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Q&A: Cerebral slide can hit your wallet

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Dear Liz: As a practicing attorney, age 72, I take exception to your advice to the grandmother who complained about her husband co-signing for his granddaughter’s deadbeat boyfriend’s auto loan. You said, “He is showing signs of cognitive impairment.” She never gave his age. Even if he was past 70, an impairment may or may not be true without knowing more facts. I know people in their 80s and beyond who are careful and manage their money very well. In my 30 years of practice, I have seen many cases where relatives and friends co-sign for a family member or friend, often for an auto loan. This practice crosses all age and demographic lines. Each person has a reason for co-signing (or lending money), but the most common thread in family members is: “It’s really hard to say no to a person I love.”

Answer: You might want to take another look at that column. The grandfather co-signed a loan not for a relative or a friend, but for a young man whose last name he didn’t know — and he did so without consulting his wife.

Not everyone turns into a financial fool in his later years, but our cognitive abilities do decline with age, starting in our 20s. Until our 50s, those losses in cognitive function are offset by increased experience and knowledge. After that, our growing wisdom isn’t enough to offset our cerebral slide.

If you think you’re cognitively as sharp as you were in your youth, then you may be the exception — or you may be deluded.

Researchers who tested people in their 80s found that “large declines in cognition and financial literacy have little effect on an elderly individual’s confidence in their financial knowledge, and essentially no effect on their confidence in managing their finances,” according to a paper for the Center for Retirement Research.

That’s why it’s important to put protections into place to keep yourself from making bad financial choices. You can start by simplifying your finances and consolidating accounts to make them easier to monitor. You may want to develop a relationship with a trusted financial advisor, one with a fiduciary duty to put your interests first, so that you can seek good counsel before making financial moves. Also, many people as they age give a trusted child or friend access to their accounts so they can be watched for suspicious transactions.

Q&A: More on Saving for Retirement

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Dear Liz: Here is another take on your response to the reader who questioned whether retirement calculators were a hoax that promoted excessive savings rates. You mentioned that current retirees had enough pensions, Social Security and savings to replace nearly 100% of their working income, while younger people likely would have only enough to replace 50%. You closed your advice by asking if the letter writer would be comfortable living on 50% of that person’s income. For a non-saver, that is a fair question. But for a saver, it isn’t an accurate comparison.

If one is presently saving, say, 10%, then that person is already living on 90% of current income. If saving 15%, then that person is already living on 85%. When you analyze the expected impact of having the compounded savings at retirement, the true “step down” in income is really the difference between the current 90% or 85% figure and what you will have with Social Security, part-time job income, pension (if you work for the government) and savings. The gap becomes much more manageable, because you already are used to living on 10% to 15% less than your current income.

The point? Savers are already accustomed to living on less — in some cases, significantly less — than current income. Between the already lowered current disposable income and the benefit from the accumulated savings and investments, the “step down” gap is made manageable. Saving helps on both ends.

Answer: That’s an excellent point. Taxes are another factor to consider. Working people pay nearly 8% of their wages in Social Security and Medicare taxes, an expense that disappears when work ends. Income tax brackets often drop in retirement as well.

Still, there are good reasons to shoot for a higher replacement rate than you think you may need. Investment markets don’t always cooperate and give you the returns you expect. Inflation can kick up and erode the value of what you’ve saved. Careers can be disrupted, leading to lower wages or an earlier retirement than you planned. People who have “oversaved” will be in a better position to deal with these setbacks than those who save only enough to scrape by.

Q&A: Helping a mentally ill family member

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Dear Liz: I want to offer some bit of advice to the woman with the mentally ill, homeless son. She didn’t say which state he lives in, and I’m guessing it’s not California. There are so many wonderful programs here. I did help a woman my age (late 40s at that time) get off the street by convincing her to let me drive her to PATH (People Assisting the Homeless). It took a few tries but she finally got into my car. PATH took over after that. She has been on Supplemental Security Income for years and lives in a low-income housing tax credit building. Tell the mother that there are social workers dedicated just to representing people that are both homeless and mentally ill in all 50 states. There is also subsidized housing available in all 50 states. She just needs to put her worry into action to find the right social worker or organization. They have the know-how to proceed and help her son. I’m not saying that this will be easy, but she will feel better if she persists in trying to find the right resources for her son and it just might work.

Answer: Thank you for suggesting PATH as a possible solution for homeless people in Southern California. The mother thought there was no help available in the state where her son lives, but every state has at least a few programs for the mentally ill. Getting low-income housing is another matter because many programs have far more applicants than availability.

The mother can certainly make inquiries and suggest possible solutions for her son. But she still needs to set boundaries in how much time and money she dedicates to his problems. She is elderly, on a limited income and several states away from her son. She deserves a little peace at the end of her life, which may mean making peace with the idea that his fate is not in her hands.

Q&A: Special needs trust

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Dear Liz: Your suggestions about resources to help a parent with an emotionally ill adult child were very helpful. But from a financial standpoint, don’t you think you should have discussed a special needs trust for the time when the parent dies? Whatever assets she has, most likely her home, should be put in this trust to protect her son’s eligibility for government benefits (Supplemental Security Income and Medicaid, for example). An inheritance could jeopardize his eligibility for these programs. It will be overseen by a responsible party and can never be taken as part of a potential lawsuit. This is something I recommend to my clients as a geriatric social worker.

Answer: Thank you for the suggestion. Given the brevity of this column, it’s impossible to cover all potential angles to every situation. In this case, there was no indication that the son was receiving government benefits or that his mother had sufficient assets to be concerned about an inheritance.

That wouldn’t be unusual. One study for the National Bureau of Economic Research found that 46% of Americans have less than $10,000 in financial assets when they die. Many single-person households (57%) have no home equity.

Still, even a small inheritance can disqualify someone from SSI, and losing access to Medicaid health coverage would be catastrophic for people who depend on the program. So parents who have both an heir who needs these programs and assets that might outlive them should discuss a special needs trust with an estate-planning attorney.

Q&A: Early withdrawal penalties on CDs

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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.

Q&A: Financial advice and family

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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.