q&a Archives - Page 89 of 106

August 3, 2015 By Liz Weston

Q&A: Paying off student loans vs saving for retirement

Dear Liz: I’m engaged to be married and need your advice on getting started in the world of shared finances.

My fiance is 43, I’m 31. He’s debt free, with a savings account but no retirement fund. I have $34,000 in student loans (consolidated at 4.25%) and it weighs heavily on my mind as I’m desperate to become debt free. I’m debt free otherwise with $10,000 in savings.

We both make good money but my income as a freelancer is sporadic, while his is steady with periodic bursts of additional income.

We want to be debt free as a couple, save up a solid emergency fund and start making up for lost time on retirement savings, all while being aware that a family and a house might not be far away.

He’s very supportive and wants to pay off my student loans. Should I let him and pay “us” back to the emergency fund or maybe a house down-payment fund? What’s our best course of action to start on a solid financial footing?

Answer: You’re already behind on retirement savings, which should have started with your first job. Your fiance is even farther behind.

Don’t let your zeal to repay your debt blind you to the very real risk that you might not be able to save enough for a comfortable retirement if you don’t get started now.

If your education debt consists of federal student loans, then your low rate is fixed. The interest probably is tax deductible, which means the effective rate you’re paying is just a little over the inflation rate. It isn’t quite free money, but it’s pretty cheap.

You don’t need to be in a rush to pay it off, particularly with all your other financial priorities looming.

Instead, get going on some retirement accounts. Your fiance should take advantage of his workplace plan, if he has access to one.

Most employer-sponsored workplace plans have company matches, which really is free money you shouldn’t leave on the table. An individual retirement account or Roth IRA can supplement the plan or be a substitute if he doesn’t have access to a workplace plan.

As a freelancer, you have numerous options for setting aside money for retirement, including Simplified Employee Pensions (SEP), Savings Incentive Match for Employees (SIMPLE) and solo 401(k)s that would allow you to contribute more than the standard $5,500 annual limit for an IRA.

Ideally, you would be saving around 15% of your income and your fiance 20% or more.

If you can’t hit those targets just yet, start saving what you can and increase your contributions regularly. Work your other goals around the primary goal of being able to afford a decent retirement.

Filed Under: Couples & Money, Credit & Debt, Q&A, Student Loans Tagged With: couples and money, debt, q&a, retirement savings, Student Loans

July 27, 2015 By Liz Weston

Q&A: Social Security death benefits for a divorced spouse

Dear Liz: I have heard conflicting information about Social Security death benefits for a divorced spouse. We divorced after 18 years and I have not remarried. What percent of his benefit is available to me?

My own Social Security is low as it started as a disability payment and then converted to regular Social Security when I turned 65.

To the best of my knowledge, my former spouse was getting the maximum Social Security benefit. He was a very high wage earner. Can you provide a simple-to-understand answer? I have received conflicting information from numerous sources including three separate people at the Social Security Administration.

Answer: It’s concerning that you would get varying answers from Social Security representatives, since the answer is simple given the facts you describe.

You should be entitled to a survivor’s benefit that equals 100% of what your ex was getting when he died, said economist Laurence Kotlikoff, a Social Security expert who co-wrote “Get What’s Yours: The Secrets to Maxing Out Your Social Security.”

Your marriage lasted the required 10 years, and you would be starting survivor benefits after your own full retirement age, so the amount would not be reduced to reflect an early start.

The fact that you’re unmarried is irrelevant in this case. Survivors’ benefits are available even to those who remarry, as long as the subsequent marriage happens after the recipient reached age 60.

That’s different from spousal benefits for the divorced, which aren’t available after remarriage at any age unless the subsequent marriage ends.

It’s possible that some or all of the people you queried didn’t understand your question or thought you were asking about spousal rather than survivor benefits. Another possibility is that they just don’t know the rules.

That’s not unusual, Kotlikoff said. Social Security regulations are complex, and not all of its employees are experienced. Kotlikoff said he often hears from people who have been told things that are “outright wrong, partially wrong, incomplete or confused.”

Educating yourself with Kotlikoff’s book and the Social Security’s own site may be a better solution than relying on its employees for answers.

Filed Under: Divorce & Money, Estate planning, Q&A Tagged With: death benefits, Divorce, q&a, Social Security

July 27, 2015 By Liz Weston

Q&A: Personal loan debt vs credit card debt

Dear Liz: I need to understand how credit reporting agencies treat personal unsecured loan debt versus credit card debt.

I am considering getting a personal loan from a reputable lender to pay down my credit card debt. The amount of my overall debt will still be the same, just in a different category. How will my credit score be affected?

Answer: What you need to understand is how credit scoring formulas treat installment debt (loans) versus revolving debt (credit cards). Credit reporting agencies maintain the credit reports used to create scores — but don’t bless (or curse) particular types of debt.

The personal loan’s overall effect on your credit scores is likely to be positive if you pay the loan on time. What you owe on an installment loan is typically treated more favorably than a similar balance on a credit card.

Installment loans have other advantages: You typically get a fixed rate, rather than the variable one charged on most credit cards, and your balance will be paid off over the term of the loan, which is usually three years. If you stop carrying balances on your credit cards, you should be in much better shape: free of debt with potentially higher scores.

Often the best place to get installment loans is from credit unions, which are member-owned financial institutions that may offer lower interest rates.

Avoid any lender that gives you a high-pressure sales pitch, that offers you a loan if you have bad credit or that pitches debt settlement, which is far more dangerous to your finances than a personal loan.

If the lender tries to tell you about a new “government program” that wipes out credit card debt or tries to collect big upfront fees, you’ve stumbled onto a scam.

Filed Under: Credit & Debt, Credit Scoring, Q&A Tagged With: credit card debt, credit report, debt, q&a

July 20, 2015 By Liz Weston

Q&A: Co-signing student loans

Dear Liz: I have two kids heading to college. Both need co-signers for their student loans. Will me co-signing have a negative effect on my credit? The kids have no choice. I’m middle class, having made enough to get myself by as a divorcee, but there’s no college savings. To make matters worse, I make just over the base for them to get a Pell Grant. I’m concerned about my credit, but my kids need to go to college.

Answer: Your children probably do need to go to college if they want to maintain a middle-class lifestyle in the 21st century. They probably don’t need to finance that education with private student loans, which are the kind that require a co-signer.

Co-signing means the loans show up on your credit reports. Your credit scores can be trashed if your children miss a single payment. If they stop paying, the lender will come after you for the balance.

Federal student loans are a much better option. They have fixed rates, numerous repayment options and the possibility of forgiveness.

Private student loans typically have none of those attributes. Quite the opposite: There are horror stories of private lenders that refused to forgive the balance of borrowers who died, leaving co-signers on the hook.

The big problem with federal student loans is that the amount your children can borrow is limited.

A first-year student typically can borrow just $5,500 and usually no more than $31,000 for an undergraduate degree. The average net cost of a public four-year university — the sticker price for tuition, fees, room and board minus grants and scholarships — was just under $13,000 in 2014-15.

That leaves a fairly substantial gap to cover, especially with no savings and two children.

If you can’t cover the gap out of your current income, your family needs to consider some options. Finding more generous colleges might be one.

Institutions vary tremendously in their willingness to meet families’ financial need. While few meet 100% of a typical student’s need, the more generous shoot for 90% or more. Some meet less than 70%. (You can find these need statistics, and many others, at the College Board’s Big Future site, at http://bigfuture.collegeboard.org.)

You also could consider a couple of years at a community college. There are some one- and two-year technical degrees, typically in the health and science fields that pay more than the average four-year degree.

Or your children could attend community college to get some requirements out of the way cheaply before transferring to a four-year school, but be aware that the dropout rate at two-year schools is high, even for students who start fully intending to complete a bachelor’s degree.

Another option is for you to borrow, but you shouldn’t consider doing so unless you’re saving adequately for retirement and can continue to do so while paying off the loans. Federal PLUS loans offer fixed rates, but if you can pay the loan off quickly, a home equity loan or line of credit may be a less expensive option.

Filed Under: Q&A, Student Loans Tagged With: financial aid, q&a, Student Loans

July 20, 2015 By Liz Weston

Q&A: IRS Electronic Payment System

Dear Liz: I was intrigued by your answer to the question about paying taxes through the IRS Electronic Tax Payment System. I went to the website you mentioned (www.irs.gov/payments) and found that there was a fee.

You didn’t point this out, and I think it is relevant. My quarterly estimated payment would be $1,726 and the fee for a Visa payment would be 2.29%, which equals $39.55. If my math is correct, that is quite a significant amount. Did I reach the correct interpretation of fees being charged?

Answer: If you return to www.irs.gov/payments, you’ll see two big blue buttons. The one on the left, IRS Direct Pay, takes you to the IRS’ free payment system for individuals. Directly below that button is a link for the Electronic Federal Tax Payment System, which offers a free method for businesses to pay their taxes.

Only if you choose the button on the right that says “Pay by Card” will you be taken to various payment processors that charge a fee. Those fees can be significant, which is why it’s worthwhile to take the time to explore the free options.

Filed Under: Q&A, Taxes Tagged With: IRS electronic payments, q&a, Taxes

July 13, 2015 By Liz Weston

Q&A: Term life insurance

Dear Liz: My husband doesn’t qualify for term life insurance because he is overweight and pre-diabetic. Although he’s working on getting in shape, I’m afraid something might happen. I should add we have a 3-year-old daughter, and he is the main breadwinner.

What would you suggest we do to ensure we are covered if something were to happen?

Answer: Just because your husband was turned down by one insurer doesn’t mean others won’t accept him. Even people who are obese or who have diabetes can find coverage, so your husband shouldn’t accept that he’s uninsurable.

Look for an independent agent or broker who works with several companies rather than a captive agent who works for just one or two. A fee-only financial planner may be able to help you find a good agent. The planner also could recommend an appropriate amount of coverage.

Your husband also should investigate any coverage he might have through his job. Many employers provide a base amount of coverage as a benefit (frequently $50,000 or one year’s pay) and often allow workers to buy additional coverage without requiring medical exams.

The downside of employer-sponsored group life insurance is that he may not be able to buy as much coverage as he needs. He may need 10 times his annual salary, for instance, but his group policy may max out at five times his salary. Also, the policy may not be portable — it may end if he’s laid off or quits, for example.

The best strategy will depend on the costs he faces. But one approach may be to buy as much employer-provided coverage as possible and supplement it with an individual term policy purchased on his own.

If his health improves, he could boost his individual coverage while buying less of the employer-provided kind.

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

July 13, 2015 By Liz Weston

Q&A: File and suspend strategy for Social Security

Dear Liz: You recently wrote an interesting piece regarding the “file and suspend” strategy for Social Security benefits. I liked the possibility of getting a lump sum if I should need the money downstream.

But when I checked with Social Security, I was told that the lump sum maximum was six months of suspended payments. Am I missing something? My understanding was that I could collect all the suspended payments if need be. Is there a specific code I could reference to our Social Security office to clear this matter up?

Answer: You’re not missing something. The Social Security representative you talked to is confusing retroactive benefits with the reinstatement of benefits that were voluntarily suspended.

When you file for benefits after your full retirement age (currently 66), the maximum lump sum you can get is six months’ of missed benefits.

When you “file and suspend” your application at or after full retirement age, however, you can end the suspension at any time and get a lump sum for all the benefits you missed.

Unfortunately, the misinformation you received isn’t unusual.

Financial planners around the country have reported running into Social Security reps who insist that only six months’ of benefits are available to people who file and suspend, which isn’t true.

The procedure is outlined in the Social Security Administration’s “Program Operations Manual System” under GN 02409.130 Voluntary Suspension Reinstatement

It’s also described in plain English on Social Security’s site: “If you change your mind and want the payments to start before age 70, just tell us when you want your benefits reinstated (orally or in writing). Your request may include benefits for any months when your payments were suspended.”

The ability to file and suspend, then change your mind, is an important protection for those who understand the important role Social Security plays as longevity insurance.

The smartest course is often to let your benefit grow to its maximum amount, taking advantage of the “delayed retirement credits” that increase your benefit 8% annually between your full retirement age (currently 66) and age 70.

If you should later find yourself in need of the money, you can get a lump sum payout for the missed benefits back to the day you filed and suspended, if you want.

But opting for the lump payment means you lose your delayed retirement credits for that period. In other words, if you ask for a lump sum dating back to your initial filing, your monthly benefit is reset to the smaller amount you would have gotten then.

Filed Under: Q&A, Retirement Tagged With: file and suspend, q&a, Social Security

July 6, 2015 By Liz Weston

Q&A: Student loan forgiveness

Dear Liz: I have $105,000 in medical school loans with an interest rate of 2.875%. I have another consolidated federal loan at 6%. I’m making $180,000 in the private sector and like my job.

Should I consolidate everything, try to get a public sector job, and apply for loan forgiveness after 10 years while paying as little as possible? Or should I accelerate my loan payments?
I would be able to pay almost the full amount after 10 years. I’m also trying to save for a house in a high-cost area. I have about $110,000 in savings and stocks.

Answer: Why would you upend your life to qualify for help you don’t need?

Loan forgiveness and federal income-based repayment programs are intended for those struggling to pay their education debt. These programs are available only for federal student loans, by the way.

The low interest rate on your medical school loans indicates that those are private student loans, which wouldn’t qualify for the relief programs or for a federal consolidation loan, for that matter.

So the question really is whether you should pay your loans off over time or try to retire them as quickly as possible.

A slower repayment schedule could allow you to buy a home sooner and save more for retirement, which are both worthy goals. Faster repayment could lower the overall cost of the debt and leave you less vulnerable to rate hikes, since the interest rates on private student loans are typically variable.

There’s no single right answer, but it’s a good question to discuss with a fee-only financial planner who can assess your entire financial situation and explain your options.

Filed Under: Q&A, Student Loans Tagged With: q&a, Student Loans

July 6, 2015 By Liz Weston

Q&A: Credit scores and new accounts

Dear Liz: My spouse signed up for a store credit card to receive a discount on a large purchase. As she has no strong interest in maintaining a line of credit there, is there a simple way of discontinuing this account without affecting our credit scores, given that we may apply for a mortgage in the near future?

If not, is it critical we maintain some frequency of use on this account?

Answer: First, let’s correct a popular misconception that marriage somehow combines your credit records. Assuming she applied for the card in her name alone, this account won’t show up on your credit report or affect your scores.

Should you apply for a mortgage together, however, her scores could affect the interest rate and terms you get. Opening and closing accounts can ding scores, so it’s best to avoid both when you’re in the market for a major loan.

Issuers vary in their policies on closing inactive accounts, so it’s hard to predict how much activity would prevent the card from being shut down. Typically, though, a small charge every two to three months is enough to keep an account open.

Filed Under: Credit Cards, Credit Scoring, Q&A Tagged With: Credit Cards, credit scoring, q&a

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