q&a Archives - Page 79 of 106

May 16, 2016 By Liz Weston

Q&A: Defaults on a co-signed student loan

Dear readers: A recent column about private student loans prompted financial aid expert Mark Kantrowitz to reach out with some additional advice for people who co-signed student loans for someone who has stopped paying. Although private student loans don’t have the same rehabilitation options as federal student loans, Kantrowitz encourages anyone in this situation to ask the lender, “What are my options?” and “Can you remove the default?”

“I’ve seen lenders not only remove the default from the co-signer’s credit history, but even reduce the interest rate if the co-signer agrees to make the payments by auto-debit,” said Kantrowitz, coauthor of the book “File the FAFSA.”

Someone who agrees to make payments may get a better deal than someone who pays off the loan in a lump sum, Kantrowitz said, because lenders want to be paid interest. But there would be nothing to stop a co-signer who makes payment arrangements to pay off the debt in full after a few months.

“This way he potentially can have the default entirely removed from his credit history, restoring him to his previous credit score,” Kantrowitz said. “It also leaves the account open, so that he can pressure the [borrower] into making payments.”

Filed Under: Credit & Debt, Q&A, Student Loans Tagged With: co-signer, default, q&a, Student Loans

May 16, 2016 By Liz Weston

Q&A: Retirement calculators are a wake-up call for undersavers

Dear Liz: Are retirement calculators a hoax? It seems that the published estimates for the amount of savings required are insanely high. If most U.S. citizens haven’t saved much and have a decent standard of living in retirement, where is the misperception? Let’s say an individual is resolved to choose hospice over intensive care — so we can reduce healthcare from the equation — and is no longer paying for a mortgage or college. How could someone really need to replace a high percentage of salary? Do we really need to save millions to retire? Even if we just spend the principal in the calculated estimates, we are truly old before we run out. I have got to be missing something.

Answer: You’re missing quite a few things.

People born between 1936 and 1945 — those aged 71 to 80 now — typically had enough savings, home equity, pension income and Social Security benefits to replace 99% of their annual incomes in retirement, according to a Pew Charitable Trust study. This generation benefited from steadily rising incomes and wealth levels through most of their working lives.

Early boomers, born between 1946 and 1955, aren’t quite as well off but typically can replace a comfortable 82% of their incomes.

They’re the last generation, though, that’s expected to be truly secure on average in retirement. Younger people are much less likely to have pensions. Stagnant incomes, rising costs and falling wealth levels further undermine their financial security.

Late boomers, born between 1956 and 1965, are on track to replace 59% of their incomes. GenX, born between 1966 and 1975, could see their incomes cut in half in retirement.

Imagine living on 50% of what you make now. If that would be easy — and if you’re really resolved to choose death over medical treatment — maybe you don’t have to worry about retirement calculations.

If the thought of eking by on half your current income makes you break out in a cold sweat, though, then you better start saving.

Filed Under: Q&A, Retirement Tagged With: q&a, Retirement, retirement calculators

May 9, 2016 By Liz Weston

Q&A: The pitfalls of renting a house to relatives

Dear Liz: My son and his family are having trouble with money. I see him stepping up since he had my lovely granddaughter. I am getting ready to retire from teaching. I have my teacher’s retirement and a nest egg set aside. I was thinking of buying him a place where he could pay me rent and when the time happens, move to find his future. I was told, though, that I would have to live in the home after purchase or I cannot get a loan. I just want to see where I can stand in this endeavor.

Answer: People get loans to buy rentals and other investment property all the time. But that doesn’t mean you should be one of them.

Taking on a mortgage in retirement is risky, to say the least, and you’d be putting your financial future in the hands of a young man who has “trouble with money” and who hasn’t always been responsible, given your comment about “stepping up.” When his family hits a rough patch, how hard would it be for him to justify skipping a rent payment, or six, to Dear Old Dad? And what would you do about that — evict him and your lovely granddaughter?

If you were wealthy enough to pay cash for this house, take care of all the ongoing costs and not care if he ever paid you a dime, then maybe this scheme would make sense. In your case, you’re inviting financial distress and family trouble at a time in your life when you should be reducing the odds of both.

Filed Under: Q&A, Real Estate Tagged With: families and money, q&a, real estate

May 9, 2016 By Liz Weston

Q&A: How much liability insurance do you need?

Dear Liz: In a previous answer to a question about liability insurance, you indicated that people should normally have enough insurance to cover their assets. Which assets should be included, as it is my understanding that some assets are exempt from creditors, such as 401(k)s and IRAs? Also, how are future earnings or future annuity payments for retirees taken into account when trying to determine how much liability insurance to carry? Should one essentially cover the present value of their future income for 10 years? Twenty years? Life?

Answer: As indicated in the previous column, there’s as much art as science in determining appropriate liability coverage. Liability insurance pays the tab when you face a lawsuit or similar claims. Some people sleep better at night with high policy limits, while others would rather deploy their money elsewhere.

Liability insurance is relatively inexpensive, so getting a lot of coverage typically won’t break the bank. But you also need to make sure you’re adequately covered for disability and long-term care, which you’re more likely to need than your liability insurance.

You’re correct that workplace retirement plans such as 401(k)s are protected from creditor claims. So are IRAs, up to $1 million. Each state has different rules about other property, but typically a certain amount of home equity is protected as well. In Texas and Florida, this so-called homestead exemption is virtually unlimited. In other states, the amount protected is relatively small. (In California, it can be as small as $25,575, according to legal self-help site Nolo.) Similarly, states are all over the map in how they treat annuities.

Social Security income, by contrast, is safe from creditors except Uncle Sam. The federal government can take a portion of your Social Security check if you’ve defaulted on federal student loans, for example.

Financial advisors typically focus on net worth, rather than incomes, when recommending appropriate levels of liability coverage. If you’re a high earner with few assets, though, you might want to take your future income stream into account. Exactly how much can be a discussion between you and your advisor or insurance agent.

Filed Under: Insurance, Q&A Tagged With: Insurance, liability insurance, q&a

May 9, 2016 By Liz Weston

Q&A: Another tool to avoid probate

Dear Liz: You recently cautioned a reader whose mother wanted to add her to a home deed to avoid probate. Please tell readers that they now may be able to avoid probate for a residence by using a transfer on death deed, similar to what’s available for bank accounts and cars. California recently enacted this option and at least 25 other states also offer this tool.

Answer: Thank you for pointing out the availability of this option, which can make it easier and less expensive to transfer a home to one’s heirs. It still would be smart to consult an estate-planning attorney, since probate isn’t the only end-of-life issue to address.

To recap, adding a child’s name to a home deed can avoid probate, the court process that otherwise follows death. But the addition is considered a gift for tax purposes and could cause the loss of a valuable tax break known as a step-up in basis.

In many states, probate is relatively quick and not that expensive, so trying to avoid it may be counterproductive. In other states, notably California, probate is expensive and protracted, which makes probate avoidance something to consider.

Filed Under: Estate planning, Q&A Tagged With: Probate, q&a

May 2, 2016 By Liz Weston

Q&A: Co-signing for a student loan backfires

Dear Liz: My wife and I both had excellent credit scores. Now mine are in the dump. I co-signed for a friend’s daughter’s school loan 10 years ago. I know now this was a bad mistake. I guaranteed $25,000. Now two things have happened: The daughter quit paying the loan and the friendship took a bad turn.

This is seriously hurting my credit. We have already been told when trying to refinance our mortgage that we’ll need to fix the school loan, which is showing more than 90 days behind. The outstanding balance is $20,000. I can pay the loan off. Making payments just adds interest to the problem. Are there any other options to repair my credit that don’t rely on the daughter’s ability to keep the loan current?

Answer: If you can pay the loan off, then do. You are legally responsible for this debt, and the longer it goes unpaid the worse the damage to your credit scores.

If this were a federal student loan, you would have the option of rehabilitation, which can erase some of the negative marks on your credit reports after you make a series of on-time payments. Because it’s a private loan — I know this because federal student loans don’t have co-signers — you probably don’t have a rehabilitation option (although it certainly doesn’t hurt to ask).

Once the loan is paid off, you can proceed with the refinancing but you probably will find that lenders want to base the loan on your battered scores, rather than your wife’s better ones. That means you might not qualify, or you might have to pay a much higher rate. If she can qualify for the refinance on her own, that’s one option. Otherwise, you might have to wait for your credit to heal before you refinance.

Filed Under: Credit & Debt, Q&A, Student Loans Tagged With: co-signing student loans, Loans, q&a, Student Loans

May 2, 2016 By Liz Weston

Q&A: Questions for a financial advisor

Dear Liz: I have some investments at a financial investment firm. My advisor said that because I am 62, I can transfer money from my 401(k) at my job into my account with his firm. He says he can do better with the amount I currently have in the 401(k). Of course I will continue to work and put in money into my 401(k). Does this sound like bad advice? The amount I would be trying to transfer would be around $62,000.

Answer: By doing better, does he mean doing such a spectacular job of investing that he rivals the legendary Warren Buffett? Because he might have to do just that to compensate for your giving up years of tax-deferred compounding.

Because you’re over 591/2, you can access your 401(k) balance without penalty, but you still must pay income taxes on any withdrawals. Investments in a regular account would be subject to income and capital gains taxes going forward.

It’s possible he wants you to roll the money over into an individual retirement account instead, which would spare you the tax bill and allow the money to continue growing tax-deferred. But unless you have a truly awful, high-cost plan, it’s hard to see how he can promise better results.

The Labor Department just approved a rule that requires advisors to adopt a fiduciary standard when providing advice about retirement funds. “Fiduciary” means the advisor is required to put clients’ interests ahead of his or her own. You might ask him if this advice aligns with the standards and if he’s willing to put that promise in writing. If not, you could be forgiven for suspecting that he’s more motivated by what he can earn via commissions or other fees than by doing what’s right by you.

Filed Under: Financial Advisors, Q&A Tagged With: financial advisors, q&a

April 25, 2016 By Liz Weston

Q&A: Adding daughter as co-owner of mother’s home could trigger costs

Dear Liz: My father passed away last year, and my mother wants to add my name to her house so there is no probate. Do I need to change the title or the deed or both? Are there any negatives to doing so? Also, we already have a durable power of attorney between us. Does that offer me any benefits as far as real estate? What does it offer me in general?

Answer: A deed is the legal document that transfers the title or ownership of a property. Please don’t alter the home’s documents until you consult an estate-planning attorney. Your mother’s desire to avoid the costs of probate could inadvertently trigger much larger costs.

Adding you as a co-owner could mean giving up a big tax benefit, for example. If your mother bequeaths the house to you when she dies, you won’t owe any tax on the gain in the house’s value during her lifetime. If she adds you to the title, she’s gifting you half the house. In that case, you potentially could owe tax on some of that gain even after she dies. If she wants to preserve tax benefits while avoiding the court process known as probate, she may need a living trust.

There could be other complications if you should die or be sued, which is why it’s important to get good advice before proceeding.

As for the durable power of attorney: It isn’t designed to give you benefits. Powers of attorney allow you to make decisions for your mother if she becomes incapacitated. Those decisions need to be in her best interest, not yours.

Filed Under: Q&A, Real Estate Tagged With: durable power of attorney, q&a, real estate

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