Ask Liz Weston

Get smart with your money

Estate Planning

Q&A: Maximizing retirement benefits

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Dear Liz: I don’t know where to turn. My husband is 76. He has a federal government pension and collects Social Security but he has only a $17,000 life insurance policy. We still have a $229,000 mortgage and no savings other than my small 401(k). I am 59 and also a federal worker. Do you have any suggestions or guidance for me? Is there such a thing as an insurance policy that could pay off the mortgage if he passes before me?

Answer: Buying a life insurance policy on your husband that would pay off your mortgage isn’t necessarily impossible, but it would be expensive and might not be the best use of your funds. You can explore that option, of course, but you also should research your own retirement resources and what’s likely to remain after he’s gone.

Will your husband’s pension make payments to his survivor or will it end when he dies? How much will your own federal pension pay you when you retire? How much will Social Security pay you, and how does that compare with your survivor’s benefit (which is essentially equal to what your husband is receiving when he dies)? What are your options for maximizing those benefits?

You also need to know if your Social Security benefits could be reduced because of your public pensions. Some federal employees and employees of state or local governments receive pensions based on earnings that were not subject to Social Security taxes. When that’s the case, their benefits could be reduced by the Windfall Elimination Provision or the Government Pension Offset. Most federal employees hired after 1983 are covered by Social Security, but just in case you should check out the information at http://www.ssa.gov/gpo-wep/.

Once you have an idea of your income as a widow, you can compare that with your expected expenses and see whether continuing to pay your mortgage will pose a burden. If that’s the case, you might consider downsizing now to a place you could afford to buy with cash or a much smaller mortgage. Reducing your expenses also could help you build up that 401(k), which will help provide you with a more comfortable retirement.

Establishing a relationship with a fee-only planner now will help you prepare for the future and give you someone to turn to for financial advice should you be left on your own.

Q&A: Inheritance vs Reality

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Dear Liz: I have really bad credit. I always have because I have never really had any money. So now I am inheriting a lot of property and some cash. Most of the property is rental properties that bring in income. There are no mortgages on them. I may want to sell one or two of them and buy a four- or five-unit apartment building so I can live in one and rent the others out. How do I do that? Unfortunately, it isn’t happening as quickly as it should since one of my siblings thinks it is all hers. So I have to go through litigation first.

Answer: Let’s start with some reality checks.

The kind of litigation you’re talking about can get expensive fast and eat into the estate’s assets. If your sister happens to be the executor, she may be able to have the estate pay for her defense. You’ll need to come up with the money to hire your own attorney to advise you, but often in these cases a settlement makes a lot more sense than a family war.

The next reality check has to do with your bad credit. Yes, it’s harder to pay your bills on a low income, but people do it. In fact, income is not even a factor in credit scoring formulas, since how much money you make doesn’t predict whether you’ll pay your debts. If you have bad credit, it’s because you borrowed money that you didn’t pay back on time, not because you “never really had any money.”

What will change if you get your hands on a substantial amount of money is that your creditors will renew their efforts to get paid. You’ll probably need some more legal advice to deal with those efforts and to avoid getting sued.

What probably won’t change, without some effort, is your poor money management skills. If you don’t improve, you’ll probably blow right through your inheritance. So you should add to your list of advisors a fee-only planner who can help you with budgeting, rebuilding your credit, investing and retirement planning. Seeking good advice and following it are the key to making money last. You can get referrals to fee-only planners from the Garrett Planning Network, http://www.garrettplanningnetwork.com. Another option is the National Assn. of Personal Financial Advisors at http://www.napfa.org.

Thursday’s need-to-know money news

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download (1)Today’s top story: Are you behind the financial times? Also in the news: How to better organize your bills, talking with your family about inheritance, and learning the five parts of your credit score.

6 Signs You’re Behind the Financial Times
Still writing checks?

4 Ways to Better Organize Your Bills
And kiss late fees goodbye in the process.

On Inheritance, UBS Urges Families to Break the Silence
The importance of difficult conversations.

Everyone Should Know the 5 Parts of a Credit Score; Do You?
Let’s find out.

5 Ways to Make Peace With Money
What to do when money is your nemesis.

Q&A: When to start Social Security when you don’t need it

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Dear Liz: Most of the questions you answer about Social Security come from people who don’t have a lot of money saved. I agree with your advice that those people should delay starting benefits. That way their Social Security checks, which will be the bulk of their income in retirement, will be as large as possible. But what about those of us who won’t need the money? I will receive a good pension and thanks to real estate investments, my retirement income will exceed my current income should I retire at age 62. That means I will never have to touch my capital. I do not have any other debt and am fully insured.

My initial thought is that I should take Social Security as soon as I’m eligible and use it while I’m in good health for travel and other activities. A friend who is in a similar situation says to wait and enjoy the emotional safety that if the need arises, I can turn on the Social Security tap later and let some more money flow. If you don’t need the money now or later, but could have more fun earlier, should you take Social Security sooner?

Answer: The less you’ll need Social Security, the less it matters when you start it.

Starting benefits early locks you into lower payments for life and will result in significantly smaller lifetime benefits for most people. That’s in part because Social Security hasn’t adjusted its payment formulas even as life expectancies have expanded, so most people will live beyond the “break-even” point where delayed benefits exceed the amounts they could have received had they started earlier. Delaying benefits is particularly important for married people, since one partner is likely to outlive the other and will have to get by on a single check. Making sure that check is as large as possible will help make the surviving spouse’s final years more comfortable.

But all that assumes that you, like most people, would receive half or more of your retirement income from Social Security. If your Social Security is truly icing on the cake — you don’t need the money now, you (and your spouse) are unlikely to need it in the future, and you don’t care about maximizing your lifetime benefits — then start it whenever you want.

Tuesday’s need-to-know money news

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Zemanta Related Posts ThumbnailToday’s top story: Why your digital assets should be part of your estate planning. Also in the news: Three reasons to consolidate your 401(k) into an IRA, what the proposed AT&T/DirecTV deal means for you, and twelve things you should always try to negotiate.

Estate Planning 101: Don’t Forget About Your Digital Assets
Your social media accounts and iTunes purchases need to be protected.

Three Big Reasons to Consolidate Your 401(k) Into An IRA
Reducing fees is a big one.

What AT&T, DirecTV deal means for you
Our choices in entertainment providers are becoming increasingly slim.

12 Things You Should Always Negotiate On
Negotiating may be awkward, but it can save you money.

Should you have to pass a test to get a loan?
Would proving financial literacy reduce the number of defaults?

Q&A: Paying off home loan with a windfall

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Dear Liz: I’m 65 and my wife is 62. We recently sold a business for over $900,000 and will net somewhere between $550,000 and $600,000. Should we use the proceeds to pay off our mortgage? Our home is worth about $1.5 million with a mortgage of $390,000 at 3.586%. We contribute an extra $200 per month to reduce the principal. We have no other debt. Our savings, retirement and brokerage accounts total $1.2 million. My wife receives a pension of $483 a month and works part time as a substitute teacher. I plan to continue working until age 70 with a salary of about $170,000 per year. On retirement we should receive about $4,400 per month in Social Security benefits.

Answer: Many people feel more comfortable having their mortgages paid off by the time they reach retirement age — even when the interest rates on the loans are so low they’d almost certainly get better returns elsewhere. (The after-tax cost of your mortgage is likely less than the longtime inflation rate of about 3%.) Not having a mortgage payment can substantially reduce your monthly expenses, which means you have to take less from your retirement accounts. Such withdrawals often trigger taxes, so you essentially save twice.

Other people feel perfectly comfortable carrying a mortgage into retirement. They’re happy to take advantage of extraordinarily cheap interest rates and keep themselves more liquid by deploying their savings elsewhere. And many people have to carry debt because they can’t pay it off before they retire, or paying off the mortgage would eat up too much of their available funds.

Because you do have choices, discuss them with a fee-only financial planner. If you pay off the mortgage and invest what’s left, you could draw about $50,000 from your retirement funds the first year without a huge risk of running out of money. That plus your Social Security and your wife’s pension may give you enough to live on. If not, you may want to invest your windfall and continue paying the mortgage down over time.