Q&A: Refinancing in your golden years

Dear Liz: I just wanted to comment on a recent question about refinancing a mortgage in retirement. The writer wrote: “… at 67 and 72 years old, it’s unlikely that both of us will survive for another 15 years to pay off this loan.” This seems an old way of thinking about age. The obituaries in my paper are full of people who have lived into their 90s and even past 100 years old!

Answer: Good point. People often misjudge life expectancies, which over time have lengthened considerably. At 67, a typical female could expect to live nearly 19 more years, according to Social Security’s life expectancy tables, while a male at 72 has a 13-year life expectancy. People with higher incomes, good health and good habits (nonsmokers, for example) could add many years to those estimates.

Q&A: Medicare and Social Security

Dear Liz: If my wife and I wait until we are 70 to collect Social Security but retired at our full retirement age of 66 and 2 months, would we still be able to get Medicare for those 3 years and 10 months before we reach 70?

Answer: You’re eligible for Medicare at age 65, which is typically when you should sign up. Delaying can incur penalties you’d have to pay for the rest of your life.

People receiving Social Security benefits at 65 are signed up automatically for Part A (hospital coverage) and Part B (which pays for doctor visits), with the Part B premiums deducted from their benefits. If you’re not already receiving Social Security, you’ll need to contact the Social Security office, which manages Medicare enrollment, to sign up and pay the Part B premiums.

Q&A: Saving after retirement

Dear Liz: I’m retired, age 67. I have a SEP that requires me to pay taxes on any withdrawals. I also have standard savings and checking accounts. The SEP has been earning 13% to 14% annually, and of course the savings account earns very little. Where does it make sense for me to place savings each month — in the bank or the SEP?

Answer:
Well, not the SEP. A SEP is a simplified employee pension plan that only allowed contributions as long as you were employed by the company that offered it.

Besides, the reason for the difference in returns is what’s in the account, not the account itself. The SEP probably is invested in stocks, while the savings account is just cash earning the current low interest rates. On the other hand, the money in your savings account is FDIC insured so that you won’t lose your principal.

Money in the stock market is at risk because stocks don’t always rise in value. (Over time, a diversified mix of stocks typically will earn better returns than other types of investments, but you can’t count on the money being there if you need it in a hurry.)

If you’re retired and don’t have earned income, you can’t put money into other retirement accounts such as IRAs or Roth IRAs. You can, however, open a brokerage account and invest money through that. You’ll still pay taxes on any withdrawals, but if you hold the investments for at least a year you can benefit from lower capital gains tax rates.

Q&A: Your accounts are likely to outlive you. How to safely store that information

Dear Liz: I’m attempting to become as paperless as possible while also organizing all of our financial information into one place so if one of us dies, the other (or our child) will be able to access everything in one concise source. My current system is downloading all bank and investment accounts and medical payments onto memory sticks. One is kept in the safe deposit box, the other hidden. Is there a better, safer system out there that would not involve a third party?

Answer:
If you’re unwilling to use a secure online storage site, then your system is a reasonable if somewhat laborious option. You should be sure, however, that your trusted person will have access to your computer for the most up-to-date information. The person also probably will need access to your phone, since identity authentication codes are often sent by text.

You’ll need to record passwords for your devices and consider creating a list of logins and passwords for all the sites you regularly use. If you use a password manager, you often can set up emergency access for trusted people.

Going paperless is usually the most convenient, safe and ecologically friendly option, but your trusted person won’t be able to rummage through your desk to find clues about where your assets are, what bills need to be paid and what services should be shut down. Otherwise, as one friend put it, your frequent flier miles could disappear while your Netflix subscription continues indefinitely.

If you want a system that doesn’t involve frequent trips to your safe deposit box, consider sites such as Everplans that allow you to store important information and to name people who can be given access if you’re incapacitated or dead. Your accountant or attorney may be able to recommend other sites that perform similar functions.

Q&A: Who inherits when estranged spouse dies?

Dear Liz: I lost my husband a year ago. We had been married since 1997 but separated 10 years ago. Does the house belong to me or my 22-year-old son? Also, how do I find out if he had life insurance without being charged a lot? His girlfriend said he did.

Answer: The two most important factors here are whether you were legally separated and whether your husband made a will. If you were legally separated, there may have been an agreement approved by a judge that could affect how assets are divided. If the separation was informal, then the law typically treats you as if you were still married.

If your husband had a will, that would dictate who gets what. If he died without a will, then state law determines how to divide what’s left after his final expenses and creditors have been paid. When someone is married and has children with the current spouse, typically the entire estate would go to that spouse. Otherwise, half usually goes to the spouse and the rest is split among other heirs, such as children from another union.

This assumes the house wasn’t jointly owned with someone else, such as your son or the girlfriend. Property held in joint tenancy, tenancy by the entirety, or community property with right of survivorship will automatically pass to the other owner at death.

“Consulting with an attorney or trusted CPA, checking title to the real property and reviewing mortgage statements should be done to help determine their rights and how to proceed,” said estate planning attorney Jennifer Sawday of Long Beach.

If you would be the beneficiary and probate hasn’t been started, consider hiring a probate attorney to put that process in motion. The person settling his estate can look through his bills and other paperwork for evidence of life insurance, or you can try the life insurance policy locator maintained by the National Assn. of Insurance Commissioners.

Q&A: Here’s a retirement dilemma: Pay off the house first or refinance?

Dear Liz: My husband and I are retired, with enough income from our pensions and Social Security to cover our modest needs, plus additional money in retirement accounts. We have owned our home for 35 years but refinanced several times and still have 15 years to go on a 20-year mortgage.

With rates so low, we were contemplating refinancing to a 15-year mortgage just for the overall savings on interest, but we started thinking about the fact that, at 67 and 72 years old, it’s unlikely that both of us will survive for another 15 years to pay off this loan. Since that’s the case, we’re now thinking about taking out a 30-year mortgage, with monthly payments $700 or $800 less than what we currently pay.

Our house is worth around 10 times what we owe on it, and if we had to move to assisted living we could rent it out at a profit, even with a mortgage. We also each have a life insurance policy sufficient to pay off the balance on the mortgage should one of us predecease the other.

I know that conventional wisdom says that we should pay off our mortgage as quickly as we can. But an extra $700 or $800 a month would come in handy! Am I missing something? Is this a bad idea?

Answer: Answer: Not necessarily.

Most people would be smart to have their homes paid off by the time they retire, especially if they won’t have enough guaranteed income from pensions and Social Security to cover their basic living expenses. Paying debt in retirement could mean drawing down their retirement savings too quickly, putting them at greater risk of ultimately running short of money.

Once people are in retirement, though, they shouldn’t necessarily rush to pay off a mortgage. Doing so could leave them cash poor.

You are in an especially fortunate position. Your guaranteed income covers your expenses, including your current mortgage, and you have a way to pay off the loan when that income drops at the first death. (The survivor will get the larger of the two Social Security checks. What happens with the pension depends on which option you chose — it may drop or disappear or continue as before.) Even with a mortgage, you have a large amount of equity that can be tapped if necessary.

So refinancing to a longer loan could make a lot of sense. To know for sure, though, you should run the idea past a fee-only, fiduciary financial planner who can review your situation and provide comprehensive advice.

Q&A: Lowering credit limits

Dear Liz: You recently answered a question about a woman who asked her credit card issuer to lower her credit limits. While it’s true that lowering your credit limit on a card can have a negative effect on your credit scores, it may be needed to leave credit room for new cards, as your total credit across cards vs. your annual income is considered. And of course your credit score won’t suffer when balances are paid down before the statement date.

Answer: Credit scoring formulas calculate your credit utilization based on the amount of credit you’re using on the day that the card issuer reports your account to the credit bureaus each month. That’s usually, but not always, the balance as of the statement closing date. Making a payment just before that date often lowers your credit utilization and can help your scores.

So yes, making a payment before the statement closing date can offset the negative impact of lowered limits. However, it would be rather foolish for an individual to request lower limits thinking that a credit card issuer might prefer them to have less credit. Typically, healthy credit limits are a sign you’re managing your credit well. Even if a credit card issuer might look askance at your available credit, you won’t know exactly where to draw that line. Credit card issuers have different policies on how they set credit limits, and they typically don’t broadcast how those decisions are made.

Q&A: Should you sell a house or let heirs deal with it? The taxes shake out differently

Dear Liz: My mother, who will be 101 later this year, is leaving me real estate in her trust. The value of it is $4.5 million. She has other assets that will put her estate over $5 million when she passes. I currently have an offer from someone who wants to buy the real estate. Is it better for her to sell it now and reduce the value of her estate? She has never exercised the option for the one-time sale of her primary residence tax free. What are the tax implications if it remains in her estate until she passes?

Answer: There’s no such thing as a one-time option to sell a home tax free. Decades ago, homeowners could defer the recognition of taxable gain if they bought another house, and homeowners 55 and older could exclude as much as $125,000 of gain. That was a one-time deal, so perhaps that’s what you’re remembering.

Since 1998, however, taxpayers have been able to exempt as much as $250,000 of capital gains from the sale of their primary residence as long as they owned and lived in the home at least two of the prior five years. Taxpayers can use this exemption as often as every two years.

Clearly, your mom needs to find a source of good tax advice, such as a CPA or other tax professional. If you have the authority to act on your mother’s behalf through a power of attorney or legal conservatorship, then you should seek the tax pro’s advice as her fiduciary.

Under current law, if she retains the real estate it would get a “step up” to the current market value as of her death. That means all the appreciation that happened during her lifetime would never be taxed. If she sells now, on the other hand, she probably would owe a substantial capital gains tax bill, even if she uses the exclusion. The tax pro will calculate how much that’s likely to be.

That tax bill has to be weighed against the possibility that her estate could owe taxes. The current estate tax exemption limit is $11.7 million, an amount that will continue to be adjusted by inflation until 2025. In 2026, the limit is scheduled to revert to the 2011 level of $5 million plus inflation. President Biden has proposed lowering the limit to $3.5 million and modifying the step up, but those ideas face stiff opposition in Congress.

An estate planning attorney could discuss other options for reducing her estate if she’s still with us as 2025 approaches. The tax pro probably can provide referrals.

Q&A: Why delaying Social Security is the smartest retirement play

Dear Liz: If someone delays applying for Social Security after their full retirement age, the common thought is that their benefit grows by 8% a year until the age of 70. It accrues by that much only if you continue to work, right? I was unceremoniously laid off during the pandemic and I am holding off as long as I can before applying. I will be 67 at the end of this month. But because I am not working, that 8% is not a reality, right?

Answer: Wrong. The 8% delayed retirement credits apply whether you’re working or not. Those credits will help you maximize the benefit you receive for the rest of your life and potentially the rest of your spouse’s life, if you are the higher earner in a marriage. This effect is so powerful that many financial planners recommend their clients tap other resources, such as retirement funds, if it allows them to put off claiming Social Security.

It may help to think of retiring as a separate event from claiming Social Security. Many people link the two, but you can work while claiming Social Security or retire but delay Social Security.

If you did continue to work, your benefit might be increased somewhat by the additional earnings. This typically happens if you had a low-earning year included in the 35 highest-earning years that Social Security uses to calculate your benefit. If you had earned more in 2020 than in one of those previous years, then your 2020 earnings would replace that past year’s earnings in the formula and boost your benefit.

The 8% delayed retirement credit probably will have a much bigger effect on what you ultimately get, though, so don’t fret about any missed opportunities. Just try to delay your application as long as you can.

Q&A: Different Roths, different rules

Dear Liz: I have a Roth 401(k). Are withdrawals from it the same as from a Roth IRA? And how do I move it to a Roth IRA?

Answer: Roth 401(k)s are a type of workplace retirement plan that, like Roth IRAs, allow tax-free withdrawals. But the rules for Roth 401(k)s are somewhat different from those governing Roth IRAs.

For example, a Roth IRA allows you to withdraw an amount equal to your contributions free of taxes and penalties anytime, regardless of your age. Earnings can be withdrawn from a Roth IRA tax- and penalty-free once you’re 59½ and the account is at least 5 years old. The clock starts on Jan. 1 of the year you make your first contribution.

To withdraw money tax- and penalty-free from a Roth 401(k), you typically must be 59½ or older and the account must be at least 5 years old.

In addition, Roth 401(k)s — like regular 401(k)s and traditional IRAs — are subject to required minimum distribution rules that require you to start taking money out at age 72. Roth IRAs aren’t subject to those rules.

Many people roll their Roth 401(k)s into Roth IRAs to avoid the required minimum distribution rules or to have more investment choices. Such a rollover resets the five-year clock that determines whether a withdrawal incurs taxes and penalties, however. If you wait until you retire to roll over your Roth 401(k) and need access to the money, that waiting period could be problematic.

You can roll over your Roth 401(k) after leaving the employer that offers the plan. But you also could ask if your plan allows “in service” rollovers — in other words, rollovers while you’re still working for the employer. Some Roth 401(k)s allow these, although they may be restricted to people 59½ and older.