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AARP Article

How to Make Your Money Last

Take advantage of Uncle Sam’s help to save at every age and stage

(The following article is taken from the 2016 edition of How to Make Your Money Last: The Indispensable Retirement Guide. The book was updated in 2020.)

“Saved more money.”

That’s the number one response retirees and people nearing retirement give when asked, “Financially speaking, what do you wish you’d done differently?” This realization, of course, usually hits most of us after we’ve blown through Plan A (the retirement fairy who’ll magically take care of everything) and Plan B (work till I drop). But since we can’t count on our health or our jobs to see us through, those of us who are lucky enough to still be employed should proceed directly to Plan C: Squeeze that paycheck like a sponge to fund our retirement accounts.

Fortunately, the government has bestowed a great gift on all retirement savers, even those nearing the end of their working lives: the tax-favored retirement plan. The contributions to these plans, as well as their earnings, are tax-deferred and even, in some cases, tax-free.

Many people close to retirement see little point in funding these accounts. “Why put money in a retirement plan now?” they ask. “I’ll be taking it out in a few years.” Two crucial reasons. First, these could well be your highest-earning years, making the tax benefits especially valuable. Second, you’ll be withdrawing the funds incrementally, not all at once. You may live another three decades — ample time for your preretirement contributions to grow tax-deferred. So be smart and get those tax breaks while you can.

Gimme (tax) shelter

Tax-favored retirement savings plans come in two types: traditional and Roths. The vast majority are traditional IRAs, 401(k)s and similar plans. The income taxes on your contributions, up to an annual limit ($18,000 in 2016, plus $6,000 for taxpayers 50 or older), are deferred, and the earnings grow tax-deferred as well. When you start withdrawing the money (which you cannot do before age 59 1/2 and must do by 70 1/2, unless you’re still on a company payroll), it is taxed as ordinary income. That’s the deal: No taxes now but definitely taxes later, when — the assumption goes — you’ll likely be in a lower tax bracket.

Roths, on the other hand, are funded with after-tax dollars. But all the earnings grow tax-free, so when you take out the money, it doesn’t count as current income and hence is totally tax-free. If you don’t need the money, you never have to take it out; a Roth can grow tax-free for the rest of your life and be left tax-free to your heirs. (Another upside: If you do need the money, you can withdraw your own contributions at any age without penalty.)

But the contribution limits for IRAs, whether Roth or traditional, are fairly low: The 2016 maximum is $5,500, or $6,500 if you’re 50 or older. There are also income limits, albeit generous ones: You can contribute the maximum if your adjusted gross income in 2016 does not exceed $117,000 or, for married couples filing jointly, $184,000.

Which plan is which?

The type of tax-favored plan you participate in is determined by your employment situation, so there’s not much angst around that choice. What is absolutely vital is that you participate in whatever plan you qualify for and sock away as much as you can afford. The money you invest now will be your nest egg later. Here’s a quick rundown.

  • If you work for a company with a tax-deferred plan, a percentage of every paycheck can be deducted automatically from your pretax salary and invested in the plan. It’s typically deposited in mutual funds provided by investment firms, brokerages, banks and insurance companies. Many employers match a percentage of your contribution, a freebie no employee should pass up.

    In general, for-profit businesses offer 401(k)s; public schools, universities and other nonprofit institutions offer 403(b)s; and certain state and local governments provide 457s. (The names correspond to sections of the tax code.)

    According to Vanguard’s 2014 study “How America Saves,” workers in their mid-50s to mid-60s contribute an average 8.8 percent of their earnings to these plans. At 65 and up, they save 10.1 percent. As an annual goal, that may be too ambitious; still, try raising your current contribution by 2 or 3 percent (an amount that should be relatively painless when deducted automatically from your paycheck). Vanguard reports that women, mindful of their longevity, save a larger percentage of their pay than men at the same income level.

  • If you work for a company and meet certain income requirements, you can fund a personal IRA in addition to a company plan. The full IRA contribution ($5,500, or $6,500 if you’re 50 or older) is tax-deferred if your modified adjusted gross income in 2016 does not exceed $61,000 or, for married couples filing jointly, $98,000. You can earn more than those amounts and still open a personal IRA in addition to a company plan if you have freelance income on the side and use it to fund the IRA.

  • If you have no employee plan, you can open a traditional IRA. The same contribution limits mentioned above make an IRA stingier than the 401(k), but the tax break it offers should not be left on the table. Moreover, if your spouse has no earnings, you can make maximum contributions in both your names — as long as the amounts are covered by your earnings. Tax-favored retirement plans cannot be funded with unearned income (Social Security, pensions, interest, dividends or rent). If your part-time job pays, say, $4,500 per year, that’s where your contribution tops out.

  • If you’re self-employed and earn a substantial income, you can start a SEP-IRA (simplified employee pension, handled like an IRA) with a maximum contribution of $53,000 in 2015. If you work with your spouse, you can each fund a SEP-IRA. However, any employees who’ve worked for you at least three of the past five years must also be included in the plan.

If and when you change jobs, your plan travels with you. Your key objective is to preserve the tax umbrella over it. There are five ways to accomplish this.

1. If your new employer also offers a 401(k), you can transfer your money tax-free into the new employer’s plan. This option has the advantage of consolidating your retirement savings in a single account.

2. You can usually keep the old 401(k) if you like, as long as the balance is at least $5,000. The pros: You’re in a familiar investment; the fees may be lower than elsewhere; and you can usually make withdrawals without penalty if you’re between 55 and 591/2. The cons: There may be limits on how and when you can withdraw the money; the fees may be higher than at a no-load (no sales charge) mutual fund; you could lose track of the old 401(k); and an heir could miss out on tax advantages that might otherwise be available.

3. Most commonly, people transfer the money from the old plan, tax free, into a “rollover IRA.” There’s no limit on the amount you can roll. You can choose the IRA offered by your plan’s current administrator — an attractive option if it’s managed by a no-load mutual fund group such as Vanguard, Fidelity or T. Rowe Price; a discount broker such as Charles Schwab or TD Ameritrade; or a low-cost firm that specializes in retirement plans. Or you can roll your old plan into an IRA administered by a different firm, preferably one of those just mentioned. Definitely switch if your current 401(k) is invested with a firm whose advisers charge sales commissions, even if you don’t use those advisers. The IRAs of such firms often contain high-cost mutual funds. Also switch if you’re in a 403(b) or 457 plan whose only investment option is a fixed or variable annuity. And run away — fast — from the friendly “advisers” who call, email, mail and even visit your office with recommendations for your rollover account.

4. If you have multiple retirement plans, roll them together into a single IRA. Separately, they’re a pain to keep track of and likely add to your costs.

5. If you want to buy individual stocks (an imprudent move), roll your retirement plan into a self-directed IRA with a discount or full-service brokerage firm or financial adviser.

Note: The money you move should go directly from your old plan to your new one without passing through your hands. (Your new plan’s trustee will explain.) If the check goes to you, it’s counted as a taxable withdrawal unless you deposit it into your personal bank account, write a new check, and send it to the new plan within 60 days. Too much can go wrong, so don’t do it.

Should you convert to a Roth IRA? You can roll any amount of money from a traditional IRA, 401(k) or similar plan into a tax-free Roth IRA regardless of how much income you earn. There’s a cost to this transfer, however — perhaps a big one. You pay current income taxes on the money you move even though you don’t withdraw any of the cash.

You might want to switch to a Roth if: 1) You won’t need the money until your later age, if ever. 2) You plan to leave all or most of your Roth to your heirs and want them to receive it tax free. 3) You expect to be in the same, or higher, tax bracket when you retire, although you can’t know for sure. 4) You’re young enough that future growth in your investments could more than offset the cost of paying current income tax. 5) You can pay the taxes due from outside funds without having to tap your tax-sheltered retirement account.

For the average person, however, the size of the current tax from a Roth conversion might overwhelm any likely benefit he or she would get from future tax-free growth.

When there’s no more paycheck

So you’re officially retired? Congratulations — we think. Your income now will derive from many possible sources, including Social Security, pensions, and taxable savings and investment accounts, as well as the tax-favored plans discussed here. It can be hard to know which funds to tap when. Your goal is to make your collective nest egg last as long as possible. The key? Use it tax-efficiently.

The general rule is to spend taxable savings (money held in regular investments) before dipping into an IRA (our term here for your tax-deferred savings, since you’ve likely consolidated them in a rollover IRA). You should also tap your savings — taxable first, then tax-deferred — if doing so enables you to put off collecting Social Security until age 70, the point at which you will get the highest possible monthly benefit for life.

That said, there are times when you should tap your IRA first:

  • When you’re in a low tax bracket and your heirs are in a high one. The IRA money is worth more if you take it now.
  • When you want to shrink your IRA so that, upon reaching 70 1/2, your required withdrawals need not be large. This strategy could save you from paying higher income taxes on your Social Security benefits when IRA withdrawals start.
  • If you’re in the 15 percent tax bracket. You might want to withdraw money from the stock funds in your IRA, even if you don’t need the cash, and pay income taxes on it now. Then you can reinvest the money in stock funds in your taxable account. That way any further increase in their value will be taxed at the low capital gains rate.
  • If you have both taxable and tax-deferred accounts for long-term investments. Keep stocks in the taxable account. That way, any profits will be subject to the low capital gains rate. Taxable bonds, such as Treasury funds, belong in the tax-deferred account. Interest income is always taxed as ordinary income.
  • If you have both a Roth and a tax-deferred IRA. Normally, spend the latter first. The longer the Roth can grow tax-free, the better. But tap the Roth first if you’re in a high tax bracket and expect it to drop in the future.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Got Money Questions?

Jane Bryant Quinn on personal finance.

Q: My husband and I are wondering when would be the best time to collect our Social Security benefits.

A: I get lots of questions like this. The answer differs for every couple, depending on their ages and the size of their potential benefits. Sometimes one of you should take retirement a year or two early so that the other can claim spousal benefits on that account. Sometimes it’s better to wait. These services can provide the answers you need. SocialSecuritySolutions.com charges $20 for a report showing the best time to claim benefits based on the life expectancy you set; it costs $50 if you want to be able to play with various retirement assumptions and $125 for one-on-one advice. SocialSecurityChoices.com charges $39.99 for a claiming strategy based on three projected lifetimes. The services’ recommendations differ a little bit because of the math involved, but both are sound. AARP’s free Social Security Calculator can also help you determine your best age to claim benefits..

Q: Our disabled son’s inheritance will go into a special-needs trust. Can I use a codicil form from the Internet to change the trustee?

A: Please don’t! If the codicil’s wording — or the way you fill in the names or sign the document — doesn’t conform exactly to your state’s law, a court might not accept it. Your son’s welfare is too important to leave to boilerplate.

Q: How are individual retirement accounts divided among heirs? Can I leave my stocks to one child, my bonds to another and my CDs to a third?

A: Yes, you can divide your children’s inheritance in this way, says IRA expert James Lange of the Lange Financial Group in Pittsburgh. But do you really want to? The person who inherits the stocks might wind up much richer than the person who gets the CDs (or much poorer, if the market collapses). You might leave anger or envy behind. And what if you want to sell some stocks and reinvest in CDs? You’d be favoring one child over another. Instead, leave the total value of the IRA in percentages — say, divided into thirds. The trustee will split the assets according to the percentages you decree.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Get More Out of Your Savings Bonds

Avoid these four mistakes that can cost you money

Are you sitting on a pile of U.S. savings bonds? If not, should you be? For safety-first investors, savings bonds still hold an edge over bank certificates of deposit. Savers put more than $631 million into these bonds last year. Those of you sitting on a pile might find, to your surprise, that some of them currently yield 4 or 5 percent.

Savings bonds come in two flavors — EE bonds, at fixed interest rates, and I bonds, at floating rates that change with inflation every six months. You have to hold them for at least one year. If you sell before five years are up, you pay a penalty equal to three months’ interest. Bonds generally stop paying interest after 30 years.

Almost all savings bonds today are sold electronically, through treasurydirect.gov. You can invest up to $10,000 a year for each type of bond (double that if your spouse buys, too). An additional $5,000 is available in the form of old-fashioned paper I bonds, if you ask that your tax refund be paid that way.

I bonds are the most popular. At this writing, a new bond yields 1.48 percent — and before you turn up your nose, consider the competition. A five-year CD might pay 2 percent, but it offers no inflation protection. You’re taxed on the interest every year unless you buy through a tax-deferred individual retirement account. You also pay taxes at all levels — federal, state and local. The income from savings bonds is tax deferred and then taxed only by the feds.

A quick word about EE Bonds. New bonds are paying (if you can call it “paying”) just 0.1 percent. If you hold them for 20 years, you’ll earn at least 3.5 percent, thanks to a guaranteed catch-up payment. Still, not appealing.

If you’ve owned savings bonds for years and are ready to cash them in, be sure to find out exactly what each bond is worth. Without that information, you might make one of four big mistakes, says Jackie Brahney, marketing director of savingsbonds.com, a service that helps you manage your bond portfolio.

Mistake 1: You cash in the oldest bonds first. They might be your highest earners.

Mistake 2: You look only at the bonds’ face amount when deciding how many to redeem. That might bring you more taxable income than you want. Bonds that add up to $3,000 on their face might be worth $6,000 or more, once the interest is counted.

Mistake 3: You cash in so many bonds at once that the cumulative, taxable interest puts you into a higher bracket.

Mistake 4: You redeem a bond in the day or week before a six-month interest payment is due to be paid.

Free calculators at treasurydirect.gov and savingsbonds.com will tell you what each of your bonds is worth. For as little at $5.95 a year, Brahney’s service will value the bonds and brief you, monthly, on what they currently earn and how much interest they’ve accumulated. Knowing your bonds can save on taxes and raise your earnings, too.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Are You Ready to Retire Early?

Use this checklist to assess your plans

Are you thinking about retiring early? Back when boomers were young they considered it almost a generational perk. Life’s second half should be merry years of play and rest.

Once you slide into your 50s, however, the question of early retirement grows complex. You might still need your paycheck. If so, case closed. And you might love your work and hope to pursue it for many more years.

If you’re ready to quit, however, there’s a lot to consider before casting loose. On the plus side, you’ll be able to take your life in any direction you want. On the downside, early retirement carries financial and emotional risks. Before telling your boss to take that job and shove it, run down this checklist to see if your plan is sound:

Do you really have enough money to finance a long retirement?

Don’t underestimate your longevity. At, say, 55, men have an average of 28 more years to live, and women 31 years. Roughly half of you will live longer than that. During your early years of play, you’ll be living primarily on your savings and investments, plus any special sources of income such as rents, royalties or perhaps a small pension. You’ll have to wait until 62 to qualify for Social Security retirement benefits. But by claiming that early, your benefit will be docked by as much as 30 percent, compared with what you would receive if you waited until your full Social Security retirement age (67 for today’s 55-year-olds). You might come to regret that.

Have you made a retirement budget you can live with?

To make it easy, sketch the budget for only your first retirement year. Start by listing the income that you can realistically expect after your paycheck stops. For budget purposes — and to feel fairly sure that your money will last for the next 30 years — assume that you’ll take only 4 percent out of your savings and investments. The total, from savings and other sources, represents your spending limit.

Now add up your expenses.If they’re higher than your spending limit, you’ll have to cut back — maybe sharply. That might not be hard if your largest budget item is your house and you’re happy to downsize. If not, you’re probably not ready, financially, to make the leap.

In fact, you’re not even ready if your budget just barely breaks even. Inevitably, you’ll run into costs that you didn’t expect. If you cover them by digging too deeply into savings, you might run seriously short of money a couple of decades from now. You might be better off staying at work for a few more years, cutting spending and concentrating on saving more.

When budgeting future withdrawals from your savings and investments, follow the classic 4 Percent Rule: Take 4 percent of your financial assets in Year 1. Take the same dollar amount plus an inflation increase in Year 2. In Year 3, take last year’s dollar amount plus another increase to cover inflation, and continue on that track. When you eventually sign up for Social Security (later, not sooner, I hope), that income will be inflation indexed, too.

Are you out of debt?

Giving up a paycheck when you’re carrying credit card debt is nothing short of madness.

Do you have health insurance?

Some corporations provide early retirees with health insurance until they reach 65 and qualify for Medicare. If you’re not that lucky, survey the private marketplace carefully to see what’s available at a price you can afford. Going bare can wreck your finances overnight.

Do you have a sustainable investment plan?

At today’s interest rates, you’d need a two-ton truck full of money to live off the interest paid by high-quality bonds or certificates of deposit. Low-quality bonds yield more but carry market risk. If you switch your savings into dividend-paying stocks, you’re facing market risk plus a lack of diversification. That’s because you’ll have too much money in financials, consumer staples and utility company stocks and not enough in the growth stocks that typically don’t pay dividends.

Financial planners might advise early retirees to hold 60 to 70 percent of their money in an index mutual fund that follows the total stock market (both large and small stocks), for 20- and 30-year growth. The balance would go into intermediate-term Treasury bond funds. They’re a good cushion because their prices usually rise when the stock market falls. Research shows that following this strategy in conjunction with the 4 Percent Rule gives you very high odds of making your money last for 30 years. Put an extra 5 percent into stocks if you need the money to last for 40 years.

If you’re married, how well do you and your spouse get along?

Retirement at any age throws you continually into each other’s company. Doing the 50 states in an RV will become a misery if you’re arguing all the time.

How flexible are you?

If your early retirement doesn’t work out because you’re bored or you’re spending money faster than you expected, be prepared to go back to work — part time, at least. That means keeping up your skills or finding new ways of deploying the natural talents you have. If you’re choosing a new place to live, you might consider its employment opportunities, just in case.

Who succeeds at early retirement?

People who have enough money (with “enough” depending on how high on the hog you want to live), plenty of personal interests and an adventurous disposition. Have a happy second half of your life!

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Maximize Your Social Security Benefits

Jane Bryant Quinn answers to your most common Social Security questions

Are you wringing all the money you can out of Social Security?

Based on my reader mail, I worry that some of you are losing out. Here are quick answers to the questions I get the most.

What can you apply for?

Retirement benefits, based on your own lifetime earnings. Spousal benefits, based on a living spouse’s lifetime earnings. Survivor’s benefits, payable after a spouse’s death.

You can effectively collect only one of these benefits at a time. Social Security automatically gives you the largest check you’re entitled to. Children might get benefits, too.

What’s the best age to claim?

This varies a lot. In general, your check is always reduced for life if you file for any benefit before what Social Security calls your “normal retirement age.” That’s 66 for people born from 1943 to 1954 and rises gradually for every birth year through 1959.

For those born in 1960 or later, normal retirement age is 67. There’s a fat bonus for collecting your benefits late: Social Security pays you an extra 8 percent for every year past “normal” that you delay your claim, up to age 70.

Can you claim a benefit as a spouse and later switch to benefits based on your own earnings record?

Yes, provided you wait to file for spousal benefits until you reach “normal” (or “full”) retirement age. You might collect a spousal benefit check from, say, age 66 to 70, then put in for your personal retirement benefit, which will have grown.

This strategy does not work, however, if you file before you reach your normal retirement age. Early filers receive a benefit amount equal to the spousal benefit or their own retirement benefit, whichever is higher. Never both.

Does it ever pay to collect benefits early?

For many married couples, yes. A wife, for example, might retire early on a reduced benefit. When her husband reaches normal retirement age, he can file for spousal benefits on her account. When he reaches 70, he can switch to his own, larger retirement account. How well this strategy works will depend on your ages and which of you is the higher earner.

What if you’re divorced?

You can claim spousal and survivor’s benefits on your ex’s earnings record if you were married for at least 10 years and are not currently married. (Exception: You can keep the survivor’s benefits if you remarry after you pass 60.) Your ex has to be eligible for Social Security, even if he or she has not yet retired.

What if your spouse dies?

If you’ve been collecting a spousal benefit, you can step up to the larger survivor’s benefit. To get the maximum amount, consider putting off your claim until you reach normal retirement age.

You might make a different choice, however, if you have a substantial Social Security earnings record of your own. You might take the survivor’s benefit early, then switch to your own, larger benefit at a later age. Play with the numbers until you get it right.

Helpful resources

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Should You Exit the Stock Market?

Ask yourself these four questions before moving your money

Should the portfolios of older investors include stocks, and if so, what percentage? The issue comes up every time stock prices wobble or fall. If you’re in your 70s or 80s, how safe does your money have to be?

In part, the answer depends on your circumstances and temperament. But there’s one rock-bottom rule: You need to feel sure that, whatever happens to stock prices, you’ll be able to pay your basic bills. Assuming that you have savings to invest, there are several things you might consider.

If it does, forget about it and use some savings to buy immediate-pay annuities. You’ll get a guaranteed income for life and will never have to think about stock prices again. To see how much an annuity would pay, go to immediateannuities.com. The monthly amount will almost certainly exceed what you’d get from high-quality bond funds. Money that is not in the annuity could go into bank savings or CDs so you’d have extra cash on hand.

Do you have enough money from other reliable sources to cover your lifetime needs?

If you’ve got enough money from your pension, Social Security and other investments, owning stocks is optional. “You’ve won the game, so you don’t have to play anymore,” says Larry Swedroe, director of research for the BAM Alliance of wealth managers and author of many personal-investment books. You might want to keep a high percentage of your savings in stocks for the benefit of the next generation, or a low percentage in case your circumstances change. Either way, the investment needs to pass the “stomach-acid” test, Swedroe says. You have to feel safe enough to not feel sick in years that prices plunge.

Do you have savings but need to grow them to provide for your later age?

Well, if so, that’s what stock investments are for, says Judith Ward, a senior financial planner for the mutual fund group T. Rowe Price. At 75, you could live another 15 or 20-plus years, which historically gives the market time to rise in price. The firm recommends at least 20 percent in stocks, with the rest in bonds. Over the past 15 years, that mix of investments lost money in only one year (the loss was just 3 percent), measured by standard stock and bond indexes. For more growth, you might go to 40 percent stocks.

How do you stay “safe” when you have money in stocks?

“Put aside some money for now and other money for later,” says financial planner Judith Lau of Lau Associates in Greenville, Del. “Now” means cash — enough to pay your bills for two years. For example, say that Social Security pays you $1,300 a month and you’re spending $2,300. The difference is $1,000 a month or $12,000 a year. You buy two years of safety with $24,000 in the bank.

“Money for later” comes in two parts. The first part holds reasonably safe investments, such as short-term bond funds, that could pay your bills for three years. You’re now safe for five years, no matter what happens to stocks. The second part comprises stocks and stock funds for longer-term growth. Every year, you sell some of your stock funds to replenish your two-year cash reserve.

That’s the theory, anyway. Stress-test your choice by asking if you’d be OK if stocks fell 50 percent before rising again. That’s the stomach-acid part.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

What to Do About Dementia; Debt and Divorce

Jane Bryant Quinn answers your financial questions

Q: My wife has early-onset dementia. When I call to ask about her retirement account or credit cards, the reps need her permission to speak with me, which she can’t give. What should I do?

A:This is a powerful reminder of the need for a properly executed power of attorney. Had your wife given you her POA as soon as she got the diagnosis, you’d have the right to manage her affairs. It might not be too late, says Rebekah Brooker, an attorney with Scheef & Stone in Dallas. People with dementia often have good days as well as bad ones. On a good day, your wife could legally sign a power of attorney. If your wife doesn’t have good days, your only option is the complexity of a legal guardianship.

Q: When I divorced 12 years ago, my ex agreed to pay the credit card debt but never did. I am being dunned for money I don’t owe. How do I get this off my credit report?

A:Such a short question with so many issues! First, you, too, owed this debt because you’re a joint account holder. A divorce agreement doesn’t change that. You can’t be sued for it because the statute of limitations has presumably run out. But the collection firm that owns your bad debt is still allowed to bill you, which is totally unfair. Unpaid debts should drop off your credit report after 7 1/2 years from the first missed payment. But the debt owner might not have told the credit bureau when to start the clock. Use the bureau’s website to dispute the bills, says Chi Chi Wu, staff attorney for the National Consumer Law Center — not on the ground that your ex should pay (that won’t work) but because they’re stale. The bureau will check with the debt’s owner, which should solve the problem.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Prepay Your Mortgage

Getting rid of housing debt is way harder once the paycheck ends

The pressure of debt repayment lies heavily on Americans in midlife and later. Surprisingly, it’s not consumer debt. What’s squeezing the budget as families enter retirement today is primarily mortgage debt.

Payments on home loans chewed up 7 percent of income on average in 2013 for people 55 and older, the Employee Benefit Research Institute (EBRI) reports. That’s up 35 percent since 1992, when the boomers’ grandparents retired. Back then, only 24 percent of this age group still carried mortgages, EBRI’s Craig Copeland says. Today 39 percent do, and in much higher amounts.

Having a high level of mortgage debt, relative to the size of your income, gets especially risky when your paycheck stops and you have to make monthly payments out of the money you’ve saved. That’s why so many preretirees try to pay off their mortgages in advance. How easy that is to do depends not only on the size of your income but also on the type of loan you have.

Prepaying a fixed-rate mortgage is pretty simple. All you have to do is add enough extra money to each monthly payment to wipe out the loan by the year that you want to retire. As an example, say that you took a $300,000 loan for 30 years at a fixed interest rate of 4 percent. The loan has 20 more years to run. If you want to retire mortgage free 13 years from now, you can do it by paying an extra $500 a month. To test various prepayment schedules, use AARP’s mortgage payoff calculator or ones at mtgprofessor.com or bankrate.com.

When your mortgage carries an adjustable interest rate, however, your prepayments have to be adjusted, too, says Jack Guttentag, founder of mtgprofessor.com. A fixed amount, such as $500 a month, will reduce the size of your loan. But every time the interest rate changes, the lender will stretch out your remaining payments over the loan’s original, 30-year term. Your monthly payments will go down but you’ll still be in debt when you retire. To burn the mortgage earlier, you will have to increase your prepayments after every rate adjustment. Pay the $500 you planned on plus enough to make up for the amount by which your scheduled mortgage payments dropped.

When you have an adjustable mortgage that you want to retire by a specific date, calculating your payments becomes an annual process. First, decide how soon you want to pay the mortgage off — say, in 12 years. A mortgage calculator will show you what you have to pay each month in the current year. When the interest rate changes, fire up the calculator again. Enter the remaining amount of the loan, the new interest rate and your target retirement date. You’ll get a new monthly payment, higher than the last. Do the same in each following year.

For something less exact but pretty close, set your first mortgage payment (plus the extra) as if you had a fixed loan, never reduce it and check your progress every couple of years.

Before you start a prepayment plan, however, consider what else you might do with that money. Top of my list would be paying off consumer debt and raising your contributions to a tax-deferred retirement plan. Both actions bolster your finances and will make monthly mortgage payments easier to cover.

If you can’t afford to prepay your mortgage and still want to retire with a paid-up home, consider downsizing earlier rather than later. You might buy a condo for cash or rent it and put the proceeds of the sale into an investment account. No more mowing lawns. You’ll declutter your life and relieve your retirement budget, too.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Dealing With Credit Card and Time-Share Companies

Financial expert Jane Bryant Quinn answers readers’ questions

Q: My husband died this year. Our credit cards are jointly held. Do I have to contact the card companies to have his name taken off the account?

A: You’re named on the cards, so you’re still entitled to use them. But yes, tell the issuers. They’ll find out anyway, during routine checks of Social Security numbers. Your husband is listed as “deceased.” As a result, any account with his name on it will no longer receive a credit score, says John Ulzheimer of CreditSesame.com. By law, lenders are not supposed to pull the credit of a surviving spouse unless there’s evidence of inability or unwillingness to pay, says Gerri Detweiler of Credit.com. Some of them will simply ship you a new card. But others will make you reapply, based on your own income. If they think it’s insufficient, they can raise the card’s interest rate or even refuse to reissue it. To me, that flies in the face of the spirit of a law intended to protect spouses. But what’s new about that?

Q: How do I get rid of a time-share I no longer need and can’t afford?

A: Unwanted time-shares are a glut on the market. Most of them have little or no resale value. Here’s great advice from Brian Rogers of the Timeshare Users Group (TUG):

1. Lower the price of your share to $1 and list it on TUG, Craigslist, eBay and similar sites. To attract buyers, offer to pay the closing costs and perhaps a year of maintenance fees.

2. Write (don’t call) your time-share’s homeowners association, asking it to take the property back. It might, if you give good reasons (poor health, don’t travel anymore, retired and can’t afford the fees). You might have to write several times.

3. Don’t get sucked in by a middleman who promises — for a mere $2,000 to $5,000 — to help you donate the time-share to charity and deduct its “value” on your tax return. Taking a big write-off for a property that can sell for only $1 amounts to fraud.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

‘The Talk’: Your Kids and Your Money

Families should keep all members in the loop, financial planners say

What should you tell your adult children about your money? That’s a question all of us confront. Some people think it’s none of the children’s business. A few tell all. Most of us are probably somewhere in the middle, revealing some things and reserving others, depending on our own feelings about money and whether the facts might cause anyone distress.

I put the disclosure question to members of the National Association of Personal Financial Advisors, who are all fee-only financial planners. They lean strongly toward having “the talk.”

Start by telling the children where to find your will, health care directive, financial records and any life insurance policies (small policies sometimes get lost). If the will leaves them uneven shares, explain your decision. Often, the children will understand. If you can’t bring yourself to discuss their shares in person, at least leave a thoughtful, explanatory letter so that the siblings won’t start blaming each other for secretly currying your favor. Tell them, too, if one of your children has power of attorney or is the executor of your will. “They should hear this from the parents,” says Marc Roland of Dean Roland Russell Family Wealth Management in San Diego. “If they learn only after your death, they might think that Mom and Dad loved one kid over another.”

You might not want to tell your children exactly what you’re worth, in case your assets get depleted later in life. The kids shouldn’t be planning on an inheritance they might not get. On the other hand, upfront disclosure about your intentions can help prevent one sibling’s dishonesty in handling family assets, if that’s a risk, says Daniel Johnson of Parsec Financial Wealth Management in Asheville, N.C.

It becomes more important to talk to the children as you get older. You might become ill or incapacitated and need help with your finances. Children also might wonder, and worry, about whether you have enough income and savings to last for life. If so, it’s a kindness to let them know that you’ll be OK. If not … well, it’s hard to face this yourself, let alone discuss it with a child, says Rob O’Dell of Wheaton Wealth Partners in Naples, Fla. But the sooner they learn about the problem, the better.

In any situation, “the talk” lets you put your wishes into words that your children will understand, says Dan Fitzgerald of Aequus Wealth Management Resources in Chicago. It can even result in useful changes to your plan. I’ve had personal experience with improving a financial decision because my kids were in the loop. Families manage better when you leave no big surprises behind.

(Originally published in The AARP Monthly Bulletin.)