Ask Liz Weston

Get smart with your money

q&a

Q&A: Government financial help after disaster may come as a loan

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Dear Liz: With all the recent hurricanes and other natural disasters, people are being helped by the Federal Emergency Management Agency with money for rentals or home replacements. What repayment does the government expect? Are there taxes owed by the recipients of that money?

Answer: FEMA grants aren’t taxable, but they’re typically not enough to replace a home. FEMA may provide up to $33,000, but the typical grant is much smaller — in the $3,000-to-$8,000 range, according to recent data from the agency.

Most financial assistance after a disaster comes in the form of low-interest loans to renters and homeowners, offered through the Small Business Administration. Recipients are expected to repay those loans.

Q&A: More reasons why adding an adult child to a deed is a bad idea

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Dear Liz: I’m an estate planning attorney and I agree with your warning to the couple who wanted to add their daughter to their house deed to avoid probate.

The daughter’s share of the home would lose the step-up in tax basis she would get if she inherited instead, plus there are several other issues. What if the daughter gets sued or has creditor problems? The house could be at risk.

The parents also may not have thought through what might happen if the daughter marries, divorces or dies before they do. A living trust would cost some money to set up but would avoid these problems.

Answer: A revocable transfer-on-death deed is another option for avoiding probate, but a living trust is a more all-encompassing solution that also can help the daughter or another trusted person take over in case of incapacity.

In any case, they should consult an estate planning attorney, who has a far better understanding of what can go wrong after a death and how to prevent those worst-case scenarios.

Q&A: Here’s a way to fight Social Security fraud

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Dear Liz: To make us less likely to become victims of fraudulent activity, years ago I froze our credit bureau files. I assume the Social Security Administration could be hacked as well. Can those files be frozen?

Answer: No, but you can create an online account to track and monitor your Social Security records — and it’s probably a good idea to do so. Fraudsters are creating such accounts and using them to divert benefits onto prepaid debit cards. If you created yours first, this fraud will be harder to pull off. If someone has already created an account in your name, you can find out and start the process of taking back your identity. The place to set up your account is www.ssa.gov/myaccount.

Q&A: Don’t jump into early retirement without considering these things

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Dear Liz: I am almost 59½. Can I retire at 60½?

I have $570,000 in a 401(k) and $180,000 in an IRA. I owe $253,000 on a condo that would sell for $600,000. I plan to buy a home next year for $400,000 and pay off the mortgage with the proceeds of the condo. Then I would be left with no bills. I will start collecting Social Security at 62 for approximately $1,850 a month.

I had a wonderful job for 23 years but something changed at work and now just going to work is hard on me. Let me know if you think this is doable.

Answer: That depends. How much do you need and want to spend?

Financial planners typically consider a 3% to 5% withdrawal rate as “sustainable.” The rate depends on how long you’re expected to live and your asset allocation, among other factors, but you should err on the conservative side if you expect to retire early.

A 3% initial withdrawal rate would give you $1,875 a month. A higher withdrawal rate could dramatically increase your chances of running short of money later in retirement.

While you might not have a mortgage, you would certainly have other bills, including the cost of healthcare insurance. If your employer is subsidizing your coverage, as many do, you could end up paying a lot more.

And if Congress dismantles or alters the Affordable Care Act, your health insurance could get even more expensive or perhaps hard to find. Your healthcare costs may go down once you qualify for Medicare at age 65, but they certainly won’t go away.

Also consider that taking Social Security retirement early means a smaller check for the rest of your life. If you do run short of money, that check may be your only source of income, and you may curse yourself for locking in the smaller amount.

You certainly shouldn’t bail on your job before you’ve had a fee-only financial planner look at your situation and see if your plans are realistic.

Q&A: Saving for retirement can’t wait

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Dear Liz: I have a family member who at 57 has no savings, a house whose value is 58% mortgaged and debt from a family member of $180,000.

This person is just starting a new job that will cover expenses with about $1,000 left over each month. The job offers a 401(k) but doesn’t allow contributions until employees have been with the company for eight months.

This person has paid into Social Security so that will be there (hopefully!) at retirement. What would be the best way for this person to start saving toward retirement?

Answer: Your relative shouldn’t wait to be eligible for the 401(k). People 50 and older can contribute up to $6,500 annually to a traditional IRA or a Roth IRA, which is $1,000 more than the usual limit.

If your relative didn’t have a previous job that offered a workplace plan in 2017, then this year’s contributions to a traditional IRA should be deductible.

Next year, when your relative is eligible for the 401(k), the deductibility of contributions will depend on that person’s income. In 2018, deductibility begins to phase out when modified adjusted gross income reaches $63,000 for singles. If IRA contributions aren’t deductible, after-tax Roth contributions typically are a better deal, but the ability to contribute to a Roth begins to phase out for singles at $120,000 in 2018.

Encourage your relative to save and to delay starting Social Security for as long as possible. When Social Security makes up the majority of one’s income in retirement — as it will for your relative — it’s important to maximize that check.

It’s not clear why your relative has been saddled with a family member’s debt, but any retirement plan needs to include options for paying off, settling or even erasing (through bankruptcy) such a substantial amount. Your relative should talk to a credit counselor and a bankruptcy attorney to better understand the options.

Q&A: Free credit monitoring won’t prevent identity theft

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Dear Liz: I thought I would share some information in light of the Equifax disaster.

Two of my credit card issuers provide free credit monitoring. Capital One scans my TransUnion file and Discover uses Experian. Both send email and text alerts about new activity and a monthly “reassurance” email when no such activity turns up in the previous 30 days.

Along with the credit freeze I placed at Equifax, I feel pretty secure at the moment. I’m sure that other credit card issuers have similar programs in place, and perhaps people should ask their financial institutions if such monitoring is available to them as account holders.

Answer: Free credit monitoring can certainly be helpful, but understand that it can’t prevent identity theft. At best, credit monitoring alerts you after the fact if someone has opened a new account in your name. Only credit freezes at all three bureaus can prevent those accounts from being opened in the first place.

Unfortunately, credit monitoring and freezes can’t help you with the most common type of identity theft, which is account takeover. That’s when someone makes bogus charges to your credit cards or steals money from your bank accounts.

Financial institutions use different types of software to detect fraud, but nothing replaces vigilance on the customer’s part. We should be reviewing transactions on our accounts at least monthly if not weekly. Online access to accounts can help you better monitor what’s going on.

You also can set up alerts that will email or text you if large or unusual transactions happen. (Just beware of a common scam where you’re texted an “alert” that your account has been frozen, along with a link that encourages you to divulge your login information.)

Even if you do everything in your power to avoid identity theft, you still can’t prevent scammers from using your information to file bogus tax returns, get medical care or commit criminal identity theft (by giving your name to the police when they’re arrested, for example). As long as Social Security numbers are used as an all-purpose identifier by businesses and government agencies alike, you can’t make yourself completely secure.