April 6, 2015 By

Q&A: Early withdrawal penalties on CDs

Dear Liz: You told a reader to be suspicious of a bank’s offer to waive early withdrawal penalties on a certificate of deposit. But several credit unions allow early withdrawals from five-year CDs after the account holder turns 59 1/2. These credit unions will even allow you to get higher-interest CDs at other credit unions with no penalty after 59 1/2 . My husband and I and sister did this for many years until just a few years ago. I even do Roth conversions every year and take money from five-year CDs with no penalty and go to the place with the highest interest rate. There are many rewards and unexpected privileges at credit unions. When my husband passed and I disclaimed his traditional IRAs, the children were allowed to keep the 6% interest on those CDs until they matured, even after they were changed to inherited IRAs.

Answer: Credit unions, which are owned by their members, often have better rates and terms than banks, although some banks also offer to waive early withdrawal penalties after 591/2 on certain CDs.

But no one should rely on a verbal assurance that a fee will be waived. The offer to waive the fee should be in writing and kept with other financial documentation.

Filed Under: Banking, Q&A Tagged With: , ,
February 23, 2015 By

Q&A: Financial advice and family

Dear Liz: Regarding the brother who has the financially irresponsible sisters, in general I agree with you about not pestering people who don’t want advice. But with family, it’s different. It is quite obvious to me and other readers that this man is concerned about his sisters coming to him later in life even if he didn’t state that in his letter. Telling them he won’t help when they come to him later in life (and they will) isn’t realistic. Maybe his continual pestering will finally make them come to their senses.

Answer: If you’ve had any problems in your own life — you needed to lose a few pounds, say, or stop smoking — think about how you would have received the “continual pestering” of a sibling on the issue.

Announcing to his sisters that he won’t help them financially before they ask may have an unintended side effect. If Mom has any money left when she dies, she may well allocate more of it to the sisters under the assumption that they’ll “need” it more because their mean old brother won’t help them.

Filed Under: Q&A Tagged With: , ,
February 23, 2015 By

Q&A: Bonus taxing

Dear Liz: You recently answered a question from someone who wondered whether to pay off tax debt or credit cards with a $10,000 bonus. You asked why the person planned to put only about half the bonus toward debt instead of all of it. I think I know the answer. A bonus is considered taxable income, so someone in a high tax bracket likely would net only about half of the gross amount.

Answer: That’s a good point. Many people fail to factor in the tax bite when they get a windfall or cash in a retirement plan. The more money you make, the more painful that bite can be.

Filed Under: Q&A, Taxes Tagged With: , ,
February 9, 2015 By

Q&A: Unsolicited financial advice

Dear Liz: Your answer to the financially savvy brother whose advice is lost on his sisters was a bit harsh and shortsighted, so my guess is that you may not know anyone who has siblings who will continue for the next few decades to need help. It is hard to deny a sibling help while enjoying the benefits of prudent saving. It is harder to watch a sibling suffer, even if they should have avoided it. Seems to me completely different from giving advice about child rearing, which I might add is sometimes simply a statement of the obvious and one that should not even have to be mentioned, like don’t let your kids scream in public. This young man is almost certainly going to live with either guilt over not supporting his sisters when the mother dies or the frustration of having to give up hard-earned funds to avoid the guilt. You should have said he needs to write them a letter citing the guidance given and making it clear not to come to him when they get in trouble.

Answer: Thank you for providing a perfect example of why people find unsolicited advice so annoying.

The brother asked what he could say to his sisters to make them more financially responsible and to his mother to make her realize she should stop supporting them. The answer, of course, is nothing. There are no words that can make other people change unless they want to change. Since his family has made clear they’re not interested in his advice, continuing to offer it would be pointless.

The brother didn’t express concern that he would wind up supporting either his mother or his sisters. Even if he has such concerns, writing such a letter would be churlish, at best. If he’s asked for help, he can make his position known then.

Filed Under: Q&A Tagged With: , ,
February 2, 2015 By

Q&A: Brokerage follow-up

Dear Liz: You recently explained the insurance limits for brokerage accounts covered by the Securities Investor Protection Corp. I recently retired from the brokerage industry and wanted to add that many firms have additional insurance coverage beyond the SIPC limits.

Answer: Good point. Brokerages often purchase additional coverage from private insurers on top of what’s provided by the SIPC. To find out how much coverage may be available, ask your brokerage or conduct a search with the brokerage name and “how are my accounts protected” as a search phrase.

Filed Under: Investing, Q&A Tagged With: , , ,
December 22, 2014 By

Q&A: Windfall Elimination Provision followup

Dear Liz: In a recent column, I believe you got one aspect of Social Security’s Windfall Elimination Provision wrong. If you’re affected by WEP, in no case can you get more than 90% of your Social Security benefit. It is a sliding scale. With 20 years of earnings under Social Security, you get 40%. It goes up 5% per year to a maximum of 90% at 30 years. I worked 28 years as a paramedic and firefighter, most of the time for agencies that offered a pension instead of paying into Social Security. I also have 22 years of substantial earnings that were covered by Social Security and plan on working eight to 10 more years to get to 90%.

Answer: It’s easy to get confused about how Social Security figures benefits, but rest assured: If you have 30 years of substantial earnings from jobs that paid into Social Security, you will get 100% of your Social Security benefit even if you have a pension from a job that didn’t pay into Social Security.

Here’s what you need to know. Social Security is designed to replace more income for lower-wage workers, because higher-wage workers presumably find it easier to save for retirement. People who get pensions from employers who don’t pay into Social Security, but who also had jobs from employers that did, can look to the Social Security system as though they were long-term low-wage workers even when they’re not. Without the Windfall Elimination Provision, they could get a bigger Social Security check than they would have earned had they paid into the system all along.

To compute our benefits, Social Security separates our average earnings into three amounts and multiplies those amounts by different factors. For a typical worker who turns 62 this year, Social Security would multiply the first $816 of average monthly earnings by 90%, the next $4,101 by 32% and the remainder by 15%.

Those affected by WEP have a different formula, but it affects only that first part of their average earnings — the part where everyone else gets credited for 90%. The WEP formula is, as you note, on a sliding scale. Someone with 20 or fewer years of substantial earnings from jobs that paid into Social Security would see the first $816 multiplied by 40%. Someone with 28 years, by contrast, would have the first $816 multiplied by 80%. Someone with 30 years or more would get the full 90%.

Social Security’s pamphlet on WEP lays this out, and notes that the Windfall Elimination Provision does not apply to anyone with 30 or more years of substantial earnings from jobs that paid into Social Security. You can read more about it here: http://www.ssa.gov/pubs/EN-05-10045.pdf.

Filed Under: Estate planning, Q&A, Retirement Tagged With: , ,
May 12, 2014 By

Q&A: An Update

Dear Liz: I think you were way too hard on the young man who said his 30-year-old girlfriend’s lack of retirement savings was a potential deal breaker. You told him to get off his high horse. He was just being prudent.

Answer: It would be prudent to regard massive debt, alcoholism or drug use as deal breakers for a relationship. Elevating the young woman’s lack of retirement savings to this level is just over the top. But let’s hear what the young man himself had to say:

Dear Liz: I want to say thank you for taking the time to write on my question. I was able to find a few charts online and show her [the power of compounded returns]. She got excited about it and is now putting in to get the company match (5%).

Thank you very much for putting me in my place. I did not mean to come across as if I was better. I have been very lucky to have been able to save and be taught about compounding at an early age.

Answer: One of the potential hazards of being good with money is arrogance. We can become convinced that we know better and that other people should do things our way. It takes some humility to understand that not everyone has had the advantages we’ve had or been able to take in the information as we’ve done. Understanding that makes it easier to find compromises in a relationship that work for both parties.
Good luck with your relationship. She sounds like a keeper.

Filed Under: Investing, Q&A, Retirement, Saving Money Tagged With: , , ,