Q&A: Maximizing retirement benefits

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

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.

Q&A: Capital gains and mutual funds

Dear Liz: Your tax expert’s answer to a person who wanted to roll over a $30,000 capital gain on a mutual fund missed an important point. Since the couple were solidly in the 15% tax bracket with a taxable income under $72,000, they should qualify for the 0% federal capital gain tax rate. (They may, of course, owe state taxes.)

Answer: They may not have had a capital gain at all, as other tax pros have pointed out. When people own mutual funds, the earnings are often reinvested each year. If the couple paid taxes on those earnings, their basis in the mutual fund would increase each year. To know if the couple had any capital gain, we’d need to know that adjusted tax basis. In any case, the original answer — that you can’t roll over the gain on a mutual fund into another investment to avoid capital gains taxes — still stands.

Q&A: Social Security and marriage

Dear Liz: Each year, I track my estimated Social Security benefit on the SSA.gov website. At full retirement age of 67, my estimated benefit is $1,504. Is it true that my actual benefit may be reduced by 50% since I am married?

Answer: Good heavens, no.

If you’re married, your spouse may be entitled to a benefit that equals up to half of your check. But your check is not reduced to provide this spousal benefit. Instead, the Social Security Administration typically would calculate the benefit your spouse earned on his own, compare that to his spousal benefit, and then give him the larger of the two amounts.

If you have ex-spouses from marriages that lasted at least 10 years, they too could be entitled to spousal benefits. But those benefits wouldn’t reduce your check or your husband’s.

Q&A: Work from home jobs

Dear Liz: Are there legitimate “work from home” Internet job opportunities, or are all those advertisements just scams?

Answer: You should be skeptical of advertisements in general and particularly advertisements about an area as scam-filled as work-from-home opportunities.

Yes, many people make a living working from home. They’re typically employees of companies that allow them to telecommute, or they’ve launched successful businesses or they’re answering phones for a call center. They are not unskilled people making a killing at jobs that require little effort, which seems to be what most of the scams promote.

You can research legitimate opportunities by starting with legitimate websites. AARP, Bankrate.com and Kiplinger all have good articles on the topic.

Q&A: How to escape a timeshare

Dear Liz: How do I walk away from a timeshare? It’s paid off but we have yearly maintenance fees that are now $3,600 each year. This will be prohibitive in retirement, and it’s quite a burden now. The developer won’t let us give it back, and we can’t sell it because the resale companies are sharks that demand money upfront. Can they ruin our credit if we stop paying? Is there any way to protect ourselves?

Answer: If you stop paying your annual maintenance fees, your account can be turned over to a collection agency. That will trash your credit, and you could be sued.

Many people who buy timeshares don’t realize they’re making a lifetime commitment, said Brian Rogers, owner and operator of Timeshare Users Group. Even after any loans to buy the timeshare are paid off, owners owe maintenance fees on the property. Maintenance fees typically rise over time and may be supplemented by special assessments to repair or upgrade resorts as they age.

The good news is that you may be able to get out from under these fees by selling your timeshare, and you don’t have to use a resale company that charges an upfront fee. In fact, you shouldn’t, since those arrangements are frequently scams, Rogers said.

The amount you’re paying indicates that you own a timeshare at an upscale resort. (The average maintenance fee is closer to $800 a year, Rogers said.) If that’s the case, your timeshare may have some value, even if it’s only a tiny fraction of what you paid. Owners at less desirable resorts often find they can sell their timeshares for only $1, and may have to pay others to take the timeshares off their hands.

You can list your timeshare for sale at no or low cost on EBay, Craigslist, RedWeek or Timeshare Users Group, among other sites. To get some idea of what it’s worth, enter the name of the resort into EBay’s search engine and click on the “completed sales” box on the lower left side of the page. Timeshare Users Group and RedWeek offer additional advice on selling timeshares.

You also could consider renting out your timeshare, using those same sites. Many owners discover they can offset or even completely cover their maintenance fees through such rentals, Rogers said.

Q&A: How to fund a Roth IRA

Dear Liz: I have quite a bit invested in stocks in a regular brokerage account. I’ve held them for many years, and to sell them would mean huge capital gains taxes. I’d like to move some of these into a Roth IRA, so that I can avoid paying taxes on their appreciation and dividends, since I plan to hold these for quite some time. Is it possible to move these stocks into a Roth IRA without selling and repurchasing?

Answer: Nope. Uncle Sam typically gets his due, with one major exception.

Roths have to be funded with cash, and direct contributions are limited to $5,500 per person per year, plus a $1,000 catch-up contribution for those 50 and over. Your contributions would be further limited once your modified adjusted gross income exceeds $181,000 for married couples and $114,000 for singles, said Mark Luscombe, principal analyst for tax research firm CCH Tax & Accounting North America. A big-enough capital gain, on top of your regular income, could push you over those limits.

If you want to avoid paying capital gains, just hold the investments until your death. Your heirs will get the investments at their market value and can sell them immediately without owing any capital gains. There may be other taxes involved, however. If your estate is worth more than $5 million, it may owe estate taxes, and a few states levy inheritance taxes on heirs.

Q&A: How to correct social security errors

Dear Liz: I am 64. I recently reviewed my Social Security summary online and saw that it does not have an accurate listing of my income, so the projections of my benefits aren’t accurate either. How do I correct these errors?

Answer: There are a number of ways the Social Security database could be wrong. An employer could have reported your earnings incorrectly or not at all. Or your earnings could have been reported using the wrong name or an incorrect Social Security number. If you married or divorced and changed your name, but failed to notify Social Security, that also could lead to errors in your record.

You can call the Social Security help line at (800) 772-1213 to start the process of correcting your records. It would be best if you have proof of your earnings, such as W-2 forms, tax returns or pay stubs from the years in question. If you don’t have such proof, the Social Security Administration asks that you provide as much information as possible about where you worked, the name of your employer(s), the dates you worked and how much you earned.

Your experience shows why it’s important to periodically review your Social Security records to make sure they’re accurate. This year the Social Security Administration will resume sending paper statements to certain workers (those aged 25, 30, 35, 40, 45, 50, 55 and 60), but in the meantime you can check your records online by signing up at http://www.ssa.gov/mystatement/.

Q&A: When to file bankruptcy

Dear Liz: I’m a 33-year-old mother who lost my full-time job during the recession in 2009. I may have my “stuff” together again, but am considering filing bankruptcy. Each month I’m spending almost half (yes half!) of my income on debt payments to credit cards, loans and medical bills. Each month after all my bills are paid and groceries are bought, I have zero dollars left over to save. Even after losing my job, I made sure to always make those payments, so my credit is decent. Last I checked my credit score was hovering right around 700. I really have no reason to have good credit at this time, as I don’t have any need for a large purchase. Should I file or pay back my debts? Is filing for bankruptcy a good idea if it allows me to build a savings account and start putting money back into a 401(k)?

Answer: A bankruptcy filing would devastate your credit scores, and that may create more problems than you think. Credit information is used by insurers to determine premiums, by landlords to evaluate applicants and by wireless carriers and utilities to set deposit requirements.

At the same time, it makes little sense to continue to struggle against a mound of debt if you’re not making a dent in the pile. If it would take you five years or more to repay what you owe, you should at least consider filing for bankruptcy. Why five years? Because that’s how long you’d be required to make payments under a Chapter 13 repayment plan.

Most people, however, qualify for Chapter 7 liquidation bankruptcy, which is typically preferable since it’s faster (three to four months, versus five years) and erases credit card and medical bills. An experienced bankruptcy attorney can advise you and help you understand the ramifications of filing.

If lower interest rates might help you pay off your debt within five years, you also should consider an appointment with a credit counselor associated with the National Foundation for Credit Counseling (www.nfcc.org). These nonprofits can set you up with debt management plans that may offer lower rates on your credit card debt.

Most people feel an obligation to pay what they owe, but that often leads to fruitless struggles against impossible debts. Bankruptcy laws allow individuals a fresh start so that they can take care of themselves and their families. Among your many financial obligations is the one to support yourself in retirement, and every year you delay saving will make it that much harder to accumulate a reasonable nest egg.

Q&A: Purchasing the right credit report

Dear Liz: I got my credit reports from http://www.annualcreditreport.com as you recommended in a recent column, but had to go through some hoops to get my actual credit score, which is the main thing I wanted. One of the bureaus required me to subscribe to its newsletter, which cost $29.95 a month after a seven-day free trial. I guess they hope people won’t cancel within seven days, but I did, without any trouble.

Answer: Confusion about the difference between credit reports and credit scores often leads people to sign up for unnecessary, costly products. (You were signing up for credit monitoring, by the way, not a newsletter.) You can get free credit scores from a variety of sites, including Credit.com, Credit Karma and Quizzle, without having to buy a product. The scores you get from these sites aren’t the scores that lenders typically use, but neither is the score the credit bureau provided you. If you want to see scores lenders usually use, you’ll need to buy those for $20 apiece from MyFico.com.