There's More To It Than Money

For nearly 20 years a segment of the Wealth Management profession has been letting you know a very simple, yet immutable fact: That there's more to a "happy" retirement than money. 

The problem has long been that we don't freely associate our "value" (either in the world or; especially in our own minds) with our work. While we may bitch more than a bit about how much we hate our jobs, frustrate over work, good and bad assignments, colleagues, etc. for many of us; our work is an important marker of our vision of how we fit in in the world and why.

As you make your choices to turn away from your work and focus on that next horizon, don't lose sight of the fact that separating from work is just; that a separation. And like any other time connections are broken, the results aren't always easy and transitions can be cumbersome, clumsy and painful. 

Working with someone who has experience in these transitions can be an invaluable part of both your PRE and POST Retirement Planning. 

Sarah O'Brien at CNBC certainly has a good take on it. She has found what I've long known, that accumulating wealth is important; but accumulating wealth targeted on specific goals and lifestyle concerns is imperative. 

When is a good time to start all this? That's simple, yesterday. 

If you haven't started yet or haven't considered it yet, today's a good time to start. 

First Time Home Buyer--- Here's Some Tips From An Expert

As the overall trend in interest rates starts to inch up, the pace of home purchases has the ability to accelerate as people try to get into the market before a substantive and sustained period of interest rate increases hit. 

In this first Blog Post of 2017 Stephanie Kotrosits with Wiechert Realtors, shares her perspective on what new home buyers need to consider in a market and a process,  that may not be a "straightaway" as one might think. 

 


Buying your first home is one of the biggest financial decisions that you'll make. It's a process that can be both scary and difficult. 

When Bob asked me to contribute this blog post, my goal was to give you some tips that are time tested and proven. I've seen them work over my years in the real estate business. I've seen them work for my Clients as well as those of my colleagues. 

Here's some of the things that you can do to optimize your efforts and remove some of the stress from what's already an innately stressful process. 

1. Keep Track of Your Credit

Good credit is an imperative in today's world and it's no less important when considering buying a home. The better your credit the better "deal" you'll get on your mortgage interest rate. A credit score of 700 or better is a plus for sure. Good credit means not just paying your bills on time, but also, involves the overall scope of your "available" vs. "used" credit. To be in the drivers seat with lenders, you'd want to have a fair amount of "available" but unused credit. Lenders typically want to see that you've used less than 30% of your available credit. 

You can reach Stephanie direct by email at stephyyk15@gmail.com or by phone at 610-657-3858.

You can reach Stephanie direct by email at stephyyk15@gmail.com or by phone at 610-657-3858.

2. Find A Lender That Suits Your Needs

Managing home related debt impacts you in many ways. Not only is it a matter of household cash flow but it also indirectly impacts what you'll be able to save and invest over time. 

You can begin looking at lenders online, no problem there. But you'll need to do your homework. Online services not only let you learn about a possible lender for your purchase but allows you to generally compare rates. 

It's a good idea to focus in on a few local lenders and have them do a simple pre-qualification over the phone to see what kind of rates that they can actually offer you. Looking generally at rates from lenders is one thing, your specific rate is obviously the most important thing. 

Getting the mortgage part of the transaction right can save you thousands of dollars over the life of your loan.

3. Know What Kind of Loan You're Looking For

A good lender is going to review all your options for you and you might be surprised at how many options that there really are. Let's take a look at some of the more popular and common types of loans. 

The most common of loans is an FHA loan, which is insured by the Federal Housing Administration. Since this loan is insured by the FHA lenders are protected against possible borrower defaults. Because of that additional layer of "protection" loans from the FHA are offered with attractive rates and low down payment amounts. 

Similar to FHA loans, USDA loans, offered by the United States Department of Agriculture are an attractive option as well for rural homebuyers. USDA loans can be for 100% of the market value of the property and with no money down and reduced premiums. In order to qualify, the area you're buying in must be considered "rural" by the Government. You can see if your loan might qualify by clicking this link. 

There is another commonly used loan, this one instead guaranteed by the US Government is the VA loan. 

Offered through the Department of Veteran Affairs, if you have been enlisted in the armed services, you might qualify for this loan. The VA offers no money down mortgages with no monthly PMI (Private Mortgage Insurance). PMI is a monthly insurance payment designed to offset ant costs to the lender if the homeowner were to default. PMI can be an added cost on any mortgage except VA loans. Rates for PMI are typically $55/month for every $100,000 that you finance. 

And lastly, there's the Conventional Loan. Conventional loans are not guaranteed, backed or insured by the Federal Government. Conventional loans generally require at least a 10% downpayment. 

There are two types of Conventional Loans, conforming and non-conforming

Conforming loans meet the standards of Freddie Mac and Fannie Mae, two government agencies whose role is to make mortgages more widely available. 

The best example of a non-conforming loan is a Jumbo Mortgage. Jumbo Mortgages would not meet the guidelines of either Freddie Mac or Fannie Mae. At high purchase prices, limits set by Freddie Mac and Fannie Mae are exceeded.

4. Find A Real Estate Professional You Can Trust

There's nothing more valuable to you as a potential homebuyer than finding a real estate professional who understands your needs and is willing to do everything that it takes, to make your dream of home ownership a reality. But where do you find this professional amongst a veritable sea of choices? Here's some tips. 

- Talk to people you know who've recently gone through a real estate transaction. Ask them if there real estate professional made their transaction easy or were they hard to deal with. Would they recommend that person for you?  Who else might they recommend? A referral from a happy homebuyer is the best place to start

- Start visiting Open Houses and using it as a chance to not only find some homes, get some ideas, and chart your course, but also to interview prospective real estate professionals in attendance that you might use.

It's easy to get swept up in the excitement of a new home and ignore the process. But from experience, I'd caution you to keep everything in perspective.

While we can all agree that finding the right house is important, getting the transaction "just right" is equally as important. Finding your new home is only valuable if you can put a team in place that makes your ownership dream an ownership reality. Surrounding yourself with a sound team of professionals is critical to your success.

 

 

Your 401(k) And Why You Should Rethink How You Use It

There are more and more articles being written that stress how you're fundamentally making a major mistake by not maximizing or at least, dramatically increasing your contributions to your 401k plan. 

Unfortunately, there's little actual thinking behind the articles touting the options of throwing more money at a less than optimal mode of investing. 

First off, prior to the tax changes in 1987 (TEFRA: The Tax Equities and Fiscal Responsibility Act) simply the notion of retirement plans was a lot more palatable. Before the changes, there were 14 tax brackets and it wasn't hard to conceive that you'd most likely be in a lower one when you retired than you were in while you were working. Even a "less than dramatic" reduction in post-retirement income yielded considerable tax savings. 

 

TEFRA left us with not 14 tax brackets but three.  And the width of those brackets leave many American's in a position where their post-retirement tax bracket will be the same one they'll retire into. 

Deferring money at the 38% bracket pre-TEFRA and getting it back in the 20% tax bracket looked like a good deal back then, but I'm not so sure it looks as good when you're in the 28% bracket before and after retirement. And let's not forget, that 100% of what you take out of your 401k after retirement is taxable as ordinary income, every single penny of it!

Now, were you to have limited your 401k contribution to the maximum you could put in and get your full employer's match and then figured out something different to do with the rest, that might at the end of the day, be the optimal strategy. 

If your employer matches 50% of the first 6% you put away, the clearly 6% is the optimal number to may way of thinking. So, based on a $200,000 salary, that'd make your 401k contribution about $12,000.  But wait the plan says that you can put as much as 10% of your salary away, or roughly $20,000 but you'd be capped at the max contribution under the tax law of $18,000 but that's still another $6k that you could stuff into the plan, so why not?

I'm not saying that you shouldn't save that $6k, but frankly, I think a personal investment account outside of the retirement realm might be a better option;

  • First, if you build a portfolio correctly and avoid actively managed mutual funds or sticking the money into an annuity of some sort, you'll have a small if any, annual income tax bill
  • When you withdraw money from your personal account, you'll pay capital gains taxes at about half the rate of income tax you'll pay on 401k withdrawals. It takes a long time for the tax deferral advantage of a 401k deposit to offset what could be a 100% increase in post retirement tax rates
  • If you retire earlier or choose to work in a different job and need some additional dollars each year to float the household cash flow; you'll have access to funds a personal account that don't require premature tax payments to the IRS. Remember, the IRS forces you to take retirement plan distributions but only when you're 70 and 1/2, anything before that means your coughing up tax dollars that the government isn't really asking for
  • You'll have more, infinitely more investment options outside of your 401k and they'll be infinitely cheaper than the ones your company retirement plan offers in almost circumstance

Retirement plans are like annuities, or municipal bonds or another other financial instrument, when they're over used or solely used, there's likely to be problems that follow.

We're enticed by the write off that putting money into a retirement plan affords us and sometimes, if not many times, to a fault. 

What Motivates Us Can Be Telling

Why Advisors Will Likely Clamor Soon for Cheaper Annuities

A recent article in Financial Planning Online, makes a prescient statement...

"If the Department of Labor's Fiduciary proposal goes into effect, advisors may find themselves taking a close look at low-cost annuities."

So let me get this straight, up until now, what exactly have they been looking at? Up until now I suppose it was the more expensive variety with higher commissions and higher internal charges and investment related expense ratios and trading costs and mortality and expense charges. 

It's odd isn't it that people won't put their Client's best interest first until the law forces them to. 

If you already own an annuity you may want to opt for dealing with someone who'll put your best interest first because it's the right thing to do.

I'd love to hear the explanation from the rep who will move your annuity to where you should have been all along a year from now if the law passes. 

And if that conversation even remotely touches on "boy, that last one we sold you was super expensive...." it's gonna come down to the fact that that's all that their employer would let them sell.

Because that's how it works.....you get played and then played again. 

Stop it as soon as you can. 

The "Hunger Games....."

Evidently, the mutual funds are chomping up your money at a rate about akin to an old Pac Man game. 

Whether it's expense ratios near 2%, coupled with undisclosed trading costs and necessary tax costs, the "active/retail" mutual fund industry continues to pocket literally thousands of your hard earned dollars for their use instead of letting your keep it for yours. All on the failed premise that with their help, you're going to outperform a rather naive "buy and hold" strategy such as buying an S&P 500 Index Fund or ETF. 

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History as does this article, seems to demonstrate that you're highly unlikely to beat the market using people/funds that [a] are in and of themselves actually the market and [b] who have to cover their costs which are huge given other investment alternatives. 

Remember, cutting expenses doesn't depend on the market, or Fed Policy or the general direction of interest rates. Reducing the cost of operating a given investment portfolio by 2% means that you get to keep that 2% and it flows right to your bottom line. 

Who needs that 2% more than you do?

Likely, no one. So why not stop doing it.

Let us know, we're here to help. 

Five "Get Ready" Rules for Retirement

There continues to be no lack of pressure on American's to get to work on building a prosperous retirement. 

Study after study, article after article, report after report continues to show what most advisors already know, American's are woefully unprepared for retirement. 

There are a lot of reasons that this is the case, lack of savings and investment, poor estimates of what post retirement spending will actually be like and the paralysis of just not being able to get started on "planning" for your golden years in any meaningful way. 

"Numbers scare me. I'm not alone in this. Scientists who study math anxiety say that the anticipation of crunching numbers can lead to the kind of agitation that, on a brain scan, looks a lot like the perception of physical pain." So said John Schwartz in his March 2015 blog post titled "Retirement Reality is Catching Up With Me" which ran on the 11th of that month in the New York Times. 

And, there are a lot of numbers to be crunched to get it right. If that weren't bad enough, the numbers need to be crunched on pretty much a regular basis, year-over-year.  We have family and life issues that change the pattern of spending and it's timing, we have market issues that impact the value of assets as well as their ability to provide either an income source to supplement us or a pool of funds we can draw on when needed to adjust to changing circumstances. 

Many an investor has been duped by the notion that "making 8%" on their portfolio means that they'll make 8% every year. Little do most pre and post retirees know that "averaging" 8% can be woefully different than earning 8%.  I mean, if the top half of your body is put in a freezer and the bottom half in an oven, we can surely figure out what the temperature of each could be to get you to your ideal 98.6 average temperature. But I'll bet you're going to be pretty uncomfortable no matter how that plays out. Averages and how we actually arrive at them can be at mathematically daunting to say the least. 

Investing for income, another notion that on it's face seems to work, inadvertently becomes an "income straight jacket" as investors allocate assets towards dividend paying stocks and long-term bonds. That's good for generating income, right?  Well, it might be, for at least a period of time. Once the Fed starts raising rates and inflationary pressures kick in we have a problem. Our dividend and interest payments from our investments are more or less locked in so now our "income" isn't keeping pace with inflation and the gap between "what we get" and "what we need" is ever increasing. In addition, both dividend paying stocks and longer term bonds are susceptible to interest rate swings, driving down the value of most investors holdings. Hamstrung, they won't sell because of depressed prices to improve their overall "income" return and they can't live any longer only on what's coming in. 

Is it any wonder that nationally the Pension Rights Center motes that the nation, as a whole, is almost $8 Trillion short in funding retirement. An increase of $2 Trillion from just five years earlier.

So what to do? Here's five things that should hold you in good stead as you move toward and through your retirement time;

  • Your magic number isn't about what you accumulate. It's about what you plan on spending during retirement. Five million dollars in banks, brokerage and retirement accounts isn't enough money if you plan on spending six million 
  • Build a long-term investment strategy and stick with it. As a sage market observer once said, "If they ain't ringing a bell to tell you when to get out of the market, I can assure you that they ain't ringing one to tell you when to get back in."  Market timing is akin to pipe dreams and tooth fairies, it'd be wonderful if it worked, but it doesn't, it won't and it never has
  • Don't forget randomness. The likelihood that a series of investment returns won't deviate from it's expected return is ZERO.  Any plan, no matter how well thought out, no matter who the provider of it is that portends that the way you average 8% is by earning 8% every year has a probability of success equal to ZERO
  • Follow the money. In 2015 everyone's asking, where to put their money when things are most uncertain. If you can't make money on cash (which you can't) and you can't make money on intermediate term bonds (bonds with maturity/duration periods of 3-7 years) then the only result is....it goes back into the market. In 1986 you may have been able to get 9% on government bonds or; ride the market tumult out.  Government bonds at 9% were a good alternative in 1986. The paucity of a 0.15% return on cash isn't an option for you, nor is it for any investment banker, mutual fund manager, endowment or any other living creature who might derive their compensation in whole or in part on making market type returns
  • Get your head out of the sand.  Unless immediate death is your post retirement plan, get comfortable with the fact that as medical technology improves so does your chance of living longer. I know you think that you can pull this one out of the fire at the last minute, but you can't. Taking more investment risk, working longer, downsizing etc. all seem like real options but there's two little problems there, which are [1] sometimes you can't and [2] they all begin from the premise that retirement will then be "based on a lifestyle less bountiful than you had envisioned and less hopeful than you'd planned for."  Those aren't good things. Plan ahead, well ahead for this goal. 

Best that you start actually thinking this one through. I know that finding out that there's a problem isn't a comfortable reality for anyone, but finding out early leaves time to adjust, plan, and rethink things a bit. Finding out too late, leads to chaos, bad decisions, and the severe likelihood that all you'll do at that point is compound your problem. 

Confront the issue, understand the pitfalls and gaps, develop or buy the expertise to deal with them and remember, retirement is suppose to be at least as good a time as your working years were, if not better. 

But that isn't going to happen by chance. You have to make it so.