulment), or the marriage is to a person entitled to certain types of Social Security auxiliary or survivor’s benefits.”

People who are eligible for pensions from the government or from a job not covered by Social Security should learn about the offsets that affect their benefit. The Social Security website has information about these offsets at http://www.ssa.gov/gpo-wep/. Information also is available by calling 1-800-772-1213.

Dragging debt? You’re not ready to retire

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Dear Liz: I just turned 65 and had planned to wait until 70 to retire. I love the actual work I do but my boss is very challenging. I’m starting to question whether working here another five years is really how I want to spend my days at this point in my life. I have about $175,000 in my 401(k), about $35,000 in an IRA and $1,500 in a single stock that’s not in a retirement account. I have two years left on my primary mortgage and a $17,000 balance on my second mortgage, plus I owe $3,500 on a line of credit and $2,000 on credit cards. I was starting to take money out of my IRA to pay down my mortgage early but the taxes at the end of the year were so much that I stopped that distribution. (I still owe $500 to the state tax agency.) I have also had trouble keeping up with my property taxes and owe about $3,500. I live in a 900-square-foot home which I love and live a fairly simple life. I’m wondering about cashing in the stock and some of my IRA to pay down my debt, then using my 401(k) for living expenses until I actually draw from Social Security. As I’m typing this out I’m thinking, “Are you crazy?” I’d love your thoughts.

Answer: One definition of insanity is doing the same thing over and over again, expecting different results.

Tapping your IRA incurred a big tax bill that you’ve yet to fully repay. You also lost all the future tax-deferred gains that money could have earned. Why would you consider doing that again?

You may long for retirement, but it’s pretty clear you aren’t ready. You don’t have a lot of savings, given how long retirement can last, and you’re dragging a lot of debt. The type of debt you have — second mortgages, credit lines, credit cards — is an indicator you’re regularly spending beyond your means. If you can’t live within your income now, you’ll have a terrible time when it drops in retirement.

So instead of bailing on work, take retirement for a test drive instead. Figure out how much you’d get from Social Security at your full retirement age next year (you can get an estimate at http://www.ssa.gov.) Add $700 a month to that figure, since that’s what you could withdraw from your current retirement account balances without too great a risk of running out of money. Once you figure out how to live on that amount, you can put the rest of your income toward paying off debt (starting with your overdue taxes), building up your retirement accounts and creating an emergency fund. It’s OK to cash out the stock to pay off debt, since it’s not in a retirement account, but make sure you set aside enough of the proceeds to cover the resulting tax bill.

Don’t forget to budget for medical expenses, including Medicare premiums and out-of-pocket costs. Fidelity estimates a typical couple retiring in 2013 should have $220,000 to pay out-of-pocket medical expenses that aren’t covered by Medicare. That doesn’t include long-term-care costs. Your costs may be lower, but you’ll want to budget conservatively. Spend some time with the Nolo Press book “Social Security, Medicare & Government Pensions: Get the Most out of Your Retirement & Medical Benefits.”

You’ll be ready to retire when you’re debt-free and able to live on your expected income without leaning on credit.

Reverse mortgage: what to consider

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Dear Liz: All my friends have said I should get a reverse mortgage to be able to live more comfortably and still stay in my house. I would think our greedy banking system would give you only 50% of value and have a high interest rate that would chew up the remaining value. What is your advice on the merits of this option?

Answer: A reverse mortgage program that lets you tap too much of your home equity wouldn’t be in business very long.

Reverse mortgages allow people 62 and older to borrow against the value of their homes without having to make payments on the debt. Instead, the amount they owe typically increases over time because interest is charged on the loan, and that adds up. Lenders get paid back when the owner moves out, sells the house or dies. If the house is worth less than the debt, the lender (or more often the insurer) suffers a loss.

Too-generous lending standards have already caused trouble for previous iterations of the Home Equity Conversion Mortgage, the federally insured option most often used by borrowers. Too many borrowers grabbed big lump sums up front, straining the program’s reserves and leaving the borrowers with few options if they ran into hard times later. Defaults rose as borrowers failed to pay their property taxes and insurance premiums as required.

The Federal Housing Administration, which insures HECMs, has tightened the rules so that borrowers can access less of their equity upfront. Fees also have increased.

How much you can borrow using a HECM depends on your age, the home’s value and current interest rates. Interest rates for lump-sum withdrawals are fixed, while those for lines of credit you can tap over time are variable.

You’ll certainly get a better (or at least less expensive) deal if you borrow 60% or less of your home’s value. The mortgage insurance premium for loans below that level is 0.5% of the home’s appraised worth under the new federal government rules that go into effect Monday. Those borrowing more than 60% face a premium equal to 2.5% of the home’s value. That’s in addition to a 1.25% annual mortgage insurance premium.

There’s no getting around the fact that these are expensive and complex loans. They’re usually not a great choice for people who have other assets to tap. They also can prove a land mine for people who drain their home equity too early and wind up with no resources later in life. On the other hand, they can provide a more comfortable retirement for those who would otherwise be strapped for cash, particularly if the borrowers opt for a steady stream of monthly payments rather than the upfront lump sum.

If you are considering a reverse mortgage, you should talk to a fee-only financial planner who is familiar with the program and who can review your other alternatives.