Better to Work at Lower-Paying Job and Keep Saving Than to Retire at 50

Q. My job was transferred to New York early this year, and I opted not to relocate there.

If I start to work for a new company, I would expect to be paid at least 30% less than I was in my old job. I will be 50 years old late this year, and my friends tell me that Social Security uses the average of the last five years’ salary to compute the retirement benefit. I am afraid to go back to work because of this situation. I do not want to reduce my benefits based on a lower new salary.

Would it be beneficial for me just to apply for retirement benefits at the minimum age? My husband is still working and will try to earn at least 50% of my net pay in the stock market if I decide to stay home until I am 59 1/2, when I can tap into my 401(k), which has about $120,000. Do you think this will be a better plan than working again at a much lower salary?

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A. In answering your question, I will try not to use the phrase “harebrained scheme.”

Oops! Oh, well.

Listen, your friends are dead wrong, your husband is deluded, and I shiver to think how much damage you could do to your finances if you proceed with your plan.

Your Social Security benefit will be based on a calculation that includes your 35 highest-earning years--not the last five. Right now, those 35 years include your summer job in high school. Surely even with a 30% pay cut you would make more now. (If you want to know more about how Social Security works, visit https://www.ssa.gov on the Internet or call (800) 772-1213.)

Your husband’s plan is a fool’s game. You don’t put money you need to live on in the stock market. It’s hard to remember this with this long-lived bull market, but stocks do go down, and sometimes they stay down. Then where will you and hubby be?

As for your 401(k): You may or may not have enough right now to get you through retirement; it depends on how much your account earns, how long you expect to live and how much money you need to live on.

If you earn 8% a year on your money until you tap it and 7% afterward, for example, it looks as if you could take about $22,000 a year until you were 85, when the money would be exhausted. Of course, that doesn’t take into account the effect of inflation. If inflation averages 3%, by the time you take your last payment, it will be worth about $7,500 in today’s dollars.

The truth is that your greatest asset is your earning power, and there’s no reason to toss it away. Even with a salary cut, you will be able to continue building your retirement funds and making yourself more financially secure.

Doing What With Whose Money?

Q. We set up a custodial account for our elder son three years ago when he was 1. At that time, we were thinking about saving some money for his college education. Now we realize that we would lose control of the account when he turns 21. Is this a not-so-smart idea to save for a kid’s education? Can we change the account into a trust fund or something else that allows us to control how the money will be spent?

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A. Don’t panic, Mom and Dad. Chances are the money already will have been spent on most of his college education by the time your son is 21. If it’s not--if he roars off on a Harley at 18 rather than applying himself at a citadel of higher learning--you can always use The Threat.

The Threat goes something like this: “Son, we gave you this money because we love you and want you to become an educated person, better able to survive in an increasingly competitive world. If you use it for anything else, you can kiss your inheritance goodbye.”

By the way, he doesn’t have to know his inheritance is the dimes under your couch cushions and your complete set of National Geographics, 1950 to 1980.

All that said, custodial accounts do have their drawbacks, including the fact that you can’t later switch them to some other format, such as a trust, that you can control. Also, money held in your son’s name is more likely to reduce a financial aid package far more than money held in yours. If that’s an issue, consider keeping his college money earmarked but in your name.

Liz Pulliam is a personal finance writer for The Times. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.

Audiotapes of panels that she moderated or participated in during The Times’ investment conference last weekend are available, including “Tax Planning: How to Lessen the Bite” (Panel 4F) and “Your Parents’ Finances: Questions to Ask, Answers to Get” (2D). The tapes are $11 each, and volume discounts are available. Several sessions are also available on videotape. Call (800) 350-3211 to order or to request a list of tapes. The list of panels and keynote speeches may also be found at https://www.latimes.com/isc.