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Q&A: Keeping an eye on your financial planner

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Dear Liz: I’m a fee-only financial planner with a quick comment regarding the investor who complained about a financial advisor who ran up a huge capital gains tax bill. I’ll bet that the vast majority of the gains came from selling the person’s initial investments to re-position them according to the advisor’s recommendations. That seems most likely given the gains seemed to be huge (implying the current investments had been in place for a long time) and the client’s balance didn’t seem to grow much at the same time. Of course, that’s not necessarily an excuse — accounts with unrealized capital gains need to be handled very carefully by an advisor. And you are dead-on with the main point of your response: Giving an advisor discretionary trading status is risky. I would add to that the client doesn’t seem to know the advisor’s investment strategy, so that’s another disconnect. I’m glad that fee-only gets a lot of positive comments in the financial press, but you’re correct that you still need to move with caution.

Answer: Advisors are in an unenviable position when they’re trying to fix a portfolio that hasn’t been properly diversified over the years. Big gains build up because the investor doesn’t want to sell and pay capital gains taxes. By refusing to sell some winners occasionally, though, those winners can comprise an ever larger share of the portfolio, making it more and more risky. A concentrated portfolio can fall more in a bad market and gain less in a good one than a portfolio that’s properly diversified.

So the advisor may have been doing what needed to be done, but the fact that the investor didn’t understand what the advisor was doing or why indicates a breakdown in communication, at the very least. No one should give an advisor blanket permission to trade an account without understanding the advisor’s strategy and being willing to monitor how it’s being carried out.

Q&A: Healthcare costs and retirement

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Dear Liz: You usually don’t give me such a laugh, but today’s letter was from someone who’s 41 and her husband is 51. They now have $800,000 saved and want to retire early. You told them they might do better leaving the country since it will be so bad for them with health insurance.

My husband was a teacher in Los Angeles, with no Social Security. We have $60,000 in the bank and together we bring in $3,400 a month. We have Kaiser insurance that totals $2,400 a year for both. We have a house, a car, not so much money, but are happy. He’s 82, I’m 79. What planet do you live on? I guess people who have so much money can’t imagine people like us.

Answer: You’re living on Planet Medicare, so perhaps you can’t imagine what people are facing who don’t have access to guaranteed medical coverage.

Currently, those without employer-provided insurance can buy coverage on Affordable Care Act exchanges, but that option may soon be going away. Congress ended the ACA’s individual mandate, which requires most people to have insurance, so costs are expected to rise sharply.

In addition, the future of so-called “guaranteed issue” is in doubt. The ACA currently requires health insurers to accept people with preexisting conditions and limits how much people can be charged, something known as “community rating.” The U.S. Department of Justice recently announced it would not defend those provisions against a lawsuit filed by several states.

When health insurance is unavailable or unaffordable, it doesn’t matter if you have $1 million or more in savings. A hefty retirement fund can disappear in a few months without coverage.

Q&A: Giving a gift with a built-in loss

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Dear Liz: You recently answered a question about the tax implications of gifting stock to children. You mentioned that if the stock had lost value since its purchase, the children could use the loss to offset capital gains or, in the absence of gains, up to $3,000 a year of income, with the ability to carry over that loss to subsequent years until it’s used up.

But if a stock has a built-in loss, why not sell it, realize the loss and give the kids the cash? That way, the loss is sure to be recognized unless the donor dies before fully utilizing the capital loss or the carryover. If the child really wants that particular stock, he or she can use the cash to buy it. The children would have to be mindful of the wash-sale rules that prohibit deducting a loss if a related party buys the same stock, but waiting 31 days would be enough to avoid that.

In my view, there’s rarely a good reason to gift a stock (or most other assets) that has a built-in loss.

Answer: Exactly. Selling the asset and taking the tax benefit usually makes more sense than transferring the shares. The loss essentially evaporates, because the assets get a new value for tax purposes when transferred.

Selling losing stocks is certainly better than bequeathing them to your heirs. The loss essentially evaporates at your death, because the assets get a new value for tax purposes, so no one gets the potential tax break.

Q&A: Volunteering can fill a void for unhappy retirees

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Dear Liz: I was very disappointed in your response to the reader who was unable to cope with unplanned retirement. The reader has sufficient assets but was unable to manage the loss of purpose. This is common, and maintaining purpose is one of the most important components of a healthy retirement.

You did not mention volunteer work as an option, and that is a shame. There are hundreds of organizations that need volunteers of all skill levels, and they come in every shape and size you can imagine.

There are social services, cultural, civic, social justice, child development, healthcare and senior organizations that exist only because of their volunteers. You can volunteer long term or short term, or even on occasion.

I have just spent the last five months running a series of events connecting retirees to organizations who need volunteers. My own retirement will be completely focused on doing all of the volunteer work I did not have time for while working.

Retirement is an excellent time to make your contribution to the community that helped you along the way.

Answer: Several people wrote in to suggest volunteering was the answer to the reader’s unhappiness with an involuntary retirement. Volunteering may indeed fill her time, but her point was that she found fulfillment in paid work. She rightly warned others that they need to think through what they might lose by retiring too early.

People may get more than paychecks for their labor. They can get recognition, respect, a feeling of achievement and a sense of mission. What they do may be a significant part of who they are — perhaps far more than they realize.

If they give that up without sufficient thought and planning, they may feel as if they’ve gone from a “somebody” to a “nobody” overnight. That can be a terribly hard adjustment that volunteering may not alleviate. Here’s another perspective:

Dear Liz: Your recent writing about considering when to retire and the dangers of a too-early retirement rings a big bell.

I am a psychotherapist who has worked with a number of people who were either considering retirement or who took early retirement. For those who took early retirement, the emotional problems associated with the large amount of both time and space in their lives after retirement, which they never fully considered, have been very surprising and upsetting for them.

To those working every day at jobs they don’t love, retirement seems like a great thing. But the reality of an open, unstructured life can present an array of problems — financial, relational and emotional — for the newly retired.

People should think about this decision carefully because it is hard to re-create a steady job. Or, even better, have a long hard conversation about it with someone close to you or a specialist like me.

Answer: Excellent advice. In addition to traditional therapists, there is a growing field of professionals who combine financial advice with psychological counseling. People can get referrals from the Financial Therapy Assn. at www.financialtherapyassociation.org.

Q&A: Should grandma sue over the student loan she co-signed?

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Dear Liz: You recently answered a letter from a grandmother who co-signed a student loan for a granddaughter who isn’t paying the debt. Although you did not suggest it, a very viable option would be for the grandmother to contact an attorney and sue her daughter and her granddaughter for the debt owed.

It doesn’t appear that they care for the grandmother anyway, so why feel bad about holding their feet to the fire? The grandmother may not have a legal leg to stand on with the daughter, but surely the granddaughter received the benefit of the loan and should ante up.

Answer: Suing a family member is a pretty drastic step that many people are reluctant to consider. If the grandmother is in fact “judgment proof” — if creditors who sue her wouldn’t be allowed to garnish her income or seize her property — then the lender might start focusing its collection actions on the granddaughter. The grandmother wouldn’t have to go to the expense of suing the young woman or trying to collect on a judgment.

Either way, the bankruptcy attorney I suggested she consult to help determine if she’s judgment proof also would be able to advise her about filing such a lawsuit.

To reiterate, student loans typically can’t be discharged in bankruptcy, but bankruptcy attorneys understand the credit laws of their states and can help people assess how vulnerable they are to lawsuits and other collection actions.

Q&A: Hard to predict tax rates

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Dear Liz: I read your column answer to the 40-year-old who asked about regular 401(k) versus Roth 401(k) contributions. Obviously, the answer has more moving parts than you have space for. However, using before-tax dollars for the 401(k) gives him a small break now, but when he hits 70 1/2, those dollars will impact the taxability of his Social Security benefits. He could contribute to the 401(k) with after-tax dollars, get the company match and avoid that impact 30 years in the future, right?

Answer: The “right” answer requires knowing what tax rates will be 30 years in the future, at a time when no one is entirely sure what tax rates will be next year. Which means the smart approach is to hedge one’s bets. Given the original reader’s current financial situation, that translates into focusing most contributions into the pretax 401(k) but also making contributions to the Roth. That will give him some flexibility to control his tax bill in retirement without going “all in” on the bet that his tax rate then will be higher than it is now.