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Ask Bankrate is a recurring feature where Bankrate’s experts answer your financial questions. Visit this page for more information on how to submit your question. Click on a question here to jump straight to it.
- What should I do if my stimulus check went to someone else?
- Should I do a cash-out refi to finance my next home purchase?
- Should I leave my money in my former company’s pension?
- Should I refinance again to give myself a cash cushion?
- How do I get the max Social Security benefit each year?
- Annuities aren’t FDIC-insured. Should I cash them in?
Q1: What should I do if my stimulus check went to someone else?
My stimulus check was deposited into someone else’s bank account. What can I do?
— Patricia C.
Answered by Stephen Kates, CFP: “Unfortunately, this could be a difficult situation to unravel. The IRS has stated that if a check or deposit is sent to the wrong account with a name or account that does not match the payment beneficiary, then it will be rejected and returned to the IRS. I would recommend the following steps (if you haven’t taken them already):
- Contact your bank and explain the situation. They may be able to help trace the situation if it was sent to another account at your bank.
- Make sure all of your information with the IRS is up to date and use the IRS portal to trace your payment. If the payment is returned to the IRS, they will cut a paper check to the address on record, and you may be able to monitor the situation.
- If you are unsuccessful in resolving the payment situation, you will need to contact the IRS directly. This could be time-consuming as the IRS is understaffed and in the midst of the same disruptions as the rest of the country.”
Q2: Should I do a cash-out refi to finance my next home purchase?
We have 50 percent equity on our primary residence with a 3.625 percent interest rate, and we are four years into a 30-year term. What is the best way to take advantage of low interest rates and pull money out of the house to finance a purchase on another primary residence without selling the current residence and keeping it for rent? We will be ready for purchase in another two years (saving for down payment). If we do a cash-out refinance now and pull $100K, where should we park it until we are ready to buy? Seems the cost is too high to keep $100K for two years until we are ready to buy, but at the same time, we don’t want to lose an opportunity to refinance and pull money out at these historically low rates.
— Kate A.
Answered by Greg McBride, CFA, Bankrate chief financial analyst: “Why not just finance the new home when you purchase it? Refinancing your current home to get a lower rate is one thing, but pulling the cash out now and parking it for a couple of years seems unnecessary. For starters, cash-out refinancing is tougher and costlier to get right now because of the risk associated with doing so. Borrowers pulling cash out of their home when unemployment is nearing 20 percent doesn’t exactly give lenders a warm-and-fuzzy feeling. If you could pull cash out, you’d likely pay a higher rate than if you just did a straight rate-and-term refinance. You’d pay that higher rate on the entire amount refinanced, which would dilute some of the savings you’d otherwise realize from doing a straight rate-and-term refi. Then you’d park that cash somewhere and earn much less than the interest you’d be paying on the money. Why borrow money at 3.25 percent, for example, and park it in a savings account earning 1.25 percent? Yes, current mortgage rates are historically low, and there’s no guarantee they’ll remain this low when you go to buy the new place in a couple years. But there’s also no guarantee they’ll be higher either. For much of the past 20 years, mortgage borrowers have worried rates would move higher and today’s rates would be a relic of the past. Someday that might prove to be true. But not something I’d recommend betting your money on.”
Q3: Should I leave my money in my former company’s pension?
I’ve been recently laid off and am not 59 1/2, so my pension is still with my former company. Many people are telling me to pull that money out now and invest it instead of leaving it with the pension firm my former employer has it with. The longer I leave it, the higher the principal amount will be. They are saying it is better to have a bird in hand than a bird in the bush. What would you recommend?
Answered by James Royal, senior investing reporter: “You may have a couple different issues here, but your instincts to continue saving and letting the money build up are good. It’s not clear from your question if your pension is a plan that pays you a regular amount on a monthly basis, like a traditional pension, or a defined contribution plan such as a 401(k), 403(b) or similar. If it’s the latter, your money should already be invested with your former employer’s plan, so moving it to a new plan won’t make it invested any more than it already is. It could make sense to move it to an IRA (either traditional or Roth) if your old plan has poor investment options, but that’s not a requirement. But you’re often allowed to keep your money at your former employer’s plan almost indefinitely. Above all, the important thing is to make sure you’re still getting your tax advantage from the retirement account. But consider whether you need your retirement money now or whether you will be better served to leave it invested. If you can get by without the money and have more than three years to retirement – and when you’re looking for growth in the stock market, the longer the better – it could make sense to leave the money invested where it is.”
Q4: Should I refinance again to give myself a cash cushion?
I’m single with one child who is on course to graduate from college next spring. I’m in my mid-50s, living in a state capital with a large public university. I am fortunate that my job looks fairly stable, although there won’t be any COLAs for a while.
Three years ago, I purchased my first home: a duplex in a second-tier neighborhood. Late last summer, I refinanced to a shorter term and lower rate, though I had to finance the costs. I’m stretched and don’t have a large rainy-day fund, but the rental income makes it work. I had planned to eventually rent out both units and buy a small house or condo.
Until recently, it was not difficult to find tenants with reliable income, and I had little doubt that my child would find work after college. Now, I’m considering refinancing again for a much longer term to provide a cushion in monthly expenses.
I have no idea what refinancing again so soon does to my credit rating. Beyond that and the obvious problems with a mortgage extending into my 80s, do you see other options or other reasons I shouldn’t refinance to a longer term?
— Joe M.
Answered by Greg McBride, CFA, Bankrate chief financial analyst: “The fact that you are stretched, don’t have a large emergency fund and can’t add to it speaks volumes. The fact that you refinanced six months ago is over and done — a sunk cost, as it is called. Worry not about what refinancing again so soon will do to your credit rating (not much) and focus on getting the payments down to something you can live with. This is why I often advocate for the 30-year fixed rate mortgage rather than saddling oneself to a shorter-term loan all in the name of saving interest on a loan that these days has an interest rate beginning with a 3. With the longer loan, you still have the freedom to pay ahead as you wish and as your cash flow allows. But having those lower payments will not only keep you from being stretched but enhance your financial flexibility by allowing you to pursue other financial objectives at the same time — such as padding your emergency fund and increasing retirement savings contributions. And don’t worry, you may well pay off this loan before you reach your 80s, so don’t let that concern keep you from giving yourself some financial breathing room today.”
Q5: How do I get the max Social Security benefit each year?
If a person contributes the maximum taxable amount each year into the Social Security system for at least 35 years, does that mean that the person should receive at age 70 the maximum benefit each year? The maximum benefit this year is $3,790 per month for a person retiring at age 70.
— Ron S.
Answered by Stephen Kates, CFP: “You have clearly worked hard and done your research! You are correct that if you have contributed the maximum amount to the Social Security system ($137,700 for 2020) for at least 35 years and are filing at age 70, you will receive the maximum benefit ($3,790).
For anyone who is still reaching for the brass ring of retirement but doesn’t want to wait for 70, you would be able to receive $3,011 as the maximum 2020 benefit for someone at Full Retirement Age (FRA). This is currently between 66 and 67 depending on when you were born. (Learn your FRA here.) For every year you wait beyond FRA, your expected payment will rise by 8 percent until you reach age 70.”
Q6: Annuities aren’t FDIC-insured. Should I cash them in?
Given the current financial crisis and seeing that annuities are not FDIC-insured like CDs, is it wise to cash in funds in annuities that have not been annuitized?
— Gustavo L.
Answered by Stephen Kates, CFP: “While it is natural to be concerned about the assets you have invested into annuities, the vast majority of annuities are completely safe. Annuities, while complicated, are one of the most protected and well-capitalized investments available. Even during the 2008 recession, while many banks and investment firms were struggling, insurance companies were buying up assets.
The most important factor protecting your annuity is the capitalization of the insurance company that owns it. The larger the insurance company’s General Account, the more assets available to support insurance and annuity payments. New York Life, for instance, has one of the largest asset surpluses in the industry and has weathered countless crises. Established in 1845, they have never missed a qualified payment to a policyholder.
All insurance companies are rated by at least one of four rating agencies. You can look up the rating of the institution holding your current policy to understand how they stack up. These agencies are AM Best, Fitch, Moody’s and Standard and Poors.
While different from FDIC insurance, annuities are still regulated and guaranteed at the state level. If an insurance company is in danger of insolvency, the state regulators will step in to liquidate the necessary assets to pay obligations. In the worst-case scenario, state guarantees on annuities range from $250,000 to $500,000. Your own state guaranty association or the National Association of Insurance Commissioners (NAIC.org) will be able to provide you with more information.”