Costco Connection - January 2012

Ask Suze Orman

Getting out early

Email your personal-
finance questions to:
suze@costco.com.
Please include
“Suze Orman Q&A”
in the subject line; or fax to
(425) 313-6718; or mail to
Q&A with Suze Orman
The Costco Connection
P.O. Box 34088
Seattle, WA 98124-1088.

By Suze Orman

I have the opportunity to retire at 59. I could get a lump sum of $315,000 or get $1,950 per month. We owe $160,000 on our house. Its value is $290,000 and is appreciating. Our credit card debt is $85,000. My husband makes $30,000 per year. I make around $100,000 at present. If I go part time with a lesser salary I will probably make around $35,000 to $40,000 per year.

your financial needs and help you make an informed decision that not only works for you today, but also provides security throughout your life.

Suze will answer
selected questions in
this bimonthly column.
She regrets that
unpublished questions
cannot be answered
individually.

Faye V.

Denver, Colorado

YOU ARE TALKING about retiring at 59 when you have $85,000 in credit card debt and the house isn’t paid off? I don’t think so. There is to be no discussion of retirement until you address that debt.

Whether you retire now or not, I want you to understand your pension options. If you take the lump sum, your best move is to roll it over into an IRA. That way you avoid an immediate tax on the entire sum.

A good rule of thumb is to plan that in retirement you limit your withdrawals in the first year to just 4 percent of your total savings. If you withdraw more than that you run the risk of running out of money if you in fact have a long life. (You then adjust your withdrawal rate for inflation each year.) So in your case, while $315,000 sounds like a lot, it in fact computes to just $12,000 or so of income a year. That $1,000 a month is a lot less than the $1,950-a-month pension.

But based on what you are telling me, that $1,950 payout is only if you choose that the payments be made during your lifetime. I have to tell you that in most instances my advice is for couples to opt for what is called a “joint and survivor” With this arrangement, your husband would continue to get the payout if you were to die first. The payouts will be lower if you opt for joint and survivor because your employer is agreeing to make the payments for a longer period. But the lower payment today, paid over both your lives, provides incredible peace of mind.

Ask your employer to show you the payout estimates for joint and survivor. Typically you will be able to choose between a payout that would give your husband 100, 75 or 50 percent of your payout. The higher the percent, the lower the monthly payout. But please be smart and choose the option that makes sense for your situation.

If you are worried about his security if he were to survive you, the 100 percent option may be wisest. This is where a trusted financial adviser is so important. You really want someone to consider all f p u l b e p e e l . u lower payment today, paid over both your lives, ov l u w o a to survive you, the 100 percent option may be wis-

My credit was shot. It is slowly creeping back up. I applied for a credit card and was approved. My plan is to use the card with a low limit to pay off monthly recurring expenses, such as cell phone, storage, etc.

My question is, should I pay off the entire balance every month or should I leave a small balance remaining to pay off the next month? Will paying off the entire balance help me establish credit more rapidly or more slowly?

Edel V.

Chula Vista, California

Suze Orman’s TV
show airs Saturday
nights on CNBC. Suze
can be contacted at
www.suzeorman.com.

BRIAN BOWEN SMI TH

YOU NEVER, EVER want to pay a finance charge. Using the card to pay for your necessities and paying it off in full each month is the best way to keep rebuilding your credit.

Different variables are part of the calculation for your FICO credit score. Length of credit (longer is better) accounts for 15 percent of the score. New credit (if you’ve opened new credit card accounts, taken out new loans) accounts for 10 percent. Types of credit (it’s seen as a good thing if you have a mix of credit: credit cards, mortgage, car loan, etc.) accounts for 10 percent.

Your track record for paying your bills on time accounts for 35 percent of your score. The big issue is whether you pay on time. So your first priority should always be to pay your bills on time, even if you can’t pay the entire bill.

But another part of your FICO score is also very important, where paying it off in full will indeed help you. FICO calculates your debt-to-credit ratio, and it accounts for another 30 percent of your credit score. This is the amount of your unpaid credit card balances divided by the total amount of available credit on all credit cards.

So let’s say someone has $1,000 in unpaid balances and total credit limits of $3,000. That puts this person’s debt-to-credit ratio at 30 percent. There is no magic percentage that FICO looks for. The rule is that lower is always better. If you can pay off your balance each month, that will help keep your ratio very low. And that, in turn, is a key component of building a high credit score. C