Cash Counts!

Lean times call for budgetary triage. But while you should clearly opt for orthodontics before Disneyland, the choice is tougher when it comes to home maintenance.

Should you get a paint job or a new furnace? “There’s no homeowner’s manual that tells you when to do what,” says Naperville, Ill., home inspector and structural engineer Mark Waldman.

Emergencies aside, the project that could cause the most damage and expense if left unfixed is the priority. Below, the order in which to tackle your biggest repair needs.

Wiring problems claim the No. 1 spot for good reason: They can lead to fires and electrocution. “That trumps everything,” says Waldman.

Danger signs: Circuit breakers that trip frequently, lights that dim when you turn on the vacuum or outlets that are loose, hot, or accept only two-prong plugs.

How to check: Spend $300 to $500 for a licensed electrician to open up your main panel to look for trouble and to tighten any loose connections. He’ll also spot-check switches, outlets and light fixtures to ensure that the wiring is in safe working order.

Replacement cost: $4,000 to $10,000 to rewire the house.

Prolong its life: Flip every circuit breaker off and on again once a year to prevent corrosion. Add new circuits ($100 to $500 each) to take the heaviest electrical loads, like window air conditioners, off the old wires.

Structural problems downstairs mean shifting and cracking upstairs — at the very least — so there’s little point in doing other repairs until you’ve fixed the building’s foundation.

Danger signs: Bowed or split beams, rotted posts, piles of sawdust (evidence of wood-boring insects), tiny mud trails (indications of termites), or large cracks in the masonry foundation — especially if the cracks are horizontal, which tends to indicate a bigger problem.

How to check: A contractor will usually take a look free of charge. If he recommends significant repairs, hire a home inspection engineer (find one at nabie.org) to investigate ($350 to $500).

Replacement cost: Major foundation work can cost $3,500 to $8,000; new posts or beams could run $1,200 to $2,500.

Prolong its life: Water is the cause of cracked concrete, rotten timbers and wood-eating pests. So keep your basement dry by making sure the landscape slopes away from the house and maintaining the next two items on the list: the roof and gutters.

Water leaking into your home from above can lead to a host of pricey problems: rot, insects, electrical shorts and mold.

Danger signs: Dampness or stains on ceilings; curling, missing, or broken shingles; smooth spots where the granules have worn away; green algae growth.

How to check: Have a roofer inspect your home. This is typically free, but the pro, of course, is looking for business. So check the company’s reputation at angieslist.com ($5 a month).

Replacement cost: $5,000 to $15,000

Prolong its life: Prune tree limbs so they’re at least 10 feet from the roof to keep squirrels away and to let moisture evaporate quickly after storms. If shingles blow off, replace them immediately, and repair small leaks promptly.

Your gutters are just as important as the roof. The only reason they’re lower on this list is that if you replace gutters first, they’re likely to get damaged when you reroof later. So if you need a roof too, it’s better to wait — or do both projects at the same time.

Danger signs: Dented or disconnected gutters, pooled water around your home’s foundation, or basement flooding near the downspouts.

How to check: Head outside during a rainstorm and watch the gutters in action, says Caitlin Corkins, stewardship manager for Historic New England, which maintains dozens of historic properties. “The best time to see clogs and overflows is when the system is working,” she says.

Replacement cost: $1,500 to $3,000

Prolong its life: Hire a gutter company to clean, check, and repair your gutters ($100 to $200) at least once a year — two or three times if you’re in a wooded area. And have someone clear the eaves of deep snow to prevent icing, which can split open gutters or rip them right off the house.

“People think paint is just a decorative element, so they let it go,” says Robert Niemeyer, a Winston-Salem, N.C., handyman, contractor, and electrician. But without a weather-tight seal, water can infiltrate the siding, causing rot and attracting wood-damaging insects. Still, leaks from a vertical surface generally aren’t as quick or lethal as ones from a roof and gutter.

Danger signs: Paint that’s peeling, cracking or blistering

Replacement cost: $4,000 to $10,000; make sure the painters replace loose putty around the window glass and caulking gaps around molding.

Prolong its life: Hire a pro to do touchups every year. Trim foliage so it’s at least a foot from the house, and kill any mildew growth with a bleach-and-water solution.

An old heating or cooling system is costly to operate — and the risk of a breakdown increases with age. But as long as your old furnace, boiler, or AC is operating safely, there’s no rush to upgrade.

Danger signs: The system cycles on and off frequently to hold your thermostat setting; you spot corrosion on the vent pipe; the natural-gas flames are yellow or orange instead of pure blue.

How to check: Get a repair estimate: if it’s more than a third of the replacement cost, spring for a new machine, says Indianapolis plumber Larry Howald.

Replacement cost: Typically $2,000 to $4,000 for a furnace (forced air); $4,000 to $8,000 for a boiler (hot water); $1,000 to $3,000 for a water heater; $6,000 to $10,000 for an air conditioner.

Prolong its life: Have your systems cleaned and tuned annually, including flushing the water heater to remove sludge, replacing all filters and lubricating any pumps.

The federal government is trying to ease the way for workers to buy annuities with their retirement savings. The goal: to create a source of income that people can’t outlive.

Insurers, already seeing demand for such products, are rolling out new annuities, which provide fixed lifetime payments in return for a lump sum and have been widely available outside of retirement plans for years.

Obama administration officials have been wrestling with the challenge of funding retirement across lengthening lifetimes and amid dwindling traditional “defined-benefit” pension plans. Those, of course, largely have been replaced with 401(k) and other “defined-contribution” plans, in which workers shoulder all of the risk involved in making their savings last.

Annuities have their own set of drawbacks, including steep fees for income guarantees, fixed payments that could lose purchasing power amid future inflation and complicated mechanics that can take hundreds of pages to explain. But they have a trump card over most other retirement investments: You can’t outlive their guaranteed lifetime payments.

The Treasury Department on Thursday rolled out a proposal making it possible to buy “longevity” annuities with a portion of savings in employer-sponsored retirement plans, including 401(k)s. A separate proposal pushes partial annuity options for traditional pension plans. And a ruling issued on Thursday clarifies how protections for workers and their spouses apply to annuities in retirement plans.

Here’s what the new proposals address.

Longevity annuities. These can provide a cost-effective way for people early in retirement, typically 65 to 70 years old, to help address the risk of outliving their assets by buying a predictable income stream with a portion of their retirement savings that would start at age 80 or 85. Once a retiree knows how long the remaining nest egg has to last, managing those savings is much less stressful.

The current barrier: Workers have to start taking required minimum distributions from retirement accounts at age 70½, including the value of an annuity within the plan. Under the Treasury proposal, an annuity that costs no more than 25% of the account balance, up to $100,000, and that begins by age 85, would be disregarded when calculating required withdrawals.

Having backup income late in life could be a big help. A 65-year-old woman has a 50-50 chance of living past age 86, and the same-aged man has an even chance of living past age 84, according to the Social Security Administration’s 2011 annual report.

While only 17% of 65 to 69 year olds get most of their income (90% or more) from Social Security, 33% of those who are 80 and over do so.

Partial annuities. At the same time life expectancies have been increasing, the use of lifetime-income tools in pension plans has been dwindling, according to a Treasury report. Defined-benefit plans are being phased out, and the ones left standing are increasingly offering lump-sum payouts.

Rather than leaving workers in defined-benefit pension plans with a choice between cash or a traditional pension, the Treasury proposal would make it simpler for such plans to offer both by streamlining the calculation of a partial annuity. That way a retiree could convert part of his account to fixed payments and keep the rest invested.

Spousal benefits. A revenue ruling also resolved uncertainty about how 401(k) rules that protect spouses’ benefits apply when an employee chooses a deferred annuity.

Under the rules, a worker who elected a single-life annuity—one with a benefit that would end when the worker dies, rather than continuing for the surviving spouse—has to get his or her spouse’s written consent. The ruling spells out terms that don’t require spousal consent until the annuity begins, at which point the insurer issuing the annuity, rather than the employer plan, would handle it, according to a Treasury fact sheet.

New products. Even before the government’s recent round of proposals and rulings, insurers were starting to experiment with annuities in 401(k)s. In January, ING introduced a “lifetime-income protection” program that gradually would move retirement assets from target-date funds into variable annuities with minimum guaranteed withdrawal benefits.

The annuities carry a 1% annual fee, and fund fees can range from 1.3% to 1.6%, with total fees maxing out at 2%. One-third of a worker’s savings would be moved into the annuity 17 years before retirement, with the entire account invested in the annuity five years from retirement, says Richard Mason, president of corporate markets at ING’s U.S. retirement division.

Firms including Aegon’s Diversified Investment Advisors, AllianceBernstein, BlackRock, Manulife Financial’s John Hancock, Prudential Financial and UBS also have tried adding annuities with guaranteed payouts to their target-date offerings in the past few years.

Marky Olson, a 63-year-old Seattle blogger, hit rock bottom the day she sneaked eight photo albums out of her parents’ apartment and chucked them in a dumpster.

Already, she had spent two years trying to make a dent in the stuff crammed into her parents’ two-car garage at their retirement villa, finding a home for a boat, model trains and other objects large and small.

After her parents moved to an assisted-living facility and had to cull again, Ms. Olson reached her breaking point. A nurse tried to stop her, but she jettisoned the photos anyway.

“I just couldn’t handle dealing with all the stuff anymore,” she says.

As older parents approach death, they often leave lengthy to-do lists for their children. The tasks can be both physical and financial. Some children must deal with a tangle of arrangements—everything from heating-oil contracts to trusts—along with jumbled stock certificates, car titles or life-insurance policies for which there may be no backup copies. Others must sift through boxes or rooms full of belongings. Sometimes siblings get involved, complicating matters further.

When the chores become overwhelming, it can be difficult for family members to recover sentimental treasures or tie up financial loose ends. At the extreme, the sheer volume of stuff can clutter a house and weigh down its value—a problem if the home must be sold quickly.

It used to be much easier to dispose of estates, experts say. But the slow recovery from the recession has softened the market for antiques and collectibles drastically, according to more than a dozen professionals who handle estate sales and elderly moves. People have curtailed recreational shopping and aren’t moving into bigger homes, stifling demand for furnishings. At the same time, younger homeowners’ decorating tastes have changed in the past decade or so away from the traditional furniture, formal china and silver tea sets found in many older homes.

Julie Hall, an estate liquidator in Charlotte, N.C., says she is seeing people eschew stately grandfather clocks for utilitarian items—even cleaning supplies—they can pick up for cheap.

Here is how to deal with your parents’ stuff while preserving family harmony and finances.

Go Slow—but Don’t Stall Out

When a loved one dies, it is especially difficult to start sorting through his or her stuff quickly. Many families, hoping to avoid getting bogged down, hire a liquidator to clear out everything fast.

On the other hand, if your financial situation allows it, taking some time can help you deal with your grief. Arleen Stern, a geriatric-care manager in New York, spent four months with her family emptying her mother-in-law’s apartment after she died. “She was a Holocaust survivor, and she saved everything,” Ms. Stern says. “It let us reminisce about her life, and that’s a very important way for people to spend time together after a recent loss.”

The trick is to avoid stalling out—or becoming too paralyzed to start. Adult children inheriting a home could wind up on the hook for bills if the estate isn’t settled yet.

Jada Krall, a 41-year-old hospice nurse in Tampa, Fla., says that for several months last year she ignored the task of emptying her parents’ 3,000-square-foot, four-bedroom home in Charlotte. “I just couldn’t wrap my head around it,” she says. Meanwhile, she and her brother had to pay the mortgage and other bills themselves.

When Ms. Krall hired an attorney to help her handle the estate, he urged her to hurry up and sell the house to stop the financial bleeding.

A real-estate agent connected her with Ms. Hall, the estate liquidator. In three days, Ms. Hall emptied the house, sending valuable pieces to an auction house. They didn’t bring much. Even an antique pump organ that Ms. Krall’s mother had painstakingly restored fetched only $125 at auction, she says: “I was shocked at how little things brought. You think that house is full of so much value, but in this economy it’s not.”

Many Different Options

Long-distance families, sibling rivalries and time pressure all are reasons to consider bringing in professionals to help sift through family belongings.

The question is which type of professional is best suited for your situation.

Estate liquidators, auction houses and consignors typically charge a percentage of the contents’ sale price—often 25% to 35%. Liquidators are the most likely to act as a one-stop shop, and they may bill in different ways for different services. Ms. Hall, for example, charges a percentage of the items that sell, and also an hourly rate starting at $110 for appraisals, clean-outs, and shipping items to auctioneers or charity. The American Society of Estate Liquidators (ASELonline.com), which she runs, provides local referrals.

If you want to sell select items and handle the disposal yourself, you could hire an auctioneer, preferably one who knows your specific merchandise and works well on the Internet, says Susan Devaney, owner of Moving Mavins in Westfield, N.J.

Consignment shops typically charge up to a 50% commission and put an item on their sales floor for 30 days. Find out upfront what happens if it hasn’t sold at that point. You might have 24 hours to a week to come get it—and if you don’t, it is theirs, warns John Buckles, president of Caring Transitions, a network of senior movers and estate-sale businesses.

Senior-move managers and professional organizers charge an hourly rate but typically offer more customized help. They can tap movers, reputable resellers, and auctioneers and charities willing to take books, clothing and home furnishings.

Their rates range from $40 to upward of $125 an hour, depending on where you live and the complexity of the job. Movers and organizers who have joined trade groups that provide training can be found at nasmm.org, napo.net and MoveSeniors.com.

Charles Naftalin, a partner at law firm Holland & Knight in Washington, hired Transitional Assistance & Design, a senior-move management company in Gaithersburg, Md., after his father died, and it quickly emptied his parents’ century-old Victorian house—including 20,000 books.

“We had a deadline,” he says. “We put the house up for sale, and my mom was moving to a one-bedroom apartment.” Mr. Naftalin says he was amazed at how much they accomplished so quickly. He hired the same mover when his mother moved from the apartment to an assisted-living facility.

Take Care of Financial Matters Quickly

In addition to dealing with the furniture and dishes, don’t forget to track down bills for monthly utilities, cancel credit cards, figure out if anything was on auto-pay from bank accounts that may be closed and tie up other bill-paying loose ends. Otherwise, the estate could end up paying late fees or bills for services no one is using—and if the estate hasn’t been settled yet, you could wind up on the hook for some of the charges ranging from utility bills and lawn service to homeowners’ association fees.

The same applies when your parents move to a long-term-care facility. When Jean Dorrell, a Summerfield, Fla., estate planner, traveled to Texas to clean out her father’s home after he moved to an assisted-living facility, she found stacks of mail and soon figured out that he was having $460 a month deducted from his bank account for magazine subscriptions and other purchases—a third of his monthly income.

Financial records can be particularly daunting. Caroline Yates, a homemaker in Rochester, N.Y., served as power-of-attorney for her octogenarian great uncle. She had to make room in his Westfield, N.J., home for health-care aides before a rehab center would release him, following an illness in 2010.

But she had to be careful not to throw out any uncashed checks or stock-sale records, since he had run a small financial business from his home with no computer records. After his death last year, she went through 16 filing cabinets searching for a set of stock certificates—before finding them in a bank safe-deposit box. She wound up hiring Ms. Devaney’s firm to help her clean out the house and sift through the important records.

Dole Out the Heirlooms Diplomatically

Some of the biggest family feuds erupt over the division of day-to-day objects. Those fights can become financial headaches if they hold up the settlement of the estate or, worse yet, drag the family into court.

The most foolproof strategy also is the most awkward: Parents and children discussing what the children will get while the parents are still alive and well, says Marlene Stum, a professor at the University of Minnesota who heads its “Who Gets Grandma’s Yellow Pie Plate?” project.

Aging parents and adult children often don’t realize which objects really matter to one another. Children might not know how the parents wound up with various heirlooms, and the stories might justify keeping what might otherwise seem like junk.

For their part, parents often are surprised to learn their children are more interested in everyday objects used while they were growing up—a pie plate or serving platter—than a coin collection with some monetary value, says Prof. Stum.

But what if a parent dies without talking with the children? First, the siblings need to agree on who is in charge, be it a family member or a professional, and give that person final say, advises Robert Spielman, an estate-planning lawyer and certified public accountant with Marcum LLP in Melville, N.Y. Next, they should determine who was promised something and who wants something that was important to him or her.

After that, they should consider giving everyone color-coded stickers to put on things they want, along with a number ranking it, and list it on a spreadsheet.

“By indicating how important a particular thing is to you in a way that everybody else can see, you’re much more likely to compromise,” says Francine Russo, author of “They’re Your Parents, Too!”

Document Deductions

Next comes the liquidation part. One option that can ease the emotional sting: making donations to charity. Doing so when your parents downsize “can make mom and dad feel good about who will get their stuff,” Mr. Buckles says.

After the second parent’s death, family members should choose the possessions they want, Mr. Spielman says. Next, the estate’s executor sells, or hires someone to sell, everything possible. (If the estate is taxable, estate tax is owed on those assets, whether or not they are sold.)

The children, as the heirs, typically get what is left after any tax is paid. They also get to claim a tax deduction for the fair-market value of any stuff donated to charity on the date of the donation, according to Mr. Spielman.

For donations, the Internal Revenue Service requires the item to be in good condition, and that you get a receipt.

“If the people at the Salvation Army think it’s worth $8,000, get a receipt for $8,000,” Ms. Dorrell says. “Your [accountant] can bring that number down if he needs to, but he can’t bring it higher.”

The IRS, Salvation Army and Goodwill Industries all post lists of suggested values on their websites. But if you have a higher-value item, such as designer clothing, take a digital photo to document it, Ms. Devaney advises.

Donations worth more than the IRS limit may require a formal appraisal, Mr. Spielman says.

The tax treatment of frequent-flier miles is at center stage following the disclosure that thousands of Citibank customers received notices in January that miles they received for opening new accounts last year produced taxable income.

Citi sent the affected customers “1099-Misc” forms, which tell taxpayers that income is being reported to the Internal Revenue Service. Recipients should include that income on their 2011 tax returns—or risk getting a letter from the IRS.

Some customers are furious. “The tax issue was only hinted at in the offer,” says Keith Sipos, a retired music teacher in San Diego who received a 1099 with $750 of income for 30,000 miles. “When I asked to have the miles rescinded, Citibank said I should have asked by the end of 2011. But I didn’t know about the tax until I got the form.”

This flap makes it a good time to review the tax treatment of frequent-flier miles. Put simply, most miles earned by most taxpayers most of the time are probably tax-free.

Now for the confusing details. There are least six categories of frequent-flier miles, and several different ways of taxing them.

Why such hairsplitting distinctions, if the miles themselves are similar? Because that is how the tax system works: If you receive $100, the tax varies according to whether it is a gift from a friend, wages from employment, dividends from a stock or a reimbursement of expenses by your employer.

“The issues surrounding frequent-flier miles are a perfect example of how complex the income-tax law can be concerning everyday transactions for virtually every American,” says Michael Graetz, a professor at Columbia University Law School and a former top Treasury official.

With frequent-flier miles, the issue of taxability often comes down to whether the miles were awarded as a rebate (not taxable), a promotion (taxable) or a prize (taxable). In tax theory, rebates are treated as a reduction of the purchase price, which isn’t taxable. But promotions and prizes count as income.

Much remains unclear, however, because the IRS hasn’t issued definitive rulings on many aspects of frequent-flier miles. (A spokesman declined to comment on most issues raised in this article.) In some cases, the only available IRS guidance is from private-letter rulings, which apply only to one tax case and can’t be cited as precedent.

For insight, Tax Report consulted specialists at the American Institute of CPAs and frequent-flier-program expert Randy Petersen, publisher of Inside Flyer magazine. Here’s how they see the taxation of different categories of frequent-flier miles.

Miles awarded by the airlines in return for flying with them. These are almost certainly a nontaxable rebate, says Melissa Labant of the American Institute of CPAs.

Miles awarded in connection with credit-card use. These also appear to qualify as a nontaxable rebate, the experts said.

In its statements about the recent flap, Citibank said, “Rewards and airline miles provided in connection with a purchase on a credit card are routinely not subject to individual income-tax reporting.”

Miles awarded in connection with business travel. In 2002, the IRS said it didn’t consider such miles taxable and that if it changes its mind, the new rules will apply only in the future. The agency hasn’t addressed the matter since.

Miles awarded as a promotion for opening an account, such as a bank account.Such miles are taxable, according to the IRS. Responding to queries about the Citibank accounts, an IRS spokesman said, “When frequent-flier miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law.” This makes the miles akin to toasters or iPods given out as promotional gifts.

Tax Report asked American Express whether it reported taxable income for miles that customers receive for opening an account. A spokeswoman said that in general it does not, and likened such miles to a rebate.

“Often there is either a spending requirement to get the miles, or the customer is paying an annual fee to sign up for the card,” she said.

Miles awarded as a promotion for putting money in a mutual fund. Ms. Labant found an IRS private-letter ruling declaring such miles taxable. Investors who received them had to adjust their cost basis downward by the amount of income for funds held in taxable accounts.

Miles awarded as prizes. Mr. Petersen notes that sometimes firms award miles to a few customers chosen at random, as in a sweepstakes. These qualify as “prizes,” which are generally taxable, just as lottery winnings would be. He has seen cases in which winners rejected the miles because they didn’t want to owe the tax involved.

Terry Williams borrowed about $7,000 to earn a degree from Spelman College 38 years ago. For her youngest child, a sophomore at Belmont University in Nashville, she will take on almost $40,000 in parental loans.

Williams, a 59-year-old widow who runs a nonprofit that helps black families navigate private-school admissions, is watching her retirement savings dwindle as she pays college bills for her three children, Bloomberg Businessweek reports in its Feb. 6 issue.

“I’ll probably work until I fall dead at my keyboard,” the Decatur, Georgia, resident said in an interview.

It’s not just graduates who are staggering under the weight of educational loans. Parents, too, are borrowing record amounts to put their kids through college, jeopardizing their retirements. With the housing crisis, many families can no longer avail themselves of one popular option for financing university studies: taking out a second mortgage.

“A plunge in home prices has erased the equity that many homeowners had just a few years ago,” said Greg McBride, a senior financial analyst at Bankrate.com in North Palm Beach, Florida.

Federally backed educational loans to parents, at an estimated $100 billion, make up 10 percent of the $1 trillion in educational loans, according to data analyzed by Mark Kantrowitz, publisher of the website FinAid.org. The problem is more acute at some private schools, such as Colgate University, Trinity College and Sarah Lawrence College, which have smaller endowments and can’t offer the same financial aid as Harvard and Princeton universities.

‘Robbing Their Future’

“Parents are facing an economic crisis because they are borrowing too much for college,” said Rick Darvis, executive director of the National Institute of Certified College Planners. “They’re sacrificing their current lifestyle and robbing their future retirement.”

Loans to parents have jumped 75 percent since the 2005-2006 academic year, according to Kantrowitz. That works out to an average of about $34,000 for those with loans. With interest, the figure rises to about $50,000 over a standard 10-year period. An estimated 17 percent of parents whose children graduated in 2010 took out loans, up from 5.6 percent in 1992- 1993, according to Kantrowitz’s estimates.

The rising levels of parental debt could ripple through the rest of the economy. By the time parents are in their 50s and 60s, they should be saving for retirement instead of taking on new liabilities, said Joseph S. Messinger, a certified college planner and president of Capstone Wealth Partners Ltd. in Columbus, Ohio. Servicing those loans becomes harder as parents stop working and their incomes decline.

‘A Lot of Money’

“A lot of money is going to the university and college systems,” Messinger said. “It’s shrinking people’s dollars to do other things.”

Most of the parental debt is in the form of Parent Loans for Undergraduate Students. PLUS loans, which are government- issued and carry a fixed interest rate of 7.9 percent, can be used to cover the entire cost of tuition, room and board, and other expenses — minus any aid secured by the student. While parents must pass a credit check, no collateral is required. PLUS loans cannot be discharged in bankruptcy.

Marvin Weinberger, 58, a self-employed inventor of hand tools in Havertown, Pennsylvania, owes $105,509 in PLUS loans for his two children. Most of that has gone to cover the almost $49,000 a year in tuition, fees, and room and board for his daughter Ariela, a junior at Muhlenberg College, a small private institution in Allentown, Pennsylvania.

‘Looked Hard’

“We really looked hard at the possibility of taking her out of Muhlenberg,” said Weinberger. “It was such a good fit and made her feel so welcome — academically and socially.”

His son David, a sophomore at Rochester Institute of Technology, is receiving some financial aid. Both Weinberger children took out federal loans of their own.

Muhlenberg never tells “a family they have to take a PLUS loan in order to come to Muhlenberg,” Chris Hooker-Haring, dean of admission and financial aid, said in an e-mail. “We simply inform families about what we can provide.” The final decision is left to the family, he said.

Many of the schools with high levels of parent loans rely more on tuition and fees than on endowments. At Trinity College in Hartford, Connecticut, where annual tuition and fees are $55,450, parents who took out federal loans borrowed an average of $27,000 in the last academic year, according to the school. At Sarah Lawrence in Bronxville, New York, where the annual cost of attending is $58,716, it was about $20,000.

Tuition Increases

Tuition and fees for private, nonprofit, four-year colleges have increased to an average of $28,500 for the 2011-2012 academic year, up from an inflation-adjusted $16,276 two decades ago, according to the New York-based College Board, a nonprofit group whose members include universities.

The trend shows no sign of abating. On Jan. 28, Princeton University in Princeton, New Jersey, announced that tuition and fees for the coming school year will rise 4.5 percent — the school’s biggest increase in six years. Days earlier, the board of trustees at Cornell University in Ithaca, New York, approved a 4.4 percent cost increase for undergraduates in its four colleges not supported by New York state.

“Colleges will keep doing this as long as the loans are available and as long as people keep applying,” said Laura J. Clark, director of college counseling at Fieldston, a private high school in New York. “If there’s a drop-off in the number of applications in the middle-income group, that’s when colleges may moderate prices or come up with new strategies for helping people pay.”

Obama’s Plan

President Barack Obama last week proposed linking federal aid to a college’s ability to control tuition costs. The plan calls for increasing campus-based aid only for schools that limit tuition cost increases and penalizing those that don’t.

The way parents are paying for college has changed over the past two decades. As recently as 10 years ago, financing college through a second mortgage was more easily accomplished because homeowners had equity from which to borrow, said Bankrate.com’s McBride.

Pamela Lauzau, 63, put three children through Boston College and took a $400,000 second mortgage on her house in Alexandria, Virginia, to do so, which funded about two-thirds of the cost. The family didn’t receive financial aid.

With her husband unable to work because he has dementia, she took a job as a school bus driver for the health insurance and sells real estate. Her youngest child graduated in May.

Second Mortgage

“I don’t see a time when I’m not going to work,” Lauzau said.

This month, Lauzau expects to close on the sale of her house. She won’t realize a profit because of the second mortgage.

“Our advice to families is to know what you’re getting yourself in for,” Robert Lay, Boston College’s dean of enrollment management, said in an interview. “You have a level of sacrifice that’s going to be required to send your son or daughter or to a private, expensive university like Boston College.”

He said families will see a return on their investment. The school’s estimated cost for this academic year is $57,000.

Parents aren’t facing the financial reality about their ability to pay off these loans when they have a smaller income stream, Capstone’s Messinger said. They are relying solely on faith that they’ll be able to pay the money back, he said.

‘Too Easy’

PLUS loans, in particular, are “too easy” to get, he said.

Terry Williams, the Spelman graduate, said her own parents didn’t borrow any money to send her to the school, a private, historically black women’s college in Atlanta.

She took out parent loans because Belmont University was a good fit for her son, Kramer, and he could be near his sister at Vanderbilt University. Belmont, a private Christian college, costs $34,000 per year. Her son has already borrowed about $14,000 in federally backed loans.

“We understand and greatly appreciate the sacrifices families make in order to send their children to Belmont,” David Mee, associate provost and dean of enrollment, said in an e-mail. He said the university is “committed” to controlling costs.

Williams said she didn’t anticipate how expensive a college education would be.

“I’m definitely hoping that the sacrifice is still worth it,” she said.

The U.S. Treasury Department will help expand the availability of annuities and lifetime income choices in retirement plans, the agency said today.

The department proposed two regulations to make it easier for those approaching retirement to fund an annuity through their company-sponsored pensions or 401(k) savings accounts. Annuities are insurance contracts that guarantee a lifetime stream of income in exchange for up-front payments.

“When American workers take the responsible step of saving for retirement, we should do all we can to provide them with sensible, accessible choices for managing their hard-earned savings,” Treasury Secretary Timothy F. Geithner said in a statement today. “Having the ability to choose from expanded options will help retirees and their families achieve both greater value and security.”

U.S. savers held about $2.9 trillion in 401(k) accounts and a total $17 trillion in retirement savings as of Sept. 30, according to the Investment Company Institute, a Washington- based trade group for the mutual-fund industry.

Regulators and legislators have been looking at Americans’ retirement security because life expectancies are increasing and savings have shifted from traditional pension plans — where employers generally provided retired employees with lifetime payments — to defined-contribution plans such as 401(k)s. Participants in 401(k)-type plans increased to 67 million in 2007 from about 11 million in 1975, the Labor Department said at a hearing on lifetime income in September 2010.

Reluctant Employers

Employers have been reluctant to adopt annuities in retirement plans they sponsor because of concern that fees are too high and that they would be held liable for their choice of insurers. Americans have resisted buying the insurance because they don’t want to lock up their assets.

The Treasury Department’s proposed regulation will make it simpler for traditional pension plans to let workers take part of their balances as lifetime income streams and take the rest as lump sums.

The other proposed rule would encourage 401(k) and IRA plans to offer participants the option of dedicating part of their savings to a so-called longevity annuity, which may not begin the guaranteed income payouts until age 80 or 85, the Treasury Department said. The agency said it would grant an exception to required minimum distributions from retirement accounts in certain cases where participants choose the insurance product.

Lifetime Commitment

Owners of traditional IRAs and 401(k)s, which generally have tax-deferred contributions, must take annual distributions starting at age 70 1/2 or over, according to the Internal Revenue Service.

The department also issued a rule today addressing how savers may roll a portion of their 401(k)s into their employer’s defined-benefit plans to create lifetime-income streams.

“The proposal will also allow individuals more flexibility to purchase products that protect them from outliving their savings,” Senator Herb Kohl, a Wisconsin Democrat and chairman of the Senate Special Committee on Aging, said in an e-mail. “We must continue to work to find ways that make it easier for Americans to make their retirement savings last a lifetime.”

Employers may remain reluctant to add choices to 401(k)s that require a lifetime commitment to an insurer or investment manager on behalf of their workers because of liability issues, David Wray, president of the Plan Sponsor Council of America in Chicago, said in a phone interview.

Insurers and Managers

“When they sign up and add XYZ mutual fund, that’s not a lifetime commitment,” Wray said. The Plan Sponsor Council of America is a nonprofit association representing employers that offer 401(k)s.

Asset managers and insurers including BlackRock Inc. (BLK), State Street Corp. (STT),Prudential Financial Inc. (PRU), MetLife Inc. (MET) and ING Groep NV (INGA) have been developing ways to add annuities and lifetime income to 401(k) investment choices.

The Labor Department issued a separate final rule today requiring detailed disclosure of 401(k) fees so companies and their employees can see what they’re being charged. The regulation will take effect for providers of 401(k) plans by July 1, according to the statement. Workers are due to receive additional disclosures later in the year, the Labor Department said.

Better Deals

The disclosures may spur small employers and their workers, who generally pay higher fees for their plans than larger companies, to shop for better deals, and put pressure on providers such as mutual-fund firms and insurers to cut costs.

The rules generally will require employers to show employees the fees on each investment option per $1,000 invested, such as $10 for a fund with an expense ratio of 1 percent, so they can make comparisons and more informed choices, according to the Labor Department. Workers also will receive statements showing administrative costs charged to their individual accounts.