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Paying Off Debts - FAQ

How Do I Eliminate Credit Card Debt As Quickly As Possible?

Many consumers come to us to find out how to pay off debts fast. Unfortunately, there is no magic formula that can be used to eliminate credit card debt. The most important goal is to understand how to pay off debt permanently. A good first step is to speak with a Certified Financial Counselor in a free credit counseling session who will work with you to explore ways for you to repay your debts in a way that fits into your budget. You'll be offered educational tools to help you discover how to pay off credit card debt and keep the problem out of your life for good!

Is there a "right way" to reduce credit card debt?

One obvious answer is not to use your credit cards, and wouldn't it be nice if it were that easy? There's no single solution to reducing credit card debt. There are some steps you can follow:

  1. Only use credit cards as a last resort.
  2. If you must, use a credit card with the lowest interest rate.
  3. Focus on paying off your credit cards with higher APRs (Annual Percentage Rates) first.
  4. Make your payments on time to avoid any late or over-limit fees.

The easiest way to get out of debt is to work directly with an experienced InCharge counselor who can walk you through the process, answer questions, offer tips and tricks and find the best solution for your particular financial situation.

What Are Debt Consolidation And Debt Settlement?

Have you heard the terms "Debt Consolidation" and "Debt Settlement"? They're not the same and you should understand the difference if you're considering one of these as a possible solution.

"Debt consolidation" means that you take out a new "consolidation loan" big enough to pay off all of your debts. Now you have one big loan instead of many smaller loans or credit balances. This might be done through a bank or for profit debt consolidation company. The problem with this approach is that it doesn't address the core issues of most people's debt problems.

"Debt settlement" is a process of contacting your creditors to see if they will accept a reduced one-time payment to close your accounts. Companies that offer debt settlement will tell you to stop making your credit payments and go into default. The idea they propose is that, after you've defaulted, they'll go to your creditors and try to negotiate a settlement where you pay only a portion of what the full balance. Often there are big upfront fee and tax implications and other negative factors that you will need to consider. Nonprofit credit counseling organizations like InCharge Debt Solutions offer you alternative solutions with less negative consequences in a free counseling session that will help you find the best debt solution for your situation.

How Do I Calculate Debt-To-Income Ratio?

Finding the right solution to your debt problems can be frustrating, emotionally challenging, and mentally exhausting, especially when you're not armed with the right knowledge and skills. You may need to know how to calculate your Debt-To-Income (DTI) ratio, if you are looking to refinance your mortgage, as an example. The DTI is a finance measure that compares the amount of money you earn to the amount of money that you owe creditors and is a key measure banks use to determine mortgage affordability.

That's where a Certified Financial Counselor at InCharge can help. The counselor will take you through a step-by-step process of reviewing your situation, calculating debt-to-income and other financial measures and explain various solutions to consider.

If you want to calculate your debt-to-income ratio:

Divide your total monthly debt obligations (recurring debt such as mortgages, car loans, child support payments, credit card payments plus other housing expenses such as insurance, taxes or other housing related expenses) by your total gross monthly income.

Example: Monthly debt obligations are $1,000 and total monthly income is $2,500. Debt-to-income ratio would be $1,000 ÷ $2,500 or .40. Traditional lenders prefer a 36% DTI, with no more than 28% dedicated to servicing the mortgage. A DTI of 37-40% is often seen as "upper limit" although some lenders may permit ratios in that range or higher. However, you should carefully consider whether you want to take a loan with a DTI that high. That's where expert financial counseling can really help.

How can I manage my debt or find a way to settle my outstanding debts?

Learning how to manage debt can be overwhelming, especially if your household income has been reduced. Many debt-stressed consumers want to know how to settle credit card debt in what is generally referred to as debt settlement, but it is a difficult process to pursue on your own and it does have tax consequences and associated fees. Rather than simply seeking to "settle" your debt, take the time to understand the benefits of credit counseling by speaking with a certified credit counselor at InCharge Debt Solutions. The counselor will work with you to evaluate your financial situation and find a debt solution that is right for you.

Is there such a thing as a how-to-get-out-of-debt calculator?

Not really; the best "calculator" is really a counseling session with a seasoned financial counselor who carefully reviews your particular situation and offers appropriate solutions for getting out of debt over a 3 to 5-year period.

InCharge Debt Solutions has many interactive tools and educational materials on this website to help you evaluate your situation and determine if you need assistance. One tool is a "debt stress guide" that asks you a series of questions to determine how stressed you are about your debt. You'll also find a home budget calculator and other useful tools and information. If you are stressed, it may be time to have your debt situation analyzed by a certified credit counselor in a free credit counseling session. On this website, you will find these calculators:

Liz: My wife of 34 years died five years ago. Her father is 94. He has accumulated a large amount of wealth over the last 40 years. I always made a point of staying out of financial discussions between my father-in-law and his daughters. He told us for years that upon his death all his wealth is to be divided between us (my wife and me) and her sister. Recently, a gold digger reappeared on the scene. My father-in-law and his late wife took her in at a young age when her parents died. I don't know if she was ever formally adopted or not, or how that affects the situation. My question is, do I have any legal rights, upon my father-in-law's death, to any distribution of his estate if I am not listed in the actual trust or will?
 
Answers: Your chances of inheriting from your father-in-law may have died along with your wife.
 
Sons-in-law don't really have inheritance rights. If your father-in-law dies without an estate plan, state law would dictate who his heirs would be: typically his surviving spouse (if he has one) and any living children. Even his kids would have no legal right to inherit if he has a will or trust that disinherits them.
Estate plans sometimes make provisions for a child's spouse, particularly if the money eventually will be inherited by the grandchildren. Such a trust might give you the right to income from assets that on your death would go to your wife's children, for example. If there aren't grandchildren, though, the money your wife would have inherited may simply go to her sister (and possibly the "gold digger," as you describe her, if she's included in the estate plan).
 
Of course, if the old man likes you, he could make a bequest to you in his will. But you have no legal right to demand that he do so, and any attempt to pressure him could raise the question of who is the actual gold digger here.

It seems so basic -- require mortgage lenders to qualify borrowers based on their ability to repay the loan. Yet this wasn't the case for many mortgages in the run-up to the housing crisis contributing to the mess we're still in now.

Nevertheless, you can hear criticism of the new mortgage rules that became effective Friday. Under the federal government's ability-to-repay rule, lenders must make a "reasonable, good-faith determination" that an applicant can afford the mortgage.  

Critics say the stronger mortgage requirements could make it harder for people to quality.

Yes, that's the point. We had to move away from how things were. For the last several years, I've worked with many homeowners struggling under burdensome mortgages. I'd often look at their loan papers and shake my head. How could they manage such large monthly payments after some ridiculously low teaser rate expired? What were they thinking?

But I also want to smack the people who approved many of these mortgages. It may have been legal in most cases, but that didn't make it right. The lenders should have known better. They were the professionals.

So many people got loans without lenders verifying their incomes. Some loans were interest-only. Borrowers got loans with super-low adjustable rates that, when reset, consumed an unstainable amount of their incomes. Some people even were approved for loans with negative amortization in which their payments didn't even cover the interest.

Such loans shouldn't be made, says Richard Cordray, director of the Consumer Financial Protection Bureau.  

I sat down with Cordray just before the ability-to-repay rule went into effect. As part of the changes, so-called "qualified mortgages" must have relatively low fees. The loans can't have certain features such as allowing a borrower to pay only interest. Generally, borrowers can't have total monthly debt, including mortgage payments, that exceeds 43 percent of their gross income.

There was one word Cordray kept coming back to in order to address the complaints from critics: sustainable.

"Homeownership is still one of the best ways to build sustainable wealth as long as you're getting a reasonable mortgage that can succeed over time," he said. "Again, all we're doing here is really going back to basics, which is the kind of lending that was done historically. ... A back-to-basics approach to us makes a lot of sense, both on the lending side and on the servicing side, and I think it's going to be good for the market."

To make his point further, Cordray referred to a Goldman Sachs report finding that of the loans made from 2005 to 2008 that defaulted, nearly 50 percent would not have been made under the ability-to-repay standards.

"All our rule says is, if you're going to make a mortgage, you have to make a reasonable determination that the borrower has an ability to repay," Cordray said. "That's not something new or exotic. That's what responsible lenders have done for decades."

Also included in the new approach are tougher requirements for mortgage services. Companies that service loans now have to send monthly statements so borrowers can clearly see how their payments are being credited.  They must   quickly fix mistakes, and they must credit payments the day they get them. They have to send people early notices if they have an adjustable-rate mortgage that will be changing in order to give them time to refinance or get help if they can't afford a higher payment.

Mortgage servicers will now have to call or contact most borrowers by the time they are 36 days late on their mortgage and provide information about their options. Except in limited cases, servicers can't start a foreclosure until a borrower is more than 120 days delinquent.  And mortgage servicers can no longer initiate a foreclosure while they are also working with a borrower who has submitted a complete application for help.

Yes, it will be harder to quality for mortgages. But it doesn't mean loans can't be made outside these new rules.

During an appearance on "The Daily Show," Cordray was compared by Jon Stewart to the Prohibition agent Eliot Ness.

That's exactly what we needed, and an agency of enforcement personnel to touch the untouchable lending practices that contributed to so much pain and heartache.

Dear Liz: I just turned 65 and had planned to wait until 70 to retire. I love the actual work I do but my boss is very challenging. I'm starting to question whether working here another five years is really how I want to spend my days at this point in my life. I have about $175,000 in my 401(k), about $35,000 in an IRA and $1,500 in a single stock that's not in a retirement account. I have two years left on my primary mortgage and a $17,000 balance on my second mortgage, plus I owe $3,500 on a line of credit and $2,000 on credit cards. I was starting to take money out of my IRA to pay down my mortgage early but the taxes at the end of the year were so much that I stopped that distribution. (I still owe $500 to the state tax agency.) I have also had trouble keeping up with my property taxes and owe about $3,500. I live in a 900-square-foot home which I love and live a fairly simple life. I'm wondering about cashing in the stock and some of my IRA to pay down my debt, then using my 401(k) for living expenses until I actually draw from Social Security. As I'm typing this out I'm thinking, "Are you crazy?" I'd love your thoughts.

Answer: One definition of insanity is doing the same thing over and over again, expecting different results.

Tapping your IRA incurred a big tax bill that you've yet to fully repay. You also lost all the future tax-deferred gains that money could have earned. Why would you consider doing that again?

You may long for retirement, but it's pretty clear you aren't ready. You don't have a lot of savings, given how long retirement can last, and you're dragging a lot of debt. The type of debt you have — second mortgages, credit lines, credit cards — is an indicator you're regularly spending beyond your means. If you can't live within your income now, you'll have a terrible time when it drops in retirement.

So instead of bailing on work, take retirement for a test drive instead. Figure out how much you'd get from Social Security at your full retirement age next year (you can get an estimate at http://www.ssa.gov%29.) Add $700 a month to that figure, since that's what you could withdraw from your current retirement account balances without too great a risk of running out of money. Once you figure out how to live on that amount, you can put the rest of your income toward paying off debt (starting with your overdue taxes), building up your retirement accounts and creating an emergency fund. It's OK to cash out the stock to pay off debt, since it's not in a retirement account, but make sure you set aside enough of the proceeds to cover the resulting tax bill.

Don't forget to budget for medical expenses, including Medicare premiums and out-of-pocket costs. Fidelity estimates a typical couple retiring in 2013 should have $220,000 to pay out-of-pocket medical expenses that aren't covered by Medicare. That doesn't include long-term-care costs. Your costs may be lower, but you'll want to budget conservatively. Spend some time with the Nolo Press book "Social Security, Medicare & Government Pensions: Get the Most out of Your Retirement & Medical Benefits."

You'll be ready to retire when you're debt-free and able to live on your expected income without leaning on credit.

WASHINGTON -- When my brother, who had severe epilepsy, died of a massive seizure at 32, I needed to see a grief counselor. I had been his primary caretaker, and his death hit me hard.

I was fortunate to have access to workplace insurance that included quality mental health services. It's a benefit I have come to really appreciate.

But many people don't have access to such care.

I was thinking about this as I followed news reports on the shooting rampage at the Washington Navy Yard in which 13 people were killed, including the gunman, and several others were injured. Police records and comments from people who knew the gunman, who had served in the Navy as a full-time reservist, indicate that he may have had mental health issues.

Now comes the recovery. At least two workers at the Navy Yard reported that they were standing beside people who were gunned down, one shot in the head. One person said that when he got up from a crouched position, there were bullet holes near the top of the wall. I would ask the question, why not me? And I might need someone to help me deal with the trauma or guilt.

I think about the folks who were working at the Navy Yard or other workplaces who have to deal with the aftermath of such tragedies. And while such incidents are rare, it is likely that you are working with people who are struggling with mental illnesses and need help to handle their condition. They aren't likely to go on a shooting spree, but they may drink too much, take illicit drugs or fall into a depression they can't shake.

Although many large and small group insurance plans include services for some mental health and substance-use illnesses, there are gaps in coverage. About one-third of those who are currently covered in the individual market have no coverage for substance-use disorders and nearly 20 percent have no coverage for mental health cases, including outpatient therapy visits and inpatient crisis intervention and stabilization, according to the Department of Health and Human Services.

But starting next year, this will change for many workers.

Under the Affordable Care Act, insurance plans offered in the new marketplaces will have to cover a core set of services called "essential health benefits." Included on the list of 10 benefits are mental health and substance-use disorder services, which include behavioral health treatment, counseling and psychotherapy. Specifically, as part of what's considered preventive services, plans will also cover alcohol-misuse screening and counseling, depression screening for adults and for adolescents, domestic and interpersonal violence screening for women, and behavioral assessments for children.

Here are two important points about mental health coverage under Obamacare. First, the coverage for behavioral health services must be generally comparable to coverage for medical and surgical care. Second, plans offered in the marketplace have to the cover preventive services without charging customers a copayment or coinsurance even if you haven't met your yearly deductible. However, the services have to be delivered by a network provider.

The Kaiser Family Foundation noted in a report released this month that benefits will be extended in many cases to cover services typically now excluded, such as mental health. Starting next year, health plans won't be able to deny coverage or charge you more because of a pre-existing health condition, including a mental illness.

Think this issue doesn't affect you? Well, take a look at these statistics from www.mentalhealh.gov <http://www.mentalhealh.gov> :

  • One in five adults has experienced a mental health issue.
  • Half of all mental health disorders first show up before a person turns 14. Three-quarters of mental health disorders begin before 24. But less than 20 percent of children and adolescents with mental health problems receive the treatment they need.
  • One in 20 Americans lived with a serious mental illness, such as schizophrenia, bipolar disorder or major depression.
We are reminded of the seriousness of mental illness when there's an incident like the one at the Navy Yard. However, this issue should matter to workers and employers more often than just at the time of a tragedy.

Open enrollment in the health insurance marketplace begins Oct. 1. Visit www.healthcare.gov <http://www.healthcare.gov>  to learn more about the behavioral health services offered.

The Affordable Care Act will provide one of the largest expansions of mental health and substance-use disorder coverage in a generation, the Obama administration says. I hope that by expanding access to mental health coverage, we can get people the help they need and in the most severe situations prevent tragedies that result in the loss of life.

Dear Liz: My daughter, 63, has been recently amicably divorced and receives a small alimony ($1,000). Her ex-husband of 30 years is a doctor who just retired. Is she entitled to part of his Social Security? Neither has remarried.

Answer: Because they were married for more than 10 years, your daughter should qualify for spousal benefits, which can equal up to half of her ex's benefit at his full retirement age. That amount would be permanently discounted if she applies before her own full retirement age (which is 66).

The ex's marital status doesn't matter, although your daughter's does. If she remarries, she will lose access to spousal benefits as a divorced spouse. This is just one of the ways that spousal benefits differ from survivor's benefits, which are based on 100% of the earner's benefit and which widows and widowers can receive even if they remarry after age 60.

One of the most important decisions you'll make when writing your will is determining who should be named executor of your estate. Even if you're just leaving behind household goods and a small savings account, someone – whether appointed by you or the state court – must settle your affairs.

Some people consider it an honor – or duty – to take responsibility for ensuring that their loved one's final wishes are carried out. But serving as an executor can be onerous and time-consuming, even for those with a strong financial or legal background. In a worst-case scenario, executors who act imprudently or in violation of their duties can be sued by beneficiaries and creditors.

Plus, you'll likely have to deal with the dreaded probate, a court-supervised process of locating and determining the value of the deceased's assets, paying final bills and taxes, and distributing what's left to the heirs.

Before you agree to serve as an estate's executor, make sure you understand what will be required of you. Major responsibilities often include:

  • Manage paperwork on behalf of the estate, including the will, trusts, insurance policies, bank, investment and retirement account statements, birth and death certificates, marriage, prenuptial agreement or divorce papers, military service records, real estate deeds, tax records, etc.
  • If the estate is complicated or likely to be contentious, you may want to hire a lawyer and/or accountant to help navigate the maze of paperwork.
  • File a certified copy of the will with the local probate court, which will determine if probate is necessary.
  • If the probate court confirms you as executor, you'll be issued a document called "letters testamentary," which gives you legal authority to act on the estate's behalf, including opening a bank account in the name of the estate to pay outstanding debts (loans, utilities, medical bills, credit card balances, etc.)
  • Notify all interested parties of the death. These might include: government agencies (Social Security, Veterans Administration, Medicare, U.S. Post Office, DMV); financial institutions; creditors; current and former employers; retirement plan administrators; investment firms; insurance companies; doctors and other professionals; landlord or tenants; utilities, etc.
  • You'll often need to send a copy of the death certificate to close out accounts, claim insurance benefits, change ownership of assets or accounts to the estate or a beneficiary, so order ample copies through the funeral home or county health department.
  • Locate assets, including personal property, bank accounts and safe deposit box contents, and ensure that they are protected until sold or distributed to inheritors. This may involve updating home and car insurance, changing locks, overseeing appraisals of property that must be sold, etc.
  • Collect money owed to the estate, such as outstanding wages, insurance benefits, retirement plan benefits and rents.
  • Notify heirs about their bequest.
  • File the deceased's final federal, state and local tax returns, as well as federal and state estate tax returns, if applicable.
  • Once probate has closed, you will distribute the remaining assets to named beneficiaries.
  • Because acting as an executor can be very time-consuming (often taking months or years), you are allowed to charge the estate a fee for your time – usually a percentage of the estate's value, as dictated by state law.

In short, both parties should thoroughly understand what's required of an estate's executor to make sure it's a good fit. There's no shame in saying no if it's beyond your abilities, and plenty of professional help is available – and advisable – if you do need assistance.

Courtesy of Visa Financial. Written by Jason Alderman.

Dear Liz: Two years ago, I elected to start my Social Security benefits early, at age 62. My current benefit is $1,350 per month. My spouse, currently working, will be turning 62 next year and is also planning to take an early retirement benefit because of health issues. Her benefit is expected to be slightly more than my benefit at that time. If she dies before me, what can I expect to collect from Social Security as the spouse of someone who started benefits early?

Answer: If your wife dies before she begins receiving Social Security, your survivor's benefit would be based on what's known as her "primary insurance amount." That's the amount she would receive at full retirement age (which is 66 for those born between 1943 and 1954; after that, full retirement age increases gradually to age 67 for those born in 1960 or later).

Once she begins benefits, though, your survivor's benefit is based on what she's actually getting. So if she receives a reduced benefit, your survivor's benefit is reduced as well. It would be further reduced if you, as a widower, begin taking survivor's benefits before your own full retirement age.

You would not be able to get your own benefit plus a survivor's benefit if your wife should die, by the way. You would get the larger of the two, but not both.

Liz Weston is "The most-read personal finance columnist on the Internet" (Nielsen/NetRatings) and author of "The 10 Commandments of Money" and "Your Credit Score."

Dear Liz: I found your recent discussion of Roth IRAs informative. But I've been told that one of the main advantages of a Roth vs. a traditional IRA is that a Roth is a safer investment when it comes to creditors trying to attack it. How can that be? Is one type of IRA safer than another?

Answer: The short answer is no.

Employer-sponsored retirement plans, including 401(k)s and 403(b)s, typically have unlimited protection from creditors in Bankruptcy Court. The exceptions: The IRS and former spouses can make claims on such plans.

Individual retirement accounts, including IRAs and Roth IRAs, lack the protection afforded by the Employee Retirement Income Security Act, or ERISA. But the bankruptcy reform law that went into effect in 2005 protects IRAs of all kinds up to a certain limit (which in April rose to $1,245,475).

Short of bankruptcy, the amount of your IRAs or Roth IRAs that creditors can access depends on state law.

If there's any chance you'll be filing for bankruptcy or the target of a creditor lawsuit, you should talk to an experienced bankruptcy attorney about your options.

Liz Weston is "The most-read personal finance columnist on the Internet" (Nielsen/NetRatings) and author of "The 10 Commandments of Money" and "Your Credit Score."

Dear Liz: None of the Web-based tools I've seen really get at the heart of the problem of how much I really need in retirement. For example, if I am diligent and save 20% of my income (I earn over $150,000), why would I need to replace 95% or even 80% of my income to maintain my standard of living in retirement? If I subtract the 20% going to savings, another 10% for the costs of working (clothes, lunches, gas) and reduce my income tax 5%, shouldn't I be living the same lifestyle at 65% of my current income? Now, if I have a pension that will replace 10% of my pay, and if Social Security benefits for my spouse and me replace 30%, don't my investments have to produce only the remaining 25%? Or am I missing something?

Answer: The further you are from retirement, the harder it can be to predict how much you'll need when you get there.

Financial planners often use an income replacement rate of 70% to 80% as a starting point. It's just that, though. Planners will tell you some of their clients' spending actually increases in the early years of retirement as they travel and indulge in other expensive hobbies. Those who are frugal or used to living well below their means are often able to retire comfortably with a much lower income replacement rate.

A big wild card is the cost of medical and nursing care in your later years. The U.S. Bureau of Labor Statistics' Consumer Expenditure Survey shows average overall spending tends to drop after retirement and continues to decline as people age. Serious illness or a nursing home bill can cause spending to surge late in life, however, leading to a U-shaped spending pattern for many.

Taxes also are hard to predict. While most people drop into a lower tax bracket once they stop working, those with substantial retirement incomes and investments may not. Tax rates themselves could rise in the future, even if your income doesn't.

Social Security benefits may change, as well. Although it's highly unlikely the program will disappear, some proposals for changing Social Security reduce checks for higher earners.

Once you're within a decade or so of retirement, you should have a better handle on what you'll spend once you quit work. Before that point, err on the side of caution. Assuming a higher income replacement rate gives you wiggle room once you've retired — or the option to retire earlier if it turns out you need less.

Liz Weston is "The most-read personal finance columnist on the Internet" (Nielsen/NetRatings) and author of "The 10 Commandments of Money" and "Your Credit Score."

Dear Liz: Everyone talks about Roth IRAs and how beneficial they are. But I am self-employed, my husband contributes 16% toward his 401(k), our house is paid off, and we no longer have dependents to deduct on our 1040 tax return. My contribution to my traditional IRA is the only tax deduction we have left. Should I consider a Roth anyway? If so, why?

Answer: A Roth would give you a tax-free bucket of money to spend in retirement. That would give you more flexibility to manage your tax bill than if all your money were in 401(k)s and traditional IRAs, where your withdrawals typically are taxable.

Also, there are no minimum distribution requirements for a Roth. If you don't need the money, you can pass it on to your heirs. Other retirement funds require you to start taking money out after you turn 701/2. If you need to crack into your nest egg early, on the other hand, you'll face no penalties or taxes when you withdraw amounts equal to your original contributions.

So is it worth giving up your IRA tax deduction now to get those benefits? If you have a ton of money saved, you want to leave a legacy for your kids and you're likely to be in the same or a higher tax bracket in retirement, the answer may be yes. If you're like most people, though, your tax bracket will drop once you retire. That means you'd be giving up a valuable tax break now for a tax benefit that may be worth less in the future.

You may not have to make a choice, however, between tax breaks now and tax breaks later if you have more than $5,500 (the current annual IRA limit) to contribute. Since you're self-employed, you may be able to put up to $51,000 in a tax-deductible Simplified Employee Pension or SEP-IRA. At the same time, you could contribute up to $5,500 to a Roth (assuming your income as a married couple is within or below the phase-out range for 2013 of $178,000 to $188,000).

This would be a great issue to discuss with a tax pro.

Liz Weston is "The most-read personal finance columnist on the Internet" (Nielsen/NetRatings) and author of "The 10 Commandments of Money" and "Your Credit Score."

Dear Liz: Many years ago I read about spousal benefits based on an ex-spouse's Social Security earnings record. Is there a minimum length of time of the marriage to qualify? How do I apply for this benefit? I am within nine months of retirement.

Answer: You can qualify for Social Security spousal benefits based on an ex's work record as long as:

•The marriage lasted 10 years or more.

•You are 62 or older and unmarried.

•Your ex-spouse is eligible to begin receiving his or her own Social Security benefit (even if he or she hasn't applied yet).

•Your own benefit is less than the spousal benefit you would get based on his or her work record.

Any benefits you receive based on his or her record won't affect what your ex receives, or what his or her current or other former spouses receive.

As with regular spousal benefits, the amount you get will be permanently discounted if you apply before you've reached your own full retirement age (which is currently 66 and will climb to 67 in a few years).

Liz Weston is "The most-read personal finance columnist on the Internet" (Nielsen/NetRatings) and author of "The 10 Commandments of Money" and "Your Credit Score."

Dear Liz: You recently wrote that people who start Social Security benefits before their full retirement age are locked in and can't switch to a higher benefit later. You are indeed locked in to that reduced benefit, but by switching to a spousal benefit at age 66, for example, it is possible to receive a higher benefit. Getting correct information about this is tough. I'm a certified financial planner and I received three different answers from Social Security personnel. Search the FAQ on the ssa.gov site for "receiving full and reduced benefits."

Answer: Thanks for that important clarification. The original letter referenced a technique that some married couples can use to significantly boost their overall benefit. The technique allows people to start spousal benefits — Social Security payments based on the work record of a husband or wife — while letting their own benefit grow, to be claimed later. But the option of switching from the spousal benefit to your own benefit is available only if you start spousal benefits at your own full retirement age (which is currently 66). People who start spousal benefits before full retirement age can't later switch to their own benefit.

As you note, however, people who start with their own benefit may be able to switch to a spousal benefit later. Both their own benefit and their spousal benefit would be reduced because of the early start. Here's how Social Security explains it:

"When you apply for reduced retirement benefits, we will check to see if you are eligible for both your own retirement benefits and for benefits as a spouse. If you are eligible for both, we always pay your own benefits first. If you are due additional benefits, you will get a combination of benefits equaling the higher spouse's benefit. If you are not eligible for both because your spouse is not yet entitled, but you are due a higher amount when he or she starts receiving Social Security benefits, then the higher spouse's benefit is payable to you when your spouse applies for retirement benefits. Remember, you cannot receive spouse's benefits until your spouse files for retirement."

Social Security claiming strategies can be complicated. The AARP has an excellent guide at http://bit.ly/153Quvh.

Liz Weston is "The most-read personal finance columnist on the Internet" (Nielsen/NetRatings) and author of "The 10 Commandments of Money" and "Your Credit Score."



Dear Liz: In a recent column, you noted that someone who chooses to obtain Social Security at age 62 on her own account is unable to switch to her spouse's account at age 66. Is this true for a spouse who is older than the husband? My husband is one year younger than me. If I chose to start Social Security at age 62 on my own benefits, would I be able to switch to his when he retires at age 66 (and I would be age 67 at the time)?

Answer: You've actually got it a bit backward. Someone who waits until her full retirement age to apply for Social Security has the choice of starting with a spousal benefit (typically half of what the spouse gets) and then switching to her own benefit later, usually at age 70 when it's reached its maximum level.

This is often a recommended strategy with two high earners, since the one receiving spousal benefits can "graduate" to her own, higher benefit later. If the spouse receiving spousal benefits was a lower earner, her benefit might not be as big as her spousal benefit at age 70, so there would be no reason to switch.

If you start benefits before your own full retirement age, however — using either your own work record or that of your spouse — you're locked in. You can't switch to the other benefit later.

For a program meant to benefit ordinary Americans, Social Security can be mind-numbingly complex. Fortunately, you can find good calculators at the AARP and T. Rowe Price websites to help you sort through your options.

Liz Weston is "The most-read personal finance columnist on the Internet" (Nielsen/NetRatings) and author of "The 10 Commandments of Money" and "Your Credit Score."

Dear Liz: My husband and I have been putting 5% and 6%, respectively, into our 401(k) accounts to get our full company matches. We're also maxing out our Roth IRAs.

The CPA who does our taxes recommended that we put more money into our 401(k)s even if that would mean putting less into our Roth IRAs. We're also expecting our first child, and our CPA said he doesn't like 529 plans.

What's your opinion on us increasing our 401(k)s by the amount we'd intended to put into a 529, while still maxing out our Roths, and then using our Roth contributions (not earnings) to pay for our child's college (assuming he goes on to higher education)?

Our CPA liked that idea, but I can't find anything online that says anyone else is doing things this way. I can't help but wonder if there's a catch.

Answer: Other people are indeed doing this, and there's a big catch: You'd be using money for college that may do you a lot more good in retirement.

Contributions to Roth IRAs are, as you know, not tax deductible, but you can withdraw your contributions at any time without paying taxes or penalties. In retirement, your gains can be withdrawn tax free. Having money in tax-free as well as taxable and tax-deferred accounts gives you greater ability to control your tax bill in retirement.

Also, unlike other retirement accounts, you're not required to start distributions after age 70 1/2. If you don't need the money, you can continue to let it grow tax free and leave the whole thing to your heirs, if you want.

That's a lot of flexibility to give up, and sucking out your contributions early will stunt how much more the accounts can grow.

You'd also miss out on the chance to let future returns help increase your college fund.

Let's say you contribute $11,000 a year to your Roths ($5,500 each, the current limit). If you withdraw all your contributions after 18 years, you'd have $198,000 (any investment gains would stay in the account to avoid early-withdrawal fees).

Impressive, yes, but if you'd invested that money instead in a 529 and got 6% average annual returns, you could have $339,000. At 8%, the total is $411,000. That may be far more than you need — or it may not be, if you have more than one child or want to help with graduate school. With elite colleges costing $60,000 a year now and likely much more in the future, you may want all the growth you can get.

You didn't say why your CPA doesn't like 529s, but they're a pretty good way for most families to save for college. Withdrawals are tax free when used for higher education and there is a huge array of plans to choose from, since every state except Wyoming offers at least one of these programs and most have multiple investment options.

Clearly, this is complicated, and you probably should run it past a certified financial planner or a CPA who has the personal financial specialist designation. Your CPA may be a great guy, but unless he's had training in financial planning, he may not be a great choice for comprehensive financial advice.

Liz Weston is "The most-read personal finance columnist on the Internet" (Nielsen/NetRatings) and author of "The 10 Commandments of Money" and "Your Credit Score."

Dear Liz: I will be 68 this summer and plan on working two more years. My wife retired in 2011 after turning 60. We would like to maximize our Social Security and are planning on having her take spousal benefits when I retire. When she turns 70, she can switch to her own benefit. How much of my benefit will she receive if she starts receiving it when she is 64 and I'm 70?

Answer: If your goal is to maximize your Social Security benefits as a couple, you should rethink having her apply before her full retirement age.

If she applies before she turns 66, she won't have the choice of switching benefits later. The Social Security Administration will compare the benefit she has earned with her spousal benefit (basically half of your benefit, reduced by the fact that she is applying early). If her spousal benefit is larger, she will get her own benefit plus an amount of money to make up the difference between the two. What she won't get is the option to let her benefit continue to grow so that she can switch to that larger check later. The option to switch is available only if she waits until her full retirement age to apply.

There are several good online calculators to help you compare your Social Security options, including ones at AARP and T. Rowe Price.

Liz Weston is "The most-read personal finance columnist on the Internet" (Nielsen/NetRatings) and author of "The 10 Commandments of Money" and "Your Credit Score."

Dear Liz: My spouse has tenure at a university. Given that one of us will always be employed, should we change the way we look at the amount of money we keep in an emergency fund or our risk tolerance for investments?

Answer: Even tenured professors can get fired or laid off. Tenure was designed to protect academic freedom, but professors can lose their jobs because of serious misconduct, incompetence or economic cutbacks, such as when a department is eliminated or a whole university is closed. About 2% of tenured faculty are dismissed in a typical year, according to the National Education Assn.'s Higher Education Department.

That's more job security than in most occupations, of course. Your spouse also may have access to a defined benefit pension, which would give him or her a guaranteed income stream in retirement. Those factors mean you reasonably can take more risk with your other investments.

As for your emergency fund, you may be fine with savings equal to three months of expenses. But consider that if your spouse were to be dismissed, he or she probably would have a tough time finding an equivalent position. If the institution starts having financial difficulties or if there is any reason to suspect that he or she could be dismissed, a fatter fund could come in handy.

Liz Weston is "The most-read personal finance columnist on the Internet" (Nielsen/NetRatings) and author of "The 10 Commandments of Money" and "Your Credit Score."

Dear Liz: In a recent column, you answered a question from someone who had started receiving Social Security benefits at 62. You mentioned the many advantages of delaying the start of Social Security checks until full retirement age but then said, "In your case, it's too late for second thoughts anyway."

Why didn't you mention the option of repaying all the Social Security checks you've received and then restarting your benefit at a higher amount, based on your age? I first learned about that option from one of your columns a few years ago, and actually did it. It sure worked out great for me. Viewed as purchasing a fixed annuity in the amount I paid back, I've been getting about a 9.5% annual return. Thanks so much for alerting me to that option!

Answer: The payback option was indeed a good one for people who regretted starting their benefits early and who had the means to pay back everything they'd received from the program. This "do over" allowed them to lock in a higher benefit amount for themselves and for their surviving spouses. In essence, they were able to "invest" the money they paid back and get a higher return than they could get from any other safe investment.

Unfortunately, after the payback option started receiving a lot of publicity, the Social Security Administration decided in 2010 to end it. So it's no longer possible to correct the mistake if you start benefits too early unless you do so within the first year after applying.

This just underscores why it's so important to research and understand your options before you apply for Social Security. Good resources include the AARP website, which has an easy-to-use retirement planner, and the book "Social Security for Dummies" by Jonathan Peterson. Another resource is the "Maximize My Social Security" calculator developed by economist Laurence Kotlikoff at www.maximizemysocialsecurity.com. For $40, the calculator will allow you to play with different scenarios and show you which options will increase your lifetime benefits.

Liz Weston is "The most-read personal finance columnist on the Internet" (Nielsen/NetRatings) and author of "The 10 Commandments of Money" and "Your Credit Score."

Dear Liz: Your comments about the benefits of delaying Social Security misled readers. While a cost-of-living increase was standard for many years, it no longer is. You might want to check back over the last 10 years to get details. In addition, a reader might interpret your points about the increased benefit at full retirement age versus the benefit amount at 62 as a promise for the future. Factors such as health and family longevity are also involved. Depending solely on one's Social Security check for living expenses will most likely bring derisive laughs for those who unfortunately have to do just that.

Answer: Your comments are a good example of why it's important to get a second opinion on Social Security benefits, because what we think we know about the program may not be true.

One of the best reasons for delaying Social Security is to claim a bigger benefit down the road, a benefit that has nothing to do with cost-of-living increases. "Retirement benefits increase by 6 2/3% each full year an individual waits between age 62 and 65," said Patricia Raymond, regional communications director for the Social Security Administration. "For each additional year an individual delays benefits from age 65 until full retirement age, the benefit increases 5%."

The full retirement age is now 66 and will increase to 67. Even if Social Security is restructured sometime in the future, it's highly unlikely that the system would stop rewarding people for delaying retirement or that cost-of-living increases would be discontinued (although they may be reduced).

By the way, there have been only two years in the last 10 when there was no cost-of-living increase, as you can see at http://www.ssa.gov/cola/automatic-cola.htm. Increases have ranged from 1.7% this year to 5.8% in 2009. The average for the last decade was 2.56%. Whether these increases truly keep up with inflation is questionable, especially with increasing Medicare costs, but to say cost-of-living adjustments are no longer "standard" simply isn't true.

Trying to decide when to take Social Security based on your current health or your family history of longevity is tricky, at best. Taking Social Security early might turn out to be a good decision if you die relatively early, or it could be a big mistake if you live longer than expected or you have a surviving spouse who may depend on your benefit. (Starting your retirement early would reduce not only your check but also the check a survivor would receive.)

The AARP website has a Social Security calculator that can help you understand the ramifications.

Obviously, some people have little choice but to apply for Social Security as soon as they're eligible because they need the money. But delaying Social Security for a bigger benefit can be seen as a kind of longevity insurance for those who can afford to do so. Even people in poor health or who lack a family history of longevity might want to hedge against the possibility of outliving other assets, either for themselves or their spouses.

Ideally, no one would rely solely on Social Security benefits, but unfortunately many do. Social Security constitutes 90% or more of income for nearly half of single retirees and more than 1 in 5 married couples. For most people who receive Social Security, the checks represent half or more of their income. So it makes sense to learn how to maximize your benefits using information from reliable sources. In addition to the Social Security and AARP websites, you can learn more from the excellent primer "Social Security for Dummies" by Jonathan Peterson.

Liz Weston is "The most-read personal finance columnist on the Internet" (Nielsen/NetRatings) and author of "The 10 Commandments of Money" and "Your Credit Score."

Dear Liz: I'm getting about $500,000 from the sale of my business this year and next year will be getting an additional $1 million. What's the best way to invest the money so I can make $150,000 to $200,000 a year? I am 55 years old and will have no other income than what I can earn with this money.

Answer: You probably know that "guaranteed" or "safe" returns are very low right now. If you're getting much more than 1% annually, you're having to take some risk of loss. The higher the potential returns, the greater the risk.

So even if you could find an investment that promised to return 10% to 13% a year, there are no guarantees such returns would last, plus you would be at risk of losing some or all of your investment. A down draft in the market or an extended vacancy in your real estate holdings could cause you to dig into your principal.

That's why financial planners typically advise their clients not to expect to take more than 4% a year or so out of their portfolios if they expect those portfolios to last. If you try to take much more out or invest aggressively to earn more, you run a substantial risk of running out of money before you run out of breath.

Liz Weston is "The most-read personal finance columnist on the Internet" (Nielsen/NetRatings) and author of "The 10 Commandments of Money" and "Your Credit Score."

Dear Liz: When I was 62, I started Social Security and I'm currently saving half of my monthly benefit after taxes (about $750). My decision to take my benefits early was influenced by a financial columnist who suggested that if I started at 62 and invested half or more of it until I reached full retirement age, the lower early benefits would be matched by the investment returns by the time I'm 85. Is this advice still reasonable?

Answer: In today's investing environment, it's hard to match the guaranteed annual return you get from delaying Social Security benefits. You may do better investing in the stock market, but there isn't an investment that can guarantee 6% returns right now, which is the approximate amount Social Security benefits increase annually between the earliest age you can take benefits (62) and your full retirement age (currently 66). The higher benefit you get by waiting is then increased by inflation adjustments each year, making it an even harder target to beat.

That's not to say it can't be done. In your case, it's too late for second thoughts anyway. But most people are better off waiting, if they can afford to do so.

There are other good reasons to delay, even if you're an investing genius. If you're married, your spouse would be eligible for a survivor's benefit should you die first. That benefit is equal to the Social Security check you've been getting. A bigger check could make it easier for him or her to make ends meet down the road.

Spouses who wait until full retirement age also have the option of taking spousal benefits first, and then switching to their own benefits later, after those benefits have had a few more years to grow. When you take benefits early, you lose the option to switch.

Even if you're not married, you can look at Social Security as a form of longevity insurance. A larger benefit could be a big help if you live a long time and spend down your other assets.

Hopefully you understood all this before you put your retirement plan into motion. If you didn't, then your situation could serve as a cautionary tale for anyone who's trying to make decisions about retirement based solely on his or her own research. It's vitally important to get a second opinion from a fee-only comprehensive financial planner. Even the most ardent do-it-yourselfer can miss important nuances when it comes to retirement, and those nuances can have a dramatic effect on your future quality of life.

Liz Weston is "The most-read personal finance columnist on the Internet" (Nielsen/NetRatings) and author of "The 10 Commandments of Money" and "Your Credit Score."