help me help a friend, financially

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arcticpineapplecorp.
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help me help a friend, financially

Post by arcticpineapplecorp. »

I have a friend who left her job recently. I'm meeting with her tomorrow in advance of her meeting with her bank. She's making some big decisions financially and I wanted to help her think through things. I have some thoughts on what to tell her/what she should think about but I wanted to get some additional ideas or thoughts about what questions I should ask or things I should tell her. I'm sorry I don't have all the details. I can post more after tomorrow after I meet with her. Here's the situation that I know so far.

She's 57 years old. She has $232,000 in her 401(k). The funds she's chosen are not great (too many funds and too high expense ratios and actively managed funds...she has the fairholme fund for instance). I met with her a few years ago and tried to steer her to a simpler approach, but she stuck with those funds because her brother picked them for her. She has a Roth IRA with Vanguard. I believe she just started it a few years ago, so I don't imagine she has much more than $20,000 in that if she was maxing it out (I'm not sure if she was maxing out). I plan to encourage her to rollover her 401(k) to Vanguard and into something simpler like a target date retirement fund based on her willingness to take risk and need for growth.

She's looking into applying for U.C. and she might have a job offer soon but it pays substantially less than what she was earning prior, maybe half. She was earning $57,000/year prior to leaving her job.

She wants to take $70,000 out of her 401(k) to pay off her mortgage and other debt. I don't know her exact interest rate, but I think it's might be around 6%.

My concern is that taking out the $70,000 from her 401(k) will not only result in taxes and penalties but will push her into a higher tax bracket. If so, she will have to pay additional tax on her previous 9 months for 2014 salary, right? She also might need to take out more than she needs, like $100,000 if she needs $70,000 to pay off debt in order to cover the taxes/penalties.

She has been in debt before and has been bailed out by another, who will not bail her out again from this point forward. After being bailed out, she got back into debt again (besides the mortgage). In fact, I think her house was paid off at one point, and now she got a mortgage again to pay off other higher interest debt. My concern is that just because she pays off her mortgage with this $70,000, doesn't mean she won't take out a HELOC or remortgage and get back into debt.

I plan to work with her to determine how much her monthly expenses are and see what the shortfall of income might be based on either unemployment comp or lower wages from the new job. I plan to work with her to see how much she might need to live on in retirement based on current expenses adjusted for inflation. I believe she thinks she will have enough to retire, but I don't think so, especially after taking such a chunk of money out of her 401(k) now. If she's unable to generate additional income or reduce costs, is it more reasonable for her to take out a monthly amount from her 401(k) or Roth IRA to make up the shortfall, rather than a lump sum to pay off the mortgage or not?

Should she consider refinancing to a lower rate if able and if she's paying 2% more than she could be at current rates or not? Could she have difficulty getting anything longer than a 20 year loan due to her current age? Even Ben Bernanke had a hard time refinancing recently.
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Should she cut up her credit cards if she can't use them responsibly (can't/won't pay them off in full each month and continues to carry a balance)?

Is there anything else I'm missing or should be inquiring about? Yes, debtors anonymous might help. She does see a psychologist but I don't know if finances are discussed.

Thanks for any help you can offer.
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ieee488
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Re: help me help a friend, financially

Post by ieee488 »

There have been other posts about people wanting to help friends out with advice.

The general consensus is don't unless they seek you for that advice.

You'll end up getting the blame big time if her 401K "loses" value because of following *your* advice.
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arcticpineapplecorp.
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Re: help me help a friend, financially

Post by arcticpineapplecorp. »

Thanks for the advice. Yes, I'm aware of the potential pitfalls of getting involved. I'm not planning on giving her specific advice unless asked. And she did ask for my opinions. But I don't think she fully understands the implications of taking out $70,000 from her 401(k) from a tax/penalty/lost growth potential perspective. I want to help her see the pros and cons of her decisions and help her think about things she's not considered.

She's planning on rolling over her 401(k) into something anyway, I got the impression that if she's meeting with her bank, they will put her in products that will be less beneficial than Vanguard. She already has Vanguard, so she's halfway home.

Paying off the house will provide psychological/emotional stability which is why she's thinking of doing this. I'm asking if there might be better reasons why she shouldn't.

Thanks again.
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Twins Fan
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Re: help me help a friend, financially

Post by Twins Fan »

So, she didn't take your advice before, she went into debt and got bailed out, went into debt again and took out a mortgage on a paid off house because no one would bail her out again, and you think your advice this time will have a different result.... :oops: :D

I don't know your friend, but I kind of see some finance patterns there. I would say answer any questions she may have best you can and see if it sticks. I don't think I would try to "advise" her unless she wants that.

If she takes out the $70k, it does not mean she pays more taxes on what she earned so far in 2014. Whatever she has earned so far, she pays the taxes on that to whatever tax bracket that takes her to, or each step along the way 10%, 15%, etc... Where it would bite her is if she, for example and assuming single, would be at the top of the 15% bracket with her regular pay for the year and the $70k withdrawal puts her at the top of the 25% or into the 28% bracket. Then she owes 25% on basically all the $70k... depending on final numbers... and it hasn't been taken out each paycheck though the year. That makes for quite a tax hit all at one time plus the penalty. If her mortgage balance is $70k, she would probably need to take out well over that to pay the mortgage off and handle the tax hit from the withdrawal.
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Re: help me help a friend, financially

Post by msj16 »

Given the fact that she lost her job and has also been in debt in the past, she should build up an emergency fund. That is priority number one. Second, you have to help her see that at her age she has to build up more in retirement or she will be trapped into working for too long. Paying off the mortgage should come second to those goals.
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Re: help me help a friend, financially

Post by fposte »

I think behaviorally this is unlikely to succeed, but I also think you may not have the information necessary anyway. For instance, does her 401k plan provide for hardship withdrawals or will she be hit with a penalty? Can she take a 401k loan instead? What are her monthly house payments, and how much of those is mortgage as opposed to taxes and insurance? What Social Security is she eligible for?

You say "if she's unable . . . to reduce costs," but she's already been unable to cut costs back to the $57k salary she's been overspending on. Is it likely she'll be able to cut back so much farther now?
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Re: help me help a friend, financially

Post by Rob5TCP »

I have a friend who is probably considerably less credit worthy than Ben Bernake refinance his mortgage.
If she has large equity in the house, it's worth a shot. Even if her credit is so-so. If her house is in a hot area
and much of the Bay Area or L.A. are fairly sellable; she might get the lower rate because the house could be
sold profitably by the lender. If she is underwater or minimal equity, that won't be possible. Still, trying is
worth the application costs, especially if she has a connection at a Credit Union.

I
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arcticpineapplecorp.
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Re: help me help a friend, financially

Post by arcticpineapplecorp. »

thank you everyone for the replies so far.

twins fan, yes I'm aware she may not take advice again and I'm aware of the pattern. I'm not under any delusions that what I tell her will be followed, but as a friend and since she's asking, I feel obliged to offer some help, unless she decides to see a professional planner--in which case I'll refer her to the Garrett planning network for a consult. Thanks for the info on the tax brackets. That's what I was looking at, but wasn't sure if additional income (from the 401(k) withdrawal) would put her earned income in a higher tax bracket as well. Thanks for answering that. I've been referring to: http://www.moneychimp.com/features/tax_brackets.htm to determine how much in tax she might owe on the withdrawal. Is this site sufficient, or are there better ones recommended?

thanks msj16. yes definitely thought about her having an emergency fund. Last time I talked to her she was making that a priority. Not sure if she did though. She certainly didn't build up enough of an emergency fund to pay off her mortgage. And yes, I agree building up retirement monies is important since she probably hasn't saved enough and retirement age is around the corner. Thanks for your thought about paying off the mortgage being of secondary importance.

thanks fpost...yes, she's single, I forgot to mention that. There may be hardship withdrawals, I'll ask about that. But I'm not sure she falls into a hardship. She doesn't have a disability. But I will ask. Thanks. I don't know if she can take a loan from the 401(k), especially now that she's left the job. I will ask though. Would that be preferable in some way?

She will need to reduce costs if her income declines, or find a better paying job. No I don't know if she'll be able to cut back so much now. She's not eligible for social security because she's only 57 and she's not disabled, so that's out. She's looking into U.C. if the new (lower-paying) job offer doesn't pan out.

I'll ask about how much the mortgage vs taxes/insurance are. Does this matter? Are you asking in the event she pays off the mortgage but will still be responsible for taxes and insurance going forward?

rob5tcp...she has equity. Her house might be valued at 125k or so and payoff amount is less than $70,000 since she wants to take that to pay off mortgage plus other debts. thanks, for the mention about credit union. Hadn't thought of that even though I belong to one. But she should consider it only if the difference in percentage points is more than 1%, definitely for a 2% difference??

thanks again.
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livesoft
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Re: help me help a friend, financially

Post by livesoft »

She left her job. She is older than 55. It is a 401(k). Why would there be any penalty for withdrawing from it? Taxes, yes; penalties, no.

Does her 401(k) plan allow for periodic withdrawals from the 401(k) for retirees?

A rollover of the 401(k) to an IRA would prevent penalty-free withdrawals from the 401(k) now.
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Re: help me help a friend, financially

Post by fposte »

Ah, I apparently completely misread a key piece of my source. Sorry, arcticpineapplecorp. Though I still think there are some details that matter here that you may not possess--it's awfully hard to translate from somebody else's narrative, especially if they're on the vague side about their finances.
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Re: help me help a friend, financially

Post by dm200 »

It seems to me that paying off her mortgage (compounded by withdrawing 401k returement funds to do so) would not be wise. With the mortgage - and only monthly payments due - she still has flexibility if she really needs liquid funds. There is no assurance that, if she pays it off, that she would necessarily qualify for another mortgage loan - this is sometimes a one-way street.

One suggestion for impartial debt management, financial counseling, and related is "Balance" (http://www.balancepro.net)

Many credit unions offer this as a FREE service to their members.
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Re: help me help a friend, financially

Post by mhalley »

Certainly she should wait till next year before withdrawing money to pay off the house to minimize taxes. Whether doing that is a good idea is debatable. Also,i don't think you can withdraw from an ira penalty free like you can from a 401k, so she may not want to roll it over. If she rolled it over i think she would have to set up periodic payments, which she may not want to do if she goes back to work. Not a tax guy, so she may need to get some real advice.
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Re: help me help a friend, financially

Post by Hypersion »

It makes no sense to pull out a huge amount from a 401K and pay 25% to 35% in taxes to save 3-4% in interest.
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Re: help me help a friend, financially

Post by celia »

Why does she want to talk to you about finances?
Why does she want to talk to a bank?
Why does she want to go back to school at age 55? (probably not cost effective for her and she may end up with student loans!)

I would think the most important thing you could do for her is help her list her assets and her debts (along with values). Maybe rough out a bar chart showing this if she is more visual. She needs to start with a good understanding of where she stands financially. Then show on the charts what would happen under each scenario she is considering.

Does she have a monthly budget? How does it compare to monthly income? Does she understand what went wrong in the past and does she want to prevent it from happening again?
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Re: help me help a friend, financially

Post by arcticpineapplecorp. »

livesoft wrote:She left her job. She is older than 55. It is a 401(k). Why would there be any penalty for withdrawing from it? Taxes, yes; penalties, no.

Does her 401(k) plan allow for periodic withdrawals from the 401(k) for retirees?

A rollover of the 401(k) to an IRA would prevent penalty-free withdrawals from the 401(k) now.
Wow, I didn't realize the rules regarding penalties on early withdrawals changed regarding 401(k)s. Thanks for that info, that's news to me.
I'll ask if her 401(k) plan allows for periodic withdrawals or not. Not sure at this point.
dm200 wrote:It seems to me that paying off her mortgage (compounded by withdrawing 401k returement funds to do so) would not be wise. With the mortgage - and only monthly payments due - she still has flexibility if she really needs liquid funds. There is no assurance that, if she pays it off, that she would necessarily qualify for another mortgage loan - this is sometimes a one-way street.

One suggestion for impartial debt management, financial counseling, and related is "Balance" (http://www.balancepro.net)

Many credit unions offer this as a FREE service to their members.
Thanks. Will check on this. Good point about retaining flexibility for liquid funds.

celia--she's not going back to school. I never said she was planning on doing that. I will go over her expenses vs. income. Could be putting credit cards away and paying in cash might be better for a while if she's not able to constrain herself.

thanks for the added info, very helpful.
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Re: help me help a friend, financially

Post by livesoft »

arcticpineapplecorp. wrote:celia--she's not going back to school. I never said she was planning on doing that.
Apparently, "applying for U.C." can mean different things. :)
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arcticpineapplecorp.
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Re: help me help a friend, financially

Post by arcticpineapplecorp. »

livesoft wrote:
arcticpineapplecorp. wrote:celia--she's not going back to school. I never said she was planning on doing that.
Apparently, "applying for U.C." can mean different things. :)

ok, U.C. in my definition from the OP was Unemployment Compensation
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Re: help me help a friend, financially

Post by FelixTheCat »

Too many red flags in this post. I would stay out of it unless she asks for your help.
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Re: help me help a friend, financially

Post by Calm Man »

OP, doesn't she have a brother to go to on this and spare you? Will you take on my sister as well? :D There seem to be some people who are the type that will go from problem to problem and seem to have less aggravation about it than the people they seek help or advice from. They then do what they want anyway and cause the person trying to help to pull their hair out. I still have a little from my sister. But the "helpers" are sort of lured in and just don't have the nerve to retreat and say to the other that she should go it alone. I don't understand why. Notice that one person has apparently withdrawn from this (the one who bailed her out once)>

If you could break this chain somehow, you would spare yourself so much grief? Maybe get her to a fee only person (not an investment person) to work on this. Even offer to go with her and pay for the session? Good luck.
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Re: help me help a friend, financially

Post by arcticpineapplecorp. »

thanks again. I'll post back if I have anything new to add. Thank you all again for your feedback. You are all very wise and I mean that with the most sincerity.
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celia
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Re: help me help a friend, financially

Post by celia »

arcticpineapplecorp. wrote:
livesoft wrote:
arcticpineapplecorp. wrote:celia--she's not going back to school. I never said she was planning on doing that.
Apparently, "applying for U.C." can mean different things. :)
ok, U.C. in my definition from the OP was Unemployment Compensation
OP, I guess I DID misunderstand you. However, you started by saying
I have a friend who left her job recently.
That sounded to me like she left voluntarily, rather than being laid off. She can't collect Unemployment Compensation if she left voluntarily, so I, of course, assumed she quit so she could go back to college. :)
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Re: help me help a friend, financially

Post by dolphinsaremammals »

arcticpineapplecorp. wrote:
livesoft wrote:
arcticpineapplecorp. wrote:celia--she's not going back to school. I never said she was planning on doing that.
Apparently, "applying for U.C." can mean different things. :)

ok, U.C. in my definition from the OP was Unemployment Compensation
I thought she was applying for a job at the University of California.
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Re: help me help a friend, financially

Post by arcticpineapplecorp. »

celia wrote:
arcticpineapplecorp. wrote:
livesoft wrote:
arcticpineapplecorp. wrote:celia--she's not going back to school. I never said she was planning on doing that.
Apparently, "applying for U.C." can mean different things. :)
ok, U.C. in my definition from the OP was Unemployment Compensation
OP, I guess I DID misunderstand you. However, you started by saying
I have a friend who left her job recently.
That sounded to me like she left voluntarily, rather than being laid off. She can't collect Unemployment Compensation if she left voluntarily, so I, of course, assumed she quit so she could go back to college. :)
My understanding--someone might be able to get unemployment comp if they quit, but it's much harder and the burden of proof is on the employee, rather than the employer. She supposedly talked with her company/HR to get a feel for whether they'd fight her applying for U.C. and it sounds favorable for her (they aren't going to fight it). There have been other layoffs, whole office is being shaken up, etc.
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denovo
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Re: help me help a friend, financially

Post by denovo »

She's a good candidate for defaulting on her credit cards and later negotiating a settled payment.

She may have trouble refinancing if she has credit problems, actually scratch that, without a job, there's no way she's going to be able to.

Let's get back to defaulting on the credit cards; she'll be blacklisted from further credit which is a good deal since she has problems using it responsibly. She already has a home which has a homestead exemption and 401ks are judgement proof.
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Re: help me help a friend, financially

Post by Herekittykitty »

There may be a non profit community agency that provides budgeting counseling on a sliding fee basis. You may be able to look it up online, or if not, then county social services should know. I don't think psychologists or other therapists are required or even given the opportunity for training in budgeting counseling.

That doesn't address the main issues you are asking about but I thought I would mention it.

Another comment: Given her money management history along with her current drop in income, I would consider the possibility she could end up defaulting on just about any debt and the possibility she could end up declaring bankruptcy. So in advising her, I would consider what might happen to various of her assets should that happen. For example - if an IRA and a 401k are treated differently in bankruptcy (I don't know) then I would consider that when advising her as to whether to roll over the 401k.
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