Q&A: Avoid this hidden risk to your retirement

Dear Liz: I have very low net worth and just inherited $500,000 from a cousin’s annuity. My net worth includes a $400,000 house with a $290,000 mortgage at 3.75%, IRA accounts of $65,000 and savings of $90,000. I also have a pension from which I receive $50,000 annually and from which our health insurance is paid. My husband is 72 and receives $6,000 annually from Social Security. I will turn 70 in a few months and will begin taking Social Security and tapping my IRAs. I have very little debt. What is the safest thing to do with this inheritance?

Answer: That depends on how you define “safe.”

Investments that don’t put your principal at risk typically offer returns that don’t beat inflation over time. That means your buying power is eroded. At 70, you may not think you need to worry much about inflation. But your life expectancy as a woman in the U.S. is 16.57 more years. About one-third of women your age will make it to age 90.

That doesn’t mean you have to take investment risk with this money by buying stocks, which are the one asset class that consistently outpaces inflation. But you’d be smart to have a fee-only financial planner take a look at your situation to make sure you’re investing appropriately, based on your goals.

And it’s your goal for this money that will help determine how to invest it. If you want the money to be readily available and safe from investment risk, then you could put it in an FDIC-insured, high-yield savings account paying 2% or so. Just make sure you don’t exceed FDIC limits, which typically cap insurance coverage at $250,000 per depositor, per bank. (You can stretch that coverage if you put the money in different “ownership categories,” such as individual, joint, retirement and trust accounts.) If you don’t expect to need the money for many years, investing at least some of it in bonds or stocks may be appropriate.

Also, a small reality check: Your net worth before the inheritance was $265,000, based on the figures you provided. That’s more than most people in your age bracket. Households headed by people ages 65 to 74 had a median net worth of about $224,000 in 2016, according to the Federal Reserve’s latest Survey of Consumer Finances. That’s not to say you’re rich, but you do have more than most of your peers — especially now.

Q&A: Avoiding Medicare sign-up penalties

Dear Liz: Someone recently asked you if signing up for Medicare is mandatory. Your answer implied no, one does not have to sign up at 65. However, it is my understanding that if a person does not enroll when first eligible, they will be hit with large penalties on their Medicare premiums if they sign up later. Am I missing something?

Answer: Not at all. That answer was too short and should have mentioned the potentially large, permanent penalties most people face if they fail to sign up for Medicare Part B and Part D on time.

To review: Medicare is the government-run healthcare system for people 65 and older. Part A, which covers hospital care, is free. Medicare Part B, which covers doctor’s visits, and Part D, which covers prescriptions, typically require people to pay premiums. Many people also buy Medigap policies to cover what Medicare doesn’t, or opt for Medicare Part C. Part C, also known as Medicare Advantage, is an all-in-one option that includes everything covered by Part A and Part B and may include other benefits.

There’s a seven-month initial enrollment period that includes the month you turn 65 as well as the three months before and three months after.

People who don’t sign up when they’re first eligible for Part B usually face a penalty that increases their monthly cost by 10% of the standard premium for each full 12-month period they delay. For Part D, the penalty is 1% of the “national base beneficiary premium” ($33.19 in 2019) times the number of full months the person was uncovered.

People who fail to enroll on time also could be stuck without insurance for several months because they may have to wait until the general enrollment period (Jan. 1 to March 31) to enroll.

People typically can avoid these penalties if they have qualifying healthcare coverage through a union or an employer (their own or a spouse’s). When that coverage ends, though, they must sign up within eight months or face the penalties. Also, they might not avoid the penalties if their employer-provided coverage becomes secondary to Medicare at 65, which can happen if the company employs fewer than 20 workers. Anyone counting on union or employer coverage to avoid penalties should check with the company’s human resources department and with Medicare to make sure they’re covered.

The original letter writer had no income to pay Medicare premiums, so the answer also should have included the information that Medicaid — the government healthcare program for the poor — might help pay the premiums. People in this situation should contact the Medicaid office in their state. (Medicaid is known as Medi-Cal in California.)

Monday’s need-to-know money news

Today’s top story: 6 types of conventional loans all home buyers should know. Also in the news: How your credit score can save you money, why you need to verify your Equifax settlement claim, and why you need to be careful when deciding to claim Social Security based on break-even calculations.

6 Types of Conventional Loans All Home Buyers Should Know
All the details.

SmartMoney podcast: ‘How Can My Credit Score Save Me Money?’
Answers to real-world money questions.

If You Asked for $125 from the Equifax Settlement, You Need to Verify Your Claim
Check your email.

Deciding when to claim Social Security based on break-even calculations? Be careful

Q&A: Signing up for Medicare

Dear Liz: Is it mandatory to sign up for Medicare at age 65, and how is it paid for? I’m 64, don’t have any assets and I’m not working (I’m living with a friend for free). I’d like to wait until 70 to collect Social Security. Is that possible? Someone just told me that I have to sign up for Medicare, and to pay for it, I have to sign up for Social Security. Is that true?

Answer: No.

You’re not required to get Medicare at 65. You should, however, at least sign up for Medicare Part A. Part A is the portion of Medicare that’s free and covers hospital visits. You sign up for Medicare through Social Security, either online or in a Social Security office, but you don’t have to start your Social Security benefit to do so.

The other parts of Medicare — Part B, which covers doctor’s visits, and Part D, which covers prescription drugs — require paying premiums, but you can pay those without signing up for Social Security. Some people are confused about this, because most people who get Medicare have those premiums deducted from their Social Security checks. But that’s not required.

Q&A: Social Security spousal benefits

Dear Liz: I’m confused by Social Security benefits for divorced spouses, which you’ve written about recently. I was told that because I remarried (after age 60), I have to wait until my ex-husband died before receiving a part of his benefits. Is this still true for remarried ex-spouses? My ex does collect Social Security and I collect my small benefit (both of us started at full retirement age).

Answer: Yes. Divorced spousal benefits would be available only if you are currently unmarried. Survivor benefits, on the other hand, could still be available if you remarried at 60 or older.

Spousal and divorced spousal benefits can be up to 50% of the worker’s benefit, while survivor and divorced survivor benefits can be up to 100%.

Monday’s need-to-know money news

Today’s top story: How student loan fees work and what they cost. Also in the news: Making renting work for your financial goals, what millennials get wrong about Social Security, and does the new Apple credit card live up to the hype?

How Student Loan Fees Work and What They Cost
Origination fees can be costly.

Make Renting Work for Your Financial Goals
It could help you buy your dream home down the line.

What Millennials Get Wrong About Social Security
Time for some mythbusting.

Does the new Apple Card live up to all the hype?
Reviews are mixed.

Friday’s need-to-know money news

Today’s top story: Make renting work for your financial goals. Also in the news: Why this investment account is becoming more popular, what millennials get wrong about Social Security, and the common money regimen that can backfire and leave you worse off.

Make Renting Work for Your Financial Goals
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Why This Investment Account Is Becoming More Popular
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What Millennials Get Wrong About Social Security
Costly myths.

The common money regimen that can actually backfire and leave you worse off
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Thursday’s need-to-know money news

Today’s top story: What millennials get wrong about Social Security. Also in the news: How to save more money for your next vacation, the best rewards credit cards for family travel, and why you should think of your finances in terms of what you’re not buying.

What Millennials Get Wrong About Social Security
The danger of believing the myths.

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What millennials get wrong about Social Security

Few issues unite millennials like the future of Social Security. Overwhelmingly, they’re convinced it doesn’t have one.

A recent Transamerica survey found that 80% of millennials, defined in the survey as people born between 1979 and 2000, worry that Social Security won’t be around when they need it. That’s not surprising — for years, they’ve heard that Social Security is about to “run out of money.”

The language doesn’t match the reality. In my latest for the Associated Press, why the myths surrounding Social Security could cause problems for millennials and their retirement.

Q&A: Divorced spousal benefits

Dear Liz: I never expected to be where I am financially. I work as an independent piano teacher and my present earnings are just enough to get by (which isn’t saying much in Southern California). I was married for 18 years and am now single, with no plans to remarry.

After I turn 66 next year, I intend to apply for Social Security benefits as a divorced spouse because my personal Social Security benefits would amount to just $875 a month and my ex is doing quite well (with earnings somewhere in the six-figure range). I anticipate the divorced spousal benefit will be greater than my own.

But I have a lot of questions. Will waiting until my former husband is 66 or 70 (he is 64) do anything to maximize my benefits? Will my Social Security be taxable? How much am I allowed to continue earning if I also receive Social Security?

Answer: Spousal and divorced spousal benefits can help lower earners get larger Social Security checks. Instead of just receiving their own retirement benefit, they can receive up to half of the higher earners’ benefits. But divorced spousal benefits are different in some important ways from the spousal benefits available to married people.

If you were still married, your benefit would be based on what your husband was actually getting. If he started benefits early, that would reduce the spousal benefit you could get. You also couldn’t get a spousal benefit unless he was already receiving his own.

Divorced spousal benefits are available if your marriage lasted at least 10 years and you aren’t currently married. If you meet those qualifications, you can apply for divorced spousal benefits as long as both you and your ex are at least 62 — he doesn’t need to have started his own benefit. Your divorced spousal benefit will be based on his “primary benefit amount,” or the benefit that would be available to him at his full retirement age (which is 66 years and two months, if he was born in 1955). It doesn’t matter if he starts early or late; that doesn’t affect what you as his ex would receive.

Spousal and divorced spousal benefits don’t receive delayed retirement credits, so there’s no advantage for you to delay beyond your own full retirement age (which is 66, if you were born in 1954) to start. Your benefit would have been reduced if you’d started early, though, so you were smart to wait.

Also, waiting until your full retirement age means you won’t be subjected to the earnings test that otherwise would reduce your checks by $1 for every $2 you earn over a certain amount ($17,640 in 2019).