Dear Liz: My daughter is getting married in September. She recently confided that she and her fiance have never discussed their respective debts (if any), credit scores or financial goals. She is hesitant to bring this up with him but realizes it's a discussion that needs to happen before they marry. I suggested they consider meeting with a financial counselor so they can have an honest talk about money as a practical matter rather than an emotional one. Would a fee-only financial planner be appropriate in this instance?
Answer: Absolutely. If you'd like, you could make a session with such a planner your engagement present to them.
Of course, they don't need a professional to start talking about their financial situations. Presumably she knows him well enough by now to have some idea about how best to broach the topic. It could be as simple as "Hey, I was just paying some bills and I realized we probably should talk about our financial situations."
A way to start the decision is to talk about dreams and goals. Would they like to raise a family? Buy a home? Start a business? Travel a lot? Retire early? All financial planning stems from knowing what your goals are, and then you can figure out how to achieve them. Your daughter shouldn't be too worried if they aren't on exactly the same financial page, since few couples are. What's important at this stage is knowing what's important to each person.
It can be trickier to talk about the present. Most people have made mistakes with money, and many have more debt and less savings than they'd like. Being a sympathetic listener and suspending judgment can go a long way toward putting a partner at ease in these discussions.
After they've had a few talks and feel comfortable, they probably should take a look at each other's credit reports. Those would give them a fairly good idea of how much each person owes. That can help them understand roughly how much of the family budget will need to go toward retiring those debts and how much is available to achieve their goals.
Calculating Social Security benefits
Dear Liz: In a recent column, I believe you got one aspect of Social Security's Windfall Elimination Provision wrong. If you're affected by WEP, in no case can you get more than 90% of your Social Security benefit. It is a sliding scale. With 20 years of earnings under Social Security, you get 40%. It goes up 5% per year to a maximum of 90% at 30 years. I worked 28 years as a paramedic and firefighter, most of the time for agencies that offered a pension instead of paying into Social Security. I also have 22 years of substantial earnings that were covered by Social Security and plan on working eight to 10 more years to get to 90%.
Answer: It's easy to get confused about how Social Security figures benefits, but rest assured: If you have 30 years of substantial earnings from jobs that paid into Social Security, you will get 100% of your Social Security benefit even if you have a pension from a job that didn't pay into Social Security.
Here's what you need to know. Social Security is designed to replace more income for lower-wage workers, because higher-wage workers presumably find it easier to save for retirement. People who get pensions from employers who don't pay into Social Security, but who also had jobs from employers that did, can look to the Social Security system as though they were long-term low-wage workers even when they're not. Without the Windfall Elimination Provision, they could get a bigger Social Security check than they would have earned had they paid into the system all along.
To compute our benefits, Social Security separates our average earnings into three amounts and multiplies those amounts by different factors. For a typical worker who turns 62 this year, Social Security would multiply the first $816 of average monthly earnings by 90%, the next $4,101 by 32% and the remainder by 15%.
Those affected by WEP have a different formula, but it affects only that first part of their average earnings — the part where everyone else gets credited for 90%. The WEP formula is, as you note, on a sliding scale. Someone with 20 or fewer years of substantial earnings from jobs that paid into Social Security would see the first $816 multiplied by 40%. Someone with 28 years, by contrast, would have the first $816 multiplied by 80%. Someone with 30 years or more would get the full 90%.
Social Security's pamphlet on WEP lays this out, and notes that the Windfall Elimination Provision does not apply to anyone with 30 or more years of substantial earnings from jobs that paid into Social Security. You can read more about it here: http://www.ssa.gov/pubs/EN-05-10045.pdf.