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AARP Article

The Spousal-Benefits Puzzle

Social Security can be as complicated as marriage

What do I get the most mail about? Winner by a mile is the question of when to file for spousal (or divorced spousal) benefits. Lots of you misunderstand the rules, with the result that you’re leaving money on the table.

So here is your guide to spousal benefits. I’m writing from the point of view of a wife filing on her husband’s earnings record, but the same rules apply to either spouse.

First, what is a spousal benefit?

It’s a payment originally designed for women who left the workforce to raise children. You need 10 years of work (40 quarters) to claim a retirement benefit of your own. If you worked less (or not at all), or your earnings were very low, you can get a spousal benefit based on the earnings of your husband.

How much is the spousal benefit?

It depends on your age when you claim it. If you wait until your full retirement age (somewhere between 66 and 67), you’ll get half of what your husband could get at his own full retirement age. If you claim earlier, you’ll receive less.

What if you worked 10-plus years and earned a Social Security retirement benefit of your own?

Here’s where claiming gets tricky. If your husband has not retired, you can file for a benefit based on your personal earnings. When he finally quits work and goes on Social Security, the spousal amount you can receive depends on your personal benefit’s size. If it’s higher than what you’d get as a spouse, you’ll continue to receive that same, higher amount, says Philip Moeller, coauthor of Get What’s Yours: The Secrets to Maxing Out Your Social Security. If your personal benefit is smaller, it will be topped up to the spousal level.

If you file when your husband has already retired, Social Security will normally assume that you’re claiming your personal and your potential spousal benefit at the same time. You will receive the higher of the two.

There’s an exception for people who were born on or before Jan. 1, 1954. If you put off your claim until full retirement age, you can file a “restricted application” for a benefit based on your spouse’s earnings, without also claiming the personal benefit you’re owed. At age 70, you can switch to your personal benefit, which will have grown at 8 percent per year plus the inflation rate.

What if you’re divorced?

You get the same benefits as a current spouse, if your marriage lasted at least 10 years and you are now single. Also, you can claim the spousal benefit even if your ex has not retired, provided that he is eligible for benefits and you have been divorced for at least two years. If you’ve been working, however, you will probably find that sticking with your own benefit is the better deal.

Special rules cover the disabled or retirees with children who are under 18. But for most of you, this road map works.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Managing Your Money Manager

Demand these things from your financial adviser

How do you know if your financial adviser has your best interests at heart? They all say they do. Then some of them turn around and sell you products with high (often hidden) costs that line their pockets at your expense. The government estimates that individual retirement accounts alone lose $17 billion a year to “me-first” investment advice from salespeople who wring large commissions and fees from their trusting clients. That’s money that could have been used to brighten your life.

Last year, the U.S. Department of Labor issued a new investor protection rule covering advisers who handle IRAs and 401(k)s. It would require them to act as fiduciaries—meaning that, when giving advice, they would have to put your financial interests ahead of theirs. If they sell you a mutual fund with a high commission when low-commission versions are available, their actions would be not only dishonorable, they would be against the law.

Not surprisingly, the brokerage and insurance industries hope to kill the rule. But because it was supposed to be implemented this month, financial firms necessarily prepared to comply. Fees dropped at some firms, and new, low-commission products were introduced. Then the Trump administration proposed putting off the start date until June, pending further review of the rule. What happens now?

Most likely, some of the reforms will last because the industry knows you want them. Others might be lost. Either way, here’s your path to getting trustworthy advice.

Ask the person managing, or offering to manage, your investments to state in writing that he or she will act as a fiduciary at all times, for retirement and nonretirement accounts. That’s especially important for less sophisticated investors who depend heavily on professional advice. Knowledgeable clients already demand fiduciaries for all their money.

Ask the adviser to compare the costs and benefits of leaving your retirement money in your 401(k) versus investing it through the firm’s IRA. You want a good-faith estimate, in writing, of what you’ll pay in direct fees or sales commissions, plus any payments the adviser’s firm quietly receives for selling particular mutual funds or annuities, says Ron Rhoades, director of Western Kentucky University’s financial planning program. Don’t settle for generalities; get specifics. True fiduciaries will give them to you.

Consider choosing an adviser who charges flat fees — such as a percentage of managed assets or a fixed amount per year — rather than those who also take commissions. Fee-based advisers can be expensive, too, so you still have to check. But commissioned advisers are those most likely to push complex products, such as annuities whose sky-high costs dwarf any benefits.

Don’t be blinded by titles like “financial adviser” or “wealth manager.” If they’re not fiduciaries, the advisers can earn commissions on sales, and they’re legally entitled to put your interests last. Even if they are fiduciaries, they still might persuade you (wrongly) that costly investments are in your best interest. The industry isn’t fighting the fiduciary rule for nothing. Remain on guard.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Why You Need a Will

Does everybody need a will? The straight answer is yes. That’s true even for people who think they don’t have a dime to leave to anyone. What if you were in an accident and died later of injuries, and your estate won a $1 million settlement? Who gets the money?

Admittedly, that’s a little far out. You might get away without having a will if, say, you’re a renter living on Social Security with no savings. If you have savings, a pay-on-death account will pass that money to named beneficiaries when you die.

But there are hitches to any no-will scheme, says attorney Patrick Lannon of Bilzin Sumberg in Miami. To begin with, a random financial asset almost always turns up. Examples might be a rental deposit that’s returned or a medical reimbursement. Those checks will be made out to the deceased. How do your heirs get them cashed?

If you had a will, you’d have named an executor to cash checks, pay off creditors and distribute any money or property to your beneficiaries. Without one, your heirs will have to ask a court to appoint a personal administrator. Usually, it will appoint your surviving spouse or a child. But you risk a family fight over who should be in charge.

Some couples try to go will-free by putting everything into joint names. Joint assets pass to the other owner automatically. So do assets with beneficiary forms, such as individual retirement accounts. But something is inevitably left out — typically, a car, Lannon says. Heirs would need an administrator to transfer title. Even if the joint-asset strategy works for the first death, what happens when the other spouse dies? He or she should make a will, which you both could have done from the start.

When there’s no will, state law dictates who gets the house, car, savings and other assets. Those laws vary widely. A surviving spouse might get everything in one state but only one-third in another, with the rest going to your children. If you have no children, half might go to a spouse and half to your parents.

Lawyers are the best source for reliable wills. Your lawyer will also remind you that you need a durable power of attorney and a health care proxy, so someone can manage your finances and make medical choices if you’re unable to do so yourself.

If you’re allergic to lawyers, you can find free, state-specific will forms online. In most states (not all), handwritten wills are also accepted, provided that they were witnessed properly. DIY should be better than nothing. But be careful.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Should You Pay Down Your Mortgage?

More and more older homeowners are carrying mortgages into their retirement. The dollar amounts are much larger than they used to be, and the average loan term is longer by several years. Is this a crisis? That depends.

Normally, the larger your debt, the greater the risk that your retirement standard of living is likely to fall. But some retirees keep large mortgages by choice. Others find it possible to carry even an unwanted mortgage because interest rates are low. Either way, retirees have options for reducing the debt.

It’s not clear that the recent surge in mortgage indebtedness is a risky trend, says Alicia Munnell, director of the Center for Retirement Research at Boston College. The most recent data comes from the 2013 survey done by the Federal Reserve. Between 2001 and 2013, the share of homeowners 65 and older who still had mortgages rose by 13 percentage points. Only 61 percent owned their homes free and clear in 2013, compared with 74 percent 12 years earlier. The median loan had 17 years remaining, compared with 13 in 2001. The story is similar for homeowners 55 to 64.

But this data reflects the housing bubble of the aughts, when optimistic spenders refinanced their homes and took out gobs of cash. It may be that your ardor for mortgage debt has cooled. We’ll learn more, Munnell says, when the 2016 survey is published later this year.

So how do you want to handle mortgage debt when you get to your retirement’s starting gate?

HOLD a large mortgage. This might make sense for people with high income who can deduct mortgage interest, who are comfortable with risk and who invest heavily in stocks. Your long-term returns are likely to beat your mortgage costs, after tax. If your income is modest, however, you’re probably using the standard deduction, so the tax break on mortgage interest doesn’t do anything for you. Your mortgage is simply an expense.

Pay down the debt faster. You might make double payments, or refinance into a 15-year mortgage. Prepaying is easiest when you’re still working and earning a paycheck. Postretirement, it works best for people with comfortable incomes who can afford the extra monthly cost. But prepay with taxable income; don’t take money out of a tax-sheltered retirement account. And don’t tackle the mortgage until you’ve paid off any lingering credit-card debt.

Sell and buy something cheaper. You might buy the new place for cash, if you’ll have enough money left over to live on. If not, take a mortgage with lower payments than you’re making now. The sooner you act, the more money you’ll save. And by the way, banks count Social Security income when evaluating your creditworthiness.

Sit tight. If you have only a few years left, just run it off.

Aim for being free and clear. Even many wealthy people get rid of their housing debt. If bad things happen, you know that the home is yours. And remember, property taxes and insurance premiums can continue to rise, long after your mortgage has been paid off.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

To Buy or Not To Buy

Leasing a car makes less sense after retirement

Need a new car? The question is whether — given your budget and lifestyle — you should buy or lease.

Here are the two classic rules.

1. To pay the least over the long run, buy the car outright.

2. But lease if you want to drive a better car than you can afford to own.

Down payments are lower when you lease, compared with taking an auto loan, and monthly payments are lower, too.

No rule is forever. You might have a different opinion in your 50s than in your 70s. Before that discussion, however, you need to weigh some other pros and cons of leasing a car versus buying it.

When you purchase a car, you pay off an auto loan in an average of about five years. After that, you drive “free” for as long as you like. You become responsible for all repairs, once the car comes off warranty. To save money, consider a factory “certified pre-owned” car that has been inspected and refurbished and carries a manufacturer’s extended warranty.

When you lease, by contrast, you never own the car. You pay for its use over a limited period of time — say, three years. The warranty should cover basic repairs. Maintenance costs may be covered in the contract. At the end of the term, you can buy the car at a price predetermined by the contract. Or you can return it to the dealer and lease another car, brand new. For those who go from lease to lease, car payments never stop.

Which approach best fits your needs?

People still working often find it attractive to lease. Driving a fancier car might be good for business (or good for the soul). And constant car payments don’t feel burdensome when there’s a steady paycheck coming in.

Before signing the lease, be aware of the many incidental fees (such as for acquisition, documentation and title). For example, you’ll pay penalties for driving more than 12,000 or 15,000 miles a year unless you buy additional mileage in advance. If you want to give up the car before the end of the lease, you’ll owe early termination fees that might run to several thousand dollars.

A crash that totals the car is considered early termination; to protect yourself, always buy gap insurance to cover that unexpected cost. At the end of the lease, there might also be a fee for unusual wear and tear.

Are you currently leasing a car? At retirement, you might rethink. There’s good reason to own rather than lease once out of the workforce. For one thing, you probably won’t be driving as much, so the car will last longer. As an owner, you’ll be able to use it, reliably, for perhaps 10 or 15 years, while making no monthly payments at all.

For another thing, owners are better off on that day when you have to give up driving for safety’s sake and start dialing car services for rides.

If you’re leasing and turn the car in early, you’ll owe the big termination fee. Owners can sell their cars and pocket the cash. Nice.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Don’t Rush Social Security

If you can afford to wait until 70, you’ll be better off

I usually encourage people to wait until age 70 before taking Social Security retirement benefits. By waiting, you get the maximum payout. Your monthly check will be at least 76 percent higher than if you started as soon as you qualified, at age 62. If you’re married and die first, waiting will also provide your spouse with a larger survivor’s benefit.

Many people need the money, so they start their benefits at 62. But what about those with substantial investment portfolios? Even if they can afford to wait, would they come out ahead if they claimed at 62 and invested those benefits for growth? 

I put this question to Bill Reich­enstein, a professor of finance at Baylor University in Waco, Texas, and cocreator of one of the most powerful Social Security calculators. He adjusted for various taxes (for example, the probable tax on a higher-income investor’s Social Security income) and assumed a 2 percent annual cost-of-living increase in benefits. After running several cases at the national average life expectancy for people who are 62, he found that they all produced the same answer: Financially, it’s better to wait. 

For example, say that you claim at 62 (accepting a much smaller check for starting early) and put the money into a nest egg invested half in stocks and half in bonds. You decide not to tap your savings to replace that Social Security income. You’d rather hold your income down so you can build your investments up. At 70, you start drawing on that nest egg, taking the monthly benefit you would have gotten if you had waited until 70 to collect. How long will your invested Social Security money last, after tax? 

Oops, only until age 81. That just about matches national life expectancy. But on average, people in the top two-fifths of the income range live longer than that. For a 50-year-old, that’s nearly 89 for men and 92 for women. Roughly half of the well-to-do will probably exceed even that extended age. Your invested nest egg will run out, leaving you only the discounted Social Security benefit that you took at 62.

Here’s another example. Say that, at 62, you decide to start your benefits and invest them but hold your income level by drawing an equal amount out of your IRA to help pay your bills. The result is about the same — your nest egg will run out before you reach your average extended life expectancy. What’s more, claiming at 62 could raise the percentage of your Social Security benefits subject to tax, Reichenstein says.

You might think you can beat the system by investing more of your Social Security benefit in stocks and less in bonds. Maybe stocks will soar, creating a nest egg that lasts until you’re 88 or older. But there’s also a greater risk of earning even less than Social Security would pay. 

You might consider starting at 62 and investing the benefits if you and your spouse are sure you’ll never need the money. That way, your heirs will inherit the account if you die early. If your health is poor, you might also start at 62, assuming your spouse will never need a larger survivor’s benefit. 

But if you think that investing your benefits will beat the lifetime returns that Social Security pays, well, you can always dream.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

FIA: Dream Investment or Potential Nightmare?

Fixed-index annuities are popular — but carry risks

I’m getting mail about an apparent dream investment. It promises gains if stocks go up, zero loss if they fall and guaranteed lifetime income, too. What’s not to like? Plenty, as it turns out.

The investment is called a fixed-index annuity, or FIA, and it’s issued by an insurance company. Sales are booming — $60.9 billion in 2016. FIA contracts vary, but this is how they work.

You buy the annuity with a lump sum, which goes into the insurer’s general fund. You are credited with a tax-deferred return that’s linked to the market — for example, to Standard & Poor’s index of 500 stocks. If the S&P rises over 12 months, you receive some of the gain. For example, your credits might be capped at an increase of 5 percent, even if the market soars. If stocks go down, you take no loss — instead, your FIA receives zero credit for the year.

Each year’s gains or zeros yield your total investment return. But I see problems:

Low returns. Salespeople might claim that FIAs could earn 6 or 7 percent a year. But with fees, they’ll struggle to match the low returns from bonds, says Michael Kitces of the wealth management firm Pinnacle Advisory Group in Columbia, Md.

High fees. You can’t find out what you’re paying for investment management. Costs are buried in the black-box system used to adjust the credits to your account. Sales commissions run 5 to 7 percent and may be hidden, too. Under the new fiduciary rule, which requires advisers to put your interests ahead of theirs, commissions have to be disclosed if you’re buying the annuity for a retirement account, but not for other accounts. Salespeople sometimes claim, falsely, that their services are free.

Profit limits. Every year, the insurer can raise or lower the amount of future gain credited to your account. You face high risk that returns will be adjusted down.

Poor liquidity. You can usually withdraw 10 percent in cash, each year, without breaking your guarantee. But you’ll owe surrender charges if you need your money back before five or 10 years are up. You might also forfeit some gains.

Lifetime benefits. For about 1.5 percent a year, you can add a “guaranteed lifetime withdrawal benefit” to your FIA. Promised yearly payments run about 5 percent. But, Kitces asks, why do it? Your basic FIA already provides a lifetime income. What’s more, 5 percent is not a return on your investment. The insurer is merely paying you your own money back, in 5 percent increments — and charging you 1.5 percent for the “service.” If you live long enough, you’ll exhaust your money and the insurer will pay, but that doesn’t happen often.

For a guaranteed income, try a plain-vanilla immediate or deferred annuity. It’s cheaper, and you’re not apt to be led astray.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Make a Plan While You Still Can

Don’t put off critical life decisions until a crisis

Most of us think about retirement as the last big plan we’ll ever have to make. But there’s one more thing that’s perhaps even more important. You need a plan to protect yourself against the risk of making poor decisions in your older age. Like it or not, we aren’t as sharp at 80 as we were at 60, even when we think we’re fine.

For example, Terrance Odean, a University of California, Berkeley finance professor, tells me that his father, weakened from a fall, decided to cancel his long-term care insurance at 85. He never asked his son’s advice. Two years later, he wound up in a nursing home, uninsured. “Dad was no longer thinking clearly, but didn’t know it,” Odean says.

Margaret King, director of the Center for Cultural Studies & Analysis in Philadelphia, wrote to me about an ill and widowed neighbor, age 76. She has no close relatives and zero plans for future health care or financial management. “Her friends can’t devote their lives to her needs,” King says. 

Loss of powers might come on us gradually or suddenly in a crisis. The better prepared we are, the safer we’ll be.

Item one is to simplify your finances, says attorney Martin Shenkman of Fort Lee, N.J., to make it easy for someone to take over. Consolidate any scattered CD accounts and IRAs, set up automatic payments to a credit card for regular bills (card companies provide fraud protection) and create good financial files, including user names and passwords.

Then choose an agent who’ll help you with your finances if you become uncertain or unable. Give him or her your durable financial power of attorney after having a heart-to-heart about what you expect. Or consider a revocable trust. Chat with your agent about even small money decisions, in order to get in the habit. Any financial advisers should have someone to contact if you start doing odd things (for example, making big gifts to a hired caretaker).

Another power of attorney should go to the person you’d want to make medical decisions for you in case you can’t make them yourself.

When your medical and financial stand-ins are not the same person, the financial document should order the financial agent to pay for any kind of care that is chosen by the health care agent, Shenkman says. Draw up a living will that covers your wishes for continuing, or final, care.

Decide where to live next. You won’t necessarily be able to stay in your home, especially if you’re married and lose your spouse. Now is a good time to investigate independent or assisted living possibilities instead of leaving it to your worried children after a crisis.

Think about when you’ll give up driving. (Hint: It should be before your kids start demanding the keys.) Does your current neighborhood offer sufficient public transportation for you to get around? 

It’s hard to identify with a future image of ourselves, King says. But that older person is someone you’re responsible for. Save yourself and your children grief by setting up guardrails now.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Is It Time to Splurge?

Having a nest egg is great, but don’t sacrifice needlessly

Here’s a surprising question. Do we become too frugal when we retire? Those of us who have spent years pinching our pennies to fatten our nest eggs often find it hard to get out of the habit. At the age when we ought to start spending those savings, we become afraid to touch them. 

There are reasons for caution. We don’t know how long we’re going to live; we fear unexpected health care costs in later age; we are earning practically nothing from savings and worry about losing money when stock prices fall. But there’s evidence that we sometimes worry too much — and risk depriving ourselves of pleasures that we can afford.

I’m thinking of the friend who flies to see her grandson only once a year because she wrongly believes that an extra visit would knock her nest egg out of whack. Or the one who has enough money to buy hearing aids but is so shocked by their cost that she stays partially deaf. 

Are you stuck, too? Could you spend more on hobbies, grandchildren, charities, fun, without that nagging dread that the money will run out?

For those of you who have only a small amount of savings and live on Social Security and perhaps a small pension, these questions are probably moot. You likely already spend all your income and need your savings for emergencies.

For those who are better fixed, however, overcaution might be crimping your style. A 2016 study from Vanguard’s Center for Retirement Research finds that, on average, savings continue to rise after people retire. A similar study from Texas Tech University finds that even people taking required minimum distributions from their individual retirement accounts tend to save some of that money, rather than spending it all. 

Maybe you want to leave more to heirs. But those of you with discretionary income might also underspend because you’re unsure how much of your money you can afford to use. 

Here’s one way to figure it out: Add up the income that you can reasonably count on in retirement in the form of regular checks, excluding interest and dividends. That would include Social Security, any pensions or annuities, and any other lifetime sources. To that, add 4 percent of the value of all your financial assets, including stocks, bonds, mutual funds, CDs and cash. This effectively includes your interest and dividends. The total is roughly the amount you can spend each year and still feel sure that your money will last at least 30 years. If you’re spending less than that amount, you can afford some extra grandchild visits, a family visit to Disneyland or Yellowstone, or a week abroad.

There’s no harm in spending even more of your disposable income in early retirement (the go-go years) because you’ll inevitably cut back later (the no-go years). As you get older, it’s normal to worry about running out of money. But don’t worry so much that you forgo joy.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Who Will Act for You if You Can’t?

Giving someone power of attorney is essential — and tricky

I got an email from a reader that set me thinking about durable powers of attorney. They’re essential to your future financial security but don’t always work the way you and your family hoped.

A durable power of attorney (POA) protects your future self. It names an agent to handle your financial affairs, such as bill paying and investment management, if an accident, illness or simple fatigue leaves you unable (or unwilling) to cope. When the agent needs to take charge, however, walls might go up. 

Take the reader who emailed me. She held her mother’s durable POA. When dementia descended, the mother, in her confusion, refused to allow her daughter to act. Financial institutions won’t always accept a POA if the person who granted the power objects. Result: The daughter had to ask a court to name her “conservator” of her mother’s financial assets. In these proceedings, a judge takes evidence from the disabled person’s doctor and perhaps others, such as a social worker. The agent can act only if the judge concludes that the incapacity is real.

Similarly, you might hold a health care proxy for someone with advanced Alzheimer’s disease who won’t enter a facility.  You’d have to ask a judge to name you guardian, freeing you to make medical decisions that the proxy put into your hands. Setting up a trust won’t help. Even trustees have to go to court if their assistance is refused. As you can imagine, all of this costs big money.

Ideally, the person who grants the POA will give you the reins before total dementia sets in, says attorney Hyman Darling of the law firm Bacon Wilson in Springfield, Mass. If you meet with resistance, you might propose taking over the big things, like investments or large CDs, while the grantor maintains control of a modest checking account.

Another risk is that the bank won’t accept the POA — because it references you by your nickname, for example, instead of your legal name. In this case you would need extra documents to prove your identity. Or maybe the grantor downloaded the POA from the internet and didn’t get proper signatures. POAs that are written by lawyers are most reliable, but internet POAs may work if they are properly filled in. 

Financial institutions have good reason for caution. An estimated 55 percent of elder financial abuse is committed by family members, caregivers and friends, some with POAs. But the bank manager might reject a trustworthy agent, too. If so, push it up the line. Lawyers definitely help. “We sometimes have to threaten banks,” Darling says. 

Those who grant POAs can clear the road for their agents by visiting their banks and having the agent added to their accounts. Also, check with your investment firm to see if it requires special forms.

If you have no POA and become incapacitated, your relatives will have no choice but to go to court. So please get one! In most cases, they work.

(Originally published in The AARP Monthly Bulletin.)