Q: Though my husband and I are struggling to pay off our $4,000 credit card debt, he contributes the maximum amount to his IRA—$5,000 per year, or $417 per month; the account is now worth $19,000. I think he should suspend his IRA contribution until we're debt-free. He thinks the IRA is more important. What are your thoughts?
A: Though I love that your husband is so focused on saving for retirement, you're right to want to get out of debt ASAP. But you're viewing this as an either/or proposition, when you actually have several options.
First off: If you suspend that $417 contribution and put it toward your credit card instead, you could be out of debt in ten months. That's a fine solution. But you could also put money toward both goals. Assuming your credit card carries an 18 percent interest rate, and you're making a minimum required payment of just 2 percent of your balance, your monthly payment is about $80. Continue paying $80 a month, and it'll take seven years to be out of debt. You'll also pay almost $3,500 in interest. Increase that to $375 by contributing $122 a month to the IRA instead of $417, and you'll have the debt paid off in one year—while still saving nearly $1,500 for retirement during that time.
But I think the best idea is to see if you can qualify for a new credit card that will charge you 0 percent interest on the transfer amount for the first 12 months. (Search for deals at creditcards.com.) Pay about $330 a month, and you'll have the balance down to zero within the year. One caveat: Use a transfer only if you won't be charged a balance transfer fee, which could be 4 percent of your transfer amount. Try a credit union credit card—many don't charge these fees.
Finally, you referred to your husband's IRA—but I hope you have a spousal IRA as well. Even if you don't have a paying job, all spouses are eligible for an IRA—provided that the spouse with an income earns income at least equal to the annual contributions. (So if a married couple both contributed $5,000 to an IRA, one spouse would need to earn at least $10,000.) Make sure you're protecting your future just as diligently as your husband is protecting his.
Q: After taking out cash advances on her credit cards, my 81-year-old mother is out $8,000. She lives on $600 a month from Social Security and cannot keep paying on this debt. Can you advise me on how to proceed? How do I get her out of credit card debt?
A: As daunting as an $8,000 debt looks, I'm relieved the figure isn't higher, given your mother's generous nature. A cash advance on a credit card is one of the worst types of borrowing because the interest rate is typically 21 percent or more. It's fruitless to try to talk your way out of this; the card issuer has every right to expect repayment.
To regain control of her debt, have your mom keep paying at least the minimum due on the monthly credit card bill. On-time installments are vital for protecting her FICO credit rating. That's important because if her score is at least 700, she has a good chance of being able to transfer the entire balance to a new card with a lower interest rate. Many card issuers offer zero percent interest for the first year when you move your balance to their card. At CardTrak.com, click on Search Cards, then choose the Balance Transfer Cards link to find issuers offering the best deals. But only sign up for one card—multiple applications made at the same time can actually hurt her credit score.
Keep reading: Suze's credit card debt eliminator calculator
Q: I've got $17,000 in credit card debt, $21,000 in student loans, a car payment, and an interest-only, variable-rate home loan that will adjust in two and a half years. I take in about $37,000 annually. How will I ever be able to save for today, for retirement, for my sons' futures? Where do I begin, and how do I prioritize?
A: Your overriding goal must be to stay current on all your monthly debt. Pay at least the minimum amount due on your credit cards each month, and keep up with the car payment. That should result in a strong credit score, which means you may be able to ask to have your cards' interest rates reduced.
Next, I want you to consider selling your home and moving into a rental. Next, ask your mortgage lender what your payment would be if the adjustment hit today. If the answer scares you, I want you to consider selling. If you can sell and make enough to cover your mortgage and moving costs, I suggest you do it now. The move will give you a better grip on tomorrow by reducing your costs today. Assuming that renting will free up some money, I want you to open two accounts that will help you establish peace of mind: an emergency cash fund and a Roth IRA. When you find full-time work in your chosen field—and you will, stay positive—you can revisit buying a home.
Keep reading: 3 real-life cures for a cash crisis
Q: My husband just discovered that I took out a $125,000 unsecured loan (at 8.29 percent interest) without his knowledge—and needless to say, he's furious. I've suggested that we either refinance our home or take out a home equity loan to pay off this debt. What do you recommend?
A: Your husband "discovered" that you took out this loan—meaning you never told him about it? Your biggest debt is the one you owe your husband, who is a saint for sticking by you. It will take work to regain his trust—you will need to hold yourself accountable from now on and observe one of my first rules of finance: Truth creates money, but lies destroy it.
I'm generally not in favor of exchanging unsecured debt for debt tied to your home, because if you have trouble keeping up with the higher mortgage payments, you could lose your home. The one exception is when you have ample resources, plenty of equity in your home and your intention is to stay in the home for at least five. In that case, it may make sense to refinance if you can qualify for a fixed interest rate of around 5 percent. (The home equity loan at 7 percent doesn't give you enough of a rate reduction over the personal loan to be worth it.) As I write this, the average 30-year fixed-rate loan is right around 4.5 percent. Paying off that $125,000 through a 4.5 to 5 percent fixed-rate mortgage in which the interest is tax deductible is a far better deal than paying 8.29 percent on a personal loan in which the interest is not tax deductible.
Keep reading: 7 deals you should never make
Q: What's the best way to finance a new car? Is it better to finance at the low rates dealers are offering or use our home equity line of credit? The line of credit has a higher rate, but the interest could be deducted on our tax return.
A: You should never use a home equity line of credit (HELOC) for a car loan. When you borrow from your house, it becomes the collateral for the loan, leaving you with the risk of losing your home. Let's say you take out a conventional auto loan and can't keep up with the payments. Worst-case scenario, your car will be repossessed. Call me crazy, but I'd prefer losing a car to losing a home.
Now let's talk strategy. First, be aware that the low rates you see advertised are typically only for borrowers with pristine credit scores (above 720 or so). So make sure your score will qualify you for a great rate. Next, get a maximum loan term of 36 months—no longer. A car is a depreciating asset, so you should put as little money as possible into the purchase. The longer the loan, the more you pay in interest. Lastly, consider a gently used car. Since the most significant drop in a car's value occurs in the first two or three years, buying one that's just a few years old means you avoid paying for those early years of big depreciation.
Q: My husband and I were in a motorcycle wreck. We had no insurance, so I charged our medical bills; now the credit card companies are coming after us. Should we go through credit counseling to reduce the amount of medical debt we owe?
A: Your situation is what 47 million Americans without health insurance have to fear every day: How will they cover their medical costs if they become ill or injured?
If you could manage to pay just the minimum amounts due on your monthly bills, that would satisfy the credit card companies. A credit counseling service (use only someone recommended by the National Foundation for Credit Counseling) can help you out through various means, but not by reducing how much you owe. They charge a ton in fees, and your credit report will be wrecked for years; after all, the creditors are going to report that you repaid only a portion of what you originally owed. But by striving to meet the credit card minimums, your credit scores will improve, which could help you qualify for a lower interest rate (or possibly a balance transfer to a card with a lower rate).
Next, pull out your tax return from the year of your accident. If your total medical costs for that year—not just from your injuries—were more than 7.5 percent of your adjusted gross income, you were eligible to claim all your medical costs as a deduction. If you didn't take advantage of this tax break, look into filing an amended tax return; any rebate can be used to pay down your debt. (But you need to hustle: The deadline to file an amended return is three years from the date you filed the original. I'm assuming you still have a little time because you probably didn't file a return until the following year.)
Suze on Marriage and Money
Q: My husband and I have a constant tug-of-war over money. What can I do?
A: Arguing over money is the number one cause of divorce in the United States, so it's important that you talk with your husband about how you are feeling before you drift further apart. Keep your conversations on the positive side; try to focus not on the mistakes of the past but on what you both can learn from this experience.
The two of you should sit down once a month to go over your finances: You can take turns paying bills. You can balance the checkbook and figure out how much money is in your accounts. You should also request copies of your credit reports from one of the three major credit bureaus (contact Equifax, Experian, or Trans Union). If you've had a hard time keeping up with your debt, my guess is that you do not have the best credit. When you and your husband look at your credit history, he'll be able to see your financial picture realistically. Once you've faced your situation, you and your husband will be in a position to end the tug-of-war and begin repairing your finances as a team.
Keep reading: Real-life couples manage their finances and get out of debt
Q: I'm a stay-at-home mom. Our bank accounts are in his name only, and I have no idea how much we have in checking, savings or our IRAs. How do I manage my financially controlling spouse?
He may be the one who earns money, but being a stay-at-home mom is a job too. Whether it generates a paycheck is irrelevant; it delivers tremendous value to your family. The real problem is that your husband doesn't appreciate what you do, and you can't expect him to value your hard work if you're not valuing yourself. You don't have a money problem. You have a self-esteem problem.
You must demand that your name be put on every account as co-owner, and then learn exactly where you and your husband stand financially. Next, bring your husband in as an equal partner in managing the monthly spending. Sit down at the end of this month and review every bill. If he has a problem with the amount that's being spent, then it's up to him to offer plausible solutions for cutting down on expenses. This is not your problem to fix alone. It's a challenge for you both to solve—together.
Keep reading: How to talk to your spouse about money
Q: I've managed to keep my husband from destroying my credit, but I'm so tired of all the bill juggling that I'm considering divorce. Any suggestions?
A: Often when life isn't working out the way we dreamed, we blame forces beyond our control. But just as often, the problem is staring at us in the mirror. I can't stress enough that when we learn to take responsibility for what we do and don't have, we put ourselves on the path to happiness.
Your goal is to see if you can avoid that extreme option of divorce. First explore why he behaves this way. I find that when people act out with their money, it's typically because they don't value who they are. Sit down with your husband and talk with him about his attitude toward money, your family's financial situation and his self-image. Spell out what you need to have happen to keep this marriage alive. For one thing, you are not to be the sole bill payer. Make this a joint exercise so that he sees the problem and understands his duty to fix it. Be patient. After a few months, if he doesn't respond, then you'll know you must leave and can do so with a clear conscience.
Extraneous spending needs to stop, and you must start paring down your debt. Pay the minimum due on all accounts, then add an extra payment onto the one with the highest interest rate. It will take time to undo the damage, but as long as you're paying the minimum on every card, you'll keep the credit raters happy and making headway on getting out of debt.
Keep reading: 5 tips for meshing love and money
Q: I'm 70 years old and have repeatedly asked my husband to write a will with me. I'm very uneasy not having a will, but he is adamant that he will not discuss the topic. I've also always wanted a trust as my mother had when she died. Can I make a will and trust on my own?
A: For some reason, men have a far harder time dealing with their inevitable mortality than women do. And, actuarially speaking, that is sad, because they don't tend to live as long as women. That means we're left to cope with the mess they refused to face when they were alive. Your first step, however, has nothing to do with estate planning. I want you to really address why this is happening to you. What is it about your relationship that allows your husband to flatly reject your request? What other needs have gone ignored? Is it possible that you've stifled your inner voice? Why do I think the answer is yes? If what I'm saying makes sense to you, then I need you to find the strength to make your voice heard in every nook and cranny of your marriage. Your husband is going to have to listen to you, because this time you're not going to let him tune you out. It's your turn to be adamant! Do you hear me? You can indeed write your own will and trust using a computer program, or an estate attorney can draw up a simple one for $500 to $1,500. But ideally, you and your husband should do this together. Everyone knows the saying "Where there's a will, there's a way." I have a gut feeling that when you find your way, there will be a will.
Keep reading: What you need to know about life insurance
Q: I'm in a same-sex relationship, and my girlfriend and I are both own property; I'm going to sell my co-op and move into her townhouse. My attorney has advised me not to pay into a house in which I don't have any equity, and her attorney told her not to sell any of her equity. I can see why this is practical counsel, but I want us to be partners in every way. We've discussed selling both places and buying something together, but we would end up with much less for our money. Please help.
A: Since you plan to move into your girlfriend's townhouse, she should sell you—not give you—a half share of the property. I'm not sure why her attorney would advise against that plan, because there is an easy way to protect her if things don't work out. Simply have the lawyer draft an agreement that lets her buy out your share if you break up. In effect, she gets paid fair market value for making you a co-owner but retains the right to keep the home down the line. That seems fair to me.
If you own title the property as joint tenants with right of survivorship, the remaining partner takes over the deceased's share. Should that make either of you uneasy at this point, you can set up your own living revocable trusts in which you specify who gets your piece of the home. If you want to leave your portion to someone other than your partner, I also recommend having the lawyer draft a life estate on the house. With this document, the surviving co-owner is allowed to stay until she moves or dies. Once that happens, the inheritance plans laid out in your trusts kick in.
Suze on Real Estate
Q: I'm retired and would like to downsize, but my home needs repairs. Should I get a reverse mortgage to fix it up?
A: Absolutely not. A reverse mortgage is far too expensive to make sense for you. Up-front fees can eat up nearly 10 percent of the mortgage amount, and while a new type of reverse mortgage insured by the FHA reduces those fees, the ongoing insurance costs embedded in reverse mortgages make them a poor choice for a short-term loan. (To learn more, visit ReverseMortgage.org.)
A real estate agent who has experience marketing fixer-uppers can explain your options. Depending on your market and the repairs your house needs, you may be better off selling it as is. At the very least, an agent can tell you what repairs to focus on to make your home salable at a solid price.
If you do decide to take on the repairs, and your intention is to get the work done and sell shortly thereafter, a home equity line of credit (HELOC) could be your best move—if you're careful. First, don't borrow more than 20 percent of your home's value. Second, know that even if you qualify for a low interest rate—which is likely if you have all or most of your mortgage paid off—HELOC interest rates are variable, meaning they rise and fall. So use a HELOC only if your intention is to sell within a year; I don't anticipate rates will rise dramatically in the short term.
Q: During the market boom, I locked into two adjustable-rate home loans that I can hardly handle now. I'm a single 34-year-old woman with a job that pays well, but I can't count on a raise, and I'm bringing in just enough to cover the mortgages and my living expenses. I'm looking for someone to rent a room for the extra income. In the meantime, do I ride this out and hope that the housing market makes an upturn, try to sell the place now, or what?
A: Hope is not a sound housing strategy. I still think real estate is a solid long-term investment—but only if you can afford what you bought. Let's be realistic about your situation. It's better to get out on your own terms than to be pushed into foreclosure because you were waiting for your luck to turn. It seems you were seduced, like so many buyers during the boom, into financing your home with two loans: a primary mortgage and a second mortgage that covered some or all of your down payment. The fact that both loans are adjustable is a huge concern. It sounds as though you've already been hit with one rate adjustment that boosted your costs, and another reset could happen relatively soon. You already feel pinched, but realize that things can still get worse.
If you can get rid of the property at a price that covers your mortgage cost and the 5 or 6 percent commission you will owe your real estate agent, sell and consider yourself lucky. You would be getting out relatively unscathed. Then you can move into a rental and start saving for a down payment so that, next time, you can buy with one standard loan. But if the price you can get today is less than what you owe on the mortgage, talk to your lender as soon as possible. The worst time to ask for leniency is after you're already behind on payments. You may be able to negotiate a deal where you lock into two fixed-rate loans at a better rate than your adjustables. If that doesn't pan out, ask about a short sale: You unload the house for the best price you can get, and the lender forgives the difference between what you owe and the sale price of the home in today's market. But lenders aren't exactly excited to take a loss, and even if they do agree to a short sale, you may have to pay tax on the forgiven amount. Learn more at HousingEducation.org, a terrific resource with plenty of useful information about home ownership.
Keep reading: Home mortgage basics everyone should know
Q: I am a divorced, self-employed 56-year-old. I own a home with at least $350,000 in equity even in this slow market, and I have $100,000 in savings and zero debt. But I'm the definition of house poor: All my disposable income goes into maintaining my property. The cost of living is so high in my area that a decent income still leaves me with little left over. There's got to be a smart way to leverage my assets. How do I summon the courage to make the bold move of moving to the country?
A: I'm thrilled that you have no debt, and your home equity is a great asset. But be aware that only the first $250,000 in capital gains from a home sale is tax-free ($500,000 for couples). Earnings beyond $250,000 will be subject to a federal capital gains tax of up to 15 percent. Additionally, the home must be your primary residence, and you can claim the full exclusion only if you lived in it for at least two of the past five years. So you need to calculate what your net after-tax profit would be from selling, then figure out the price of living in the country. Remember, even dream houses come with utilities and property taxes, so be sure your move would sharply reduce your monthly living costs.
So often we approach decisions as all or nothing. How about a little of both? Can you move and continue to work with your current clients? That's important because your $100,000 isn't enough for a comfortable retirement. I want you to make it a goal to put away at least $10,000 a year until you're 65. With those savings plus what you've already got, you could have a $350,000 nest egg by the time you're 65. That's a decent sum, and Social Security should provide more income.
Keep reading: Smart ways to pay for home repairs
Q: My husband and I owe $300,000 on our house (valued at $900,000), but that is our only debt. We have about $40,000 in mutual funds, so we have some emergency money, but our retirement account is only fair. Our annual income is about $325,000, and my husband will receive a $30,000 bonus at the end of the year. Should we pay our mortgage with it, invest in annuities or buy a resort property?
A: I'm confused. You and your husband make more than $300,000 a year and yet you have only $40,000 in mutual funds and a "fair" retirement account. What's up with that? It sounds like you do not have a handle on spending.
The money you have in mutual funds is not an emergency fund; it's an investment. Markets go up and down, and your $40,000 can become $30,000 before you know it. An emergency fund is money kept in a federally insured credit union or savings account; it is invested in safe deposits that do not fluctuate in value. You need to figure out where all your money is going and make sure you have eight months' worth of living expenses in an emergency fund. You need to pay off the current mortgage and boost your 401(k) and IRA contributions before you even think about buying a vacation home.
Q: My husband and I purchased our first home by taking out two mortgages on it. Within six months, the house went into foreclosure because we couldn't cover the larger mortgage. We have negotiated with the lender of the smaller loan to pay back the principal with a 3 percent interest rate over 10 years. It sickens me to think that we're paying off a house we no longer own. I'm wondering if we should declare bankruptcy. What's your opinion?
A: I think it's important—and fair—that you repay the small loan. You signed those documents in good faith, so it's only right that you take responsibility for what you borrowed. The fact that the lender is charging you 3 percent interest sounds like you're being given an opportunity to make good. Bankruptcy is a very serious process that's meant to address situations in which individuals have no way of meeting their obligations—it isn't an out for when you don't feel like paying up. Besides, bankruptcy laws were tightened in 2005; even if you did file, chances are you would be pushed into Chapter 13, and a judge would probably require you to follow a repayment plan.
The other thing you need to think about is your credit profile. You say that your goal is to eventually buy another home, which you will no doubt need to finance with a mortgage. While the foreclosure on the primary loan is going to remain on your credit report for up to seven years, at least you won't have two of them on your record. Bankruptcy stays on your report up to 10 years. There's no formula for determining exactly how much each ding hurts your record, but bankruptcy is worse than foreclosure. Any lender willing to take a risk on you after you've gone bankrupt is going to charge a much higher interest rate than it would for someone with a solid credit score. Finishing off that loan is the best thing you can do to show future lenders that you can be trusted.
Keep reading: What to do when you're facing foreclosure
Q: I took a buyout from my job and will be leaving soon. I'm thinking about walking away from my home and letting it foreclose, using my buyout money to start a home healthcare business, and borrowing more to cover start-up costs. This is the first time in my life I've had a financial opportunity like this, and I want to go for it. But would a foreclosure put my plan at risk?
A: It's one thing to seek foreclosure when you can't afford your mortgage, but to walk away from a legal obligation because it's financially convenient is just plain wrong. You could run into legal trouble, too; some mortgages are "recourse" loans, meaning the lender has the right to sue the borrower to collect on the full mortgage amount. The fact that you indeed have money—the buyout cash—makes it clear you can afford to pay the mortgage. Foreclosing on your home will also lower your FICO credit score, making it incredibly expensive, or even impossible, to borrow any money for your start-up. Even people with sparkling FICO scores are having trouble getting credit right now. A low score will also make it tougher to rent a new place. Landlords may well slam the door in your face, or ask you to pay a higher deposit or rent.
Your next roadblock is a lack of working capital. That's money in the bank you can use to support your business in its infancy. Please tell me you don't expect clients to just materialize on day one and start paying all your bills. That is so not the way it works! At a minimum, you need enough capital to cover six months of expenses as you hustle to set up your business and actually get paid by clients. And in today's rough economy, I'd suggest you have a year's cushion. That's on top of the eight months of emergency savings everyone should have tucked away to pay basic living costs. If your buyout isn't enough to finance all of that—and make good on your mortgage—then you are not ready to start this business right now.
Suze on Financial Planning
Q: I have funds saved in Thrift Savings Plan (TSP) and Roth accounts, my house is paid off, and I have no debt. Given that I'm not married and have no children, I'm wondering how I should bequeath my assets. I've heard that you should name a person rather than a charity—is that true? If so, I'm considering naming my boss's teenage daughter a beneficiary. Can I do this without telling her? I feel it would be awkward for her to know in advance. I'm also concerned that naming her may cause her tax problems. What do you think?
A: There is absolutely no reason you should leave your estate to a person rather than a charity. Nor does the decision have to come down to one or the other—you can divide your assets among multiple recipients. The best advice I can give you is to do what feels right. Think through your options, and when you catch yourself smiling at the prospect of leaving an inheritance to a particular person or organization, you'll know you've arrived at the right decision.
To make the transfer of assets as simple as possible, I encourage you to create a revocable living trust. If you die with just a will, it's possible that your beneficiary will have to spend time and money to take control of the inheritance through the court process known as probate. A trust can allow assets to be more easily transferred to your heirs.
With a revocable living trust, you'd be the primary beneficiary while you're alive. If you want to include your boss's teenage daughter as a successor beneficiary, you can of course do so. I hope you'll live a long time and she'll be an adult before she receives this gift. For now, if she's a minor, you'll want to discuss your intentions with her parents and appoint them custodians of her inheritance until she reaches adulthood.
Q: My 20-year-old daughter is trying to increase her credit card limit (currently, it's capped at $300) but has been unsuccessful. The strange thing is, she's a better credit risk than most: She has two jobs, earns $20,000 a year, and has her own apartment. Her only debt is a $6,000 car note—she had a student loan, but she recently paid it off. She also has $25,000 saved in the bank. Any ideas about what she can do?
A: Lenders who turn down an applicant are required to send the applicant a letter—called an adverse action notice—that explains either their decision or how to obtain the reasons for the decline. Your daughter should have received this. It would give her some insights into what's working against her. If the letter is unclear, point her to scoreinfo.org, which helps consumers decipher credit scores and adverse action notices.
In the meantime, I bet I can guess what's making the credit card issuers cautious. One factor is completely out of your daughter's control: her age. Fifteen percent of a FICO credit score is based on the length of our credit history; at 20, hers is still short. That said, each month she pays her bills on time, she'll be building up her score, 35 percent of which is based on punctual payments.
It's also possible that her credit report is incorrect. One error—such as a debt wrongly listed as unpaid—can be enough for a credit card company to give the thumbs-down. Your daughter should visit annualcreditreport.com and scour her record to make sure everything is as it should be. If she sees any mistakes, she should follow the included instructions to correct them. She should also get a FICO credit score at myfico.com. Given how scarred lenders are in the wake of the financial crisis, many are extending new credit only to borrowers with FICO credit scores of at least 720.
Finally, the best thing your daughter can do if she wants more credit is to stop applying for more credit. Each time she does, the card issuer checks her records, and other issuers can see that inquiry. Racking up several inquiries makes it look as if she's trying to take out a lot of new credit, which is sure to set off warning bells.
Q: I'm a single mom who has always spent half of my annual salary of $140,000 and invested the rest. If I retire from my federal job in three years at age 55, I will have an annual pension of about $100,000 (adjusted for inflation), plus a 401(k) of about $300,000 and an emergency fund of $45,000. My only real debt is $216,000 on my mortgage. I am happy about my financial decision making but am struggling with what to do next. I want to start investing in rental properties. I just don't know how to start!
A: You've done a great job with your financial planning, but you're about to enter a danger zone. Early retirement is so tantalizing, it's easy to miss a few cold facts. By retiring at 55, you could easily spend more years not working than you did working. The average life expectancy for a 55-year-old woman today is 83! That means half of women who are 55 will live even longer. So you need a financial game plan that will keep you safe for at least 30 more years. As well as you are doing, the fact that you have just $45,000 in an emergency fund tells me you are in no position to invest in rental properties. First off, where will you get the money for a sizable down payment? In today's tougher credit markets, you cannot buy with no money down. You also need more working capital to cover your mortgage, property tax, and insurance costs in case a renter ever falls behind in payments, or if the property sits vacant for a few months. Retirement is meant to be enjoyed, not filled with stress. Given your finances, I do not want you to pursue becoming a landlord.
Though you are in solid financial shape, you may not have as much disposable income as you think. You will owe tax on at least part of your pension income. If you leave work after age 55, you can make penalty-free withdrawals from your 401(k), but you will owe income tax on that money, too. A conservative strategy is to withdraw no more than 4 percent of your 401(k) balance each year so you do not run the risk of eating through all the money. That's $12,000 a year, or $1,000 a month. After federal, state, and local taxes, it's more like $650. So if we add it all up, my guess is that your total after-tax income (including your pension) will be $6,000 to $7,000 a month. Once you cover the mortgage (which I estimate is $2,500 a month) and living expenses, you should have a nice sum, but you need to spend it carefully. Use any extra income to try to pay off your mortgage before you retire. And while you are still working, keep contributing to your 401(k); after you retire, you can look into an IRA. Finally, consider buying long-term-care insurance so you have added protection from medical costs as you age. Age 59 or 60 is the ideal time to buy a long-term-care insurance policy; you're typically still in good enough health to qualify, and the premiums are more affordable at that age than when you get older.
Keep reading: 9 small financial steps that will pay off big in the future
Q: My brother Kevin passed away in 2007. Kevin generously willed his 401(k) to my two children, who are 19 and 23. With the market drop, the account lost a substantial amount of its value, and after inheritance taxes my kids could end up with far less than Kevin intended. I know that he would want the best for them and would be heartbroken if we did the wrong thing. So what's the right thing to do?
A: I want you to know it is going to be very easy to make the most out of Kevin's legacy. Thanks to a change in federal tax law that went into effect in 2007, any beneficiary of most 401(k), 403(b), or similar company-sponsored retirement plans can now inherit the money and roll it over into what's called an inherited IRA—a special type of IRA for just this purpose. (Previously only spouses could keep the tax advantages of an inherited retirement account.) There is no tax on the money that is rolled into the inherited IRA. But there's one catch: The beneficiary must make annual withdrawals from the inherited IRA and pay tax on the withdrawn amount. The required minimum annual distribution is based on the beneficiary's life expectancy; because your kids are young, they will have to withdraw only small amounts each year, while the rest of their account can continue to grow, tax-deferred. I would initially put all the money in a Treasury money market fund. You will want to keep some cash in the money market to cover annual withdrawals, but money the kids don't need for at least 10 years belongs in stocks. Instead of moving this money over in one lump sum, divide it by 12, then transfer that amount each month into a dividend-paying exchange traded fund (ETF) or no-load stock mutual fund. Your kids have time on their side. I am confident that over the decades they will see big gains.
Here's a strategy to make even more of your brother's gift: Assuming your kids have jobs (even part-time), they are eligible to fund a Roth IRA. Individuals with income below $105,000 in 2009 can invest the maximum $5,000 a year (for married couples the income limit is $166,000). I would encourage the kids to take the annual withdrawals they are required to make, pay the tax, and then invest the remainder in a Roth IRA. There's no tax on the money while it is invested in the Roth, and if they wait until age 59 1/2 to make withdrawals, their tax bills will be zero. We're putting Kevin's gift back to work building more financial security.
Q: In the past four years, I've paid off all my debts and saved enough for a six-month emergency fund. Should I invest some of it in the stock market? If so, what percentage? I've never had this much cash sitting in the bank before, and I don't know if it's doing what it should.
A: Paying off debt and building a six-month backup fund is a major accomplishment—good for you! (And keep it up.) While it's fantastic that you want to make the most of this money, you should definitely not invest it in the stock market. This is your emergency savings—so you need to know it's going to be there for you the next time one inevitably arises. You just can't count on the market in the short term: Say you had $20,000 in emergency savings on January 1, 2008 and you put that money into a stock market index fund. Then, on December 31 of the same year, you were laid off. You might have told yourself you'd be okay with your severance and your savings. But when you checked your account, you might have found that its value had fallen to $12,600, since the S&P 500 stock index fund was down 37 percent.
Keep reading: Insure that you'll be cared for in retirement
Q: I went through a terrible divorce and have racked up well over $100,000 in legal expenses. Though I earn a substantial income, I've had to take money from my 401(k) and get a second mortgage to cover these costs. My oldest son is looking into college, and because I pay so much in alimony and child support, I'm concerned I won't be able to help him pay for it (my ex refuses to help). Because of my income, we probably won't qualify for financial aid, and I live paycheck to paycheck as it is. Any advice?
A: I know this is difficult to accept, but right now, helping your son pay for college is not nearly as important as regaining your financial footing—which is the only way to ensure that you'll be able to continue providing for all your children. So contribute by helping your son plot a realistic college strategy. Suggest that he consider public school. While many private colleges can cost $35,000 or more a year, the average tab for public four-year colleges is under $10,000 a year for in-state residents. Even if you don't qualify for financial aid—and I encourage you to apply anyway—your son can still take out a federal Stafford loan. He can borrow up to $5,500 freshman year and as much as $7,500 junior year. And while you could also borrow through the federal PLUS program, think clearly about your priorities. More debt is not what you need right now. This is the time for you to shake off the bad divorce and focus on improving your long-term financial stability. That's one of the best things you can do for yourself and your children.
Q: I gave a friend my life savings to put away for me. She has since been laid off and is going through some financial trouble. She has called several people asking to borrow money. I'm afraid she has tapped into my funds. How do I ask for my money back without telling her I know about her financial problems or jeopardizing our friendship?
A: The real question is, why did you give your life savings to someone else to manage? Were you trying to avoid dealing with it? If so, you have just learned one of the most important money lessons: You, and only you, should control what happens to your money. With your financial future on the line, it makes absolutely no sense to push responsibility onto somebody else. You need to find your power and take control of your life.
Even if your friend is a professional whom you hired to help manage your money, that does not mean your finances should be out of sight, out of mind. At the very least you should be receiving a quarterly statement from a legitimate third-party bank, brokerage, or mutual fund where your money is invested. Your panic tells me that hasn't been happening. It is time to summon the courage to be responsible for yourself and your money. There need not be any accusation or apology in your talk with your friend. Simply say you appreciate her willingness to help, but you have turned over a new leaf and are now taking responsibility for your own finances. The fact that your friend was laid off and may be in financial trouble is irrelevant. This is about you gaining control of your future—control you never should have handed off in the first place.
Suze Orman is the author of The Money Class.