Updated: October 8, 2012 11:37AM
Terry Savage answers questions from readers in her blog, blogs.suntimes.com/savage/ and via her website, terrysavage.com. Here are a few of her recent responses to readers.
Q. In November I will be 59½ and hope to retire at 62. I am currently working on being debt-free, but in order to do that, I’m considering pulling money out of my 401k. Without this, I will remain in debt and will not be able to retire. Eliminating debt will relieve high interest payments and allow me to take access funds and reinvest back into retirement, i.e. Roth, etc. I realize this goes against what all financial advisers recommend, but I don’t see any way out at this point. What is your advice?
A. Well, the advice is “standard” because it is good! You are not only paying taxes on the money you withdraw from your 401k, but you are giving up all future tax-deferred growth on that money. I can understand the desire and need to be debt-free, because you are probably paying so much interest. Isn’t there any other way to earn extra money? That would be a much better solution. And I’m pretty sure your desire to retire at 62 is unrealistic. Check out my book “The New Savage Number” to get the big picture on that, and some calculators that can help you.
Q. I’m interested in investing in dividend paying investments, AT&T etc. but don’t have a clue as to the best way to go about this. I see all these investment firms and don’t know which is best. I’m 65 and retired.
A. I think your best bet would be an “equity-income” mutual fund. Please understand that although stocks in the fund pay dividends, the prices can fall despite that fact, so there is some downside risk. I would start at Fidelity or Vanguard. Also, I have owned the T. Rowe Price Equity Income Fund for many years. Go to their websites — just put the company name in your search engine (or add .com after their names). You can also talk to them on their toll free numbers, and they will help you set up an account. There is no “load” or “commission” to do this — which is why you have to do some of the work to get started!
Or if you want to learn more about funds that buy dividend-paying stocks, go to Morningstar.com and search. And go to Chuck Carlson’s website www.bigsafedividends.com, to learn about dividend-paying stocks. Again, remember the dividend is only a “cushion” — not a guarantee against a stock price decline.
Q. My mother recently passed away at age 90 without a will. I have one older sibling. She had a substantial amount of cash in her checking account that included both my brother and my name on the account. Mom previously paid taxes on this account and her unwritten instructions were for the cash to go to me since my wife and I were her caregivers for the past five years. Is it necessary to set up an estate? Are there any type of income tax requirements that I should be aware of? Do I have to report this as income?
A. Let this be a lesson to all that unwritten “instructions” do not make a bit of difference after you die! If both of your names (yours and your sibling’s) were on that account — either as joint owners or joint beneficiaries — then you are each entitled to HALF the cash! As for estate taxes, unless the estate was worth more than $500,000, there will be no taxes. But, depending on her other assets and how they were titled, and how this account was titled, you may have to file for probate in your state court. I’d suggest you consult an estate-planning attorney for advice on what is required. (Probate is the process of changing title to assets, not a tax process.) Any money you and your brother receive from the estate will come to you free of income taxes.
Q. I bought a house in 2005 for $232,000. I put $80,000 down. I now owe $164,000 and the value of the home is approximately $85,000 to $95,000. I live in Cape Coral, Fla., and don’t see much of a future in this investment. I’m a retired Chicago Police officer and get a pension and have some savings. I’m thinking of short-selling this home. Any ideas?
A. Well, I’ve written a lot about this. From a moral, and a practical, point of view you might want to think twice about defaulting on this property — if you can afford to maintain it, and especially if you want to have a Florida home. At some point the market will come back — and if you have a default on your record you will find it difficult to get a mortgage on a new property.
Q. I retired in December 2011 and receive about $4000 a month in my account after taxes and insurances. I was advised to invest a portion of this money because I do not have an IRA or any stocks. My debt is less than $8,000. What would you do?
A. I would pay down your debt as fast as possible, and then build up a savings account in your bank as fast as possible. Yes, I know you will earn negligible interest these days, but write me back when you have a “cushion” of at least $15,000 in your savings account. And in the meantime, don’t listen to that “investment” advice!