What to consider before paying off a vehicle loan
Dear Liz: In January, I used financing to buy a used car, and now I have about $8,000 left to pay off. I recently received a windfall and can pay off that debt in full. Is there any reason to not go ahead and do that? This car loan is my only current debt. However, I do anticipate buying a home and thus getting a mortgage in the near future. Additionally, would paying off the car loan help lower my auto insurance payment?
Answer: Having an open installment loan showing on your credit reports can help your scores, according to credit expert Barry Paperno, who used to work for leading credit scoring firm FICO. But paying it off shouldn’t hurt you much if at all. By contrast, paying off revolving debts such as credit card balances can give a real boost to your scores.
Paying off the loan should save you some interest and eliminating the payment could help you qualify for a bigger mortgage. Those are real advantages. Still, there may be better uses for your windfall. Are you taking full advantage of your 401(k) match, if your company offers one? If you don’t have a workplace retirement plan, are you contributing to an IRA? Do you have an emergency fund?
A paid-off car doesn’t automatically qualify for lower insurance rates. You can consider dropping collision and comprehensive coverage on older cars, since you’re no longer required to carry that coverage, but make sure that you’re comfortable with the risk of not getting anything from your own insurer to repair or replace your car if, for example, you cause an accident and your car is damaged.
Social Security benefits for children
Dear Liz: My husband was 51 when our last child was born, meaning that our son was only 15 when my husband turned 66. Because I was working full time and we had sufficient income, we adhered to the traditional advice of delaying my husband's Social Security payment. However, when he filed this past year at age 69, we learned that our son is eligible to receive a considerable monthly amount. Fortunately, the Social Security office was able to backdate my husband's application for six months, but nevertheless we lost out on several thousand dollars by not filing when my husband was 66. Although his monthly payout would have been lower, the accumulated difference would have been considerable with our son's payment. Therefore, although most retiring people do not have minor children, I believe that all financial advisors should be aware of this option and that those parents should plan carefully to maximize their payout.
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Answer: More than 4 million children receive Social Security benefits because their parents are disabled or deceased or have reached retirement age. A child can receive up to half the parent’s disability or retirement check. If the parent dies, a child’s survivor benefit can be up to 75% of the parent’s basic benefit. (There’s a limit to how much a family can receive, though, which ranges from 150% to 180% of the parent’s check.) Benefits typically stop at age 18, although they can continue until two months past the child’s 19th birthday if the child is still in high school. Benefits can continue indefinitely if the child is disabled.
Children’s benefits can be subject to the same earnings test that reduces Social Security retirement checks if the parent claims early and continues working. So it often makes sense to wait to start benefits until the parent is full retirement age, currently 66, when the earnings test no longer applies. You’re right that delaying beyond that age may not make sense when the child is young enough to receive benefits, since they can considerably boost a family’s total benefit.
Having minor children at retirement age definitely complicates the calculation of when to take benefits. Many free Social Security claiming calculators don’t let you include minor children in your calculation, so if you’re in this situation it can be worth paying $40 to get a customized claiming strategy from calculators such as MaximizeMySocialSecurity.com.
Changing the executor of a will
Dear Liz: You recently wrote about a stepmom who dismissed her deceased husband’s son as an executor. Sometimes a will provides that someone such as the surviving spouse can alter the executor pattern. This is done to keep the children in line.
Answer: That’s certainly a possibility. But if that’s the case, the stepmother could simply show at least that portion of the will to the other children to allay their fears. The fact that she hasn’t shared the will, which should be a public record at some point, is reason for concern.
Liz Weston, certified financial planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the "Contact" form at asklizweston.com. Distributed by No More Red Inc.
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