Is Conventional Wisdom about Paying Off Your Mortgage Always the Smartest Move?

Is Conventional Wisdom about Paying Off Your Mortgage Always the Smartest Move?

One thing many of us have been programmed to believe will always be in our best financial interest is eliminating our mortgage debt. The idea seems to be something that is not even up for any consideration; it’s settled! But is it always as simple as that?

James inherited approximately $150,000 from his late wife’s estate and was convinced that it was in his best interest to use it to eliminate the remaining balance on his mortgage – which, incidentally, is about that much. After all, every media financial guru he’s ever seen believes that is what any smart homeowner in his situation should do, without any reservations whatsoever. From what James understands, why not pay off the mortgage and save himself the 5 percent interest he’s paying to the bank? Besides, when he sells his house later on – as he is planning to do when he retires in a different state – he will get to keep all the proceeds to augment his retirement income.

First of all, it is important to remember that I am all about doing the things that are in the very best interest of my clients. Yet, it seems to me that those who think it is always in your best interest to pay off your mortgage quickly are seeing only one side of the picture: the cost of the mortgage. But they are forgetting – or ignoring – a very critical piece of the puzzle: the cost of actually paying off the mortgage. Yes, there is also a cost for paying off your mortgage to consider.

In James’ case, the $150,000 mortgage is costing him 5 percent, or $7,500 a year, but that is  before taking into account the fact that he claims the same $7,500 on his schedule A tax form, on which he receives $1,875 at his 25 percent marginal tax bracket. So in reality, his mortgage ends up costing him $5,625 a year. In other words, James’ 5 percent mortgage really costs him 3.75 percent.

Now let’s look at the other side of the picture – the facet that seems to elude many. What would James do with the $150,000 if he doesn’t use it to pay off his house? In this case, he could invest it toward his retirement. Let’s say he was able to invest this money at an interest rate greater than 3.75 percent a year. Would it still be in his best financial interest to use it to pay off his mortgage? We found James an income-tax free investment vehicle that would earn him a guaranteed interest of 4.5 percent a year, after deducting the associated costs.

So here’s the final math: Keeping his mortgage would cost him $5,625 a year. However, he’d earn $6,750 on that $150,000 in the first year. Therefore, James would actually improve his financial situation – get richer – by NOT paying off his mortgage. Looking at it from another angle: he could pay his mortgage and still earn $1,125 with the interest he’d make by investing the money rather than eliminating his mortgage. Another thing is that – just like most investments do – his investment pays interest on a compound basis, so in year two he’d earn more than $6,750 a year, and his profit situation would only improve from there as time progresses.

Something that James didn’t really think about is whether he will be able to guarantee that he’ll have a specific amount of equity when he retires and sells his house. Now how can he guarantee such a thing? He can’t – because the value of his home is determined by outside forces, and as such is totally up in the air. On the other hand, he can make sure he invests his $150,000 cash with some guarantees.

Of course, every situation is different and must be reviewed carefully. There are several factors to be considered, which is exactly what I’m driving at here – don’t simply buy into the litmus test financial planning mold.
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Would you like more information about creating a side account you could use to pay your mortgage and increase your retirement income? Call us today at  877.656.9111 or visit us on the Web to schedule your no-strings-attached consultation!

Municipal Bonds are NOT Tax-Free for Social Security Recipients

Municipal Bonds are NOT Tax-Free for Social Security Recipients

It is fair to assume that most people who turn to municipal bonds do so thinking of them as “tax-free” income. But are they, really? You may have heard that the interest from municipal bonds is “tax-free,” but that is not entirely accurate IF you receive Social Security retirement checks.

Although the interest from municipal bonds is treated differently than that earned on CDs or shot-term dividends, make no mistake. If you receive Social Security checks or will do so sometime soon, there is an indirect way that municipal bonds may cause you to shell out more in taxes than you normally would.

Talking taxes could be a windy – and, quite frankly, boring – enterprise, but here’s the general scoop under Section 86 of the Tax Code: the portion of Social Security checks that is taxed depends on how large your “Provisional Income” is at the end of the year. Basically, if your magic number (Provisional Income, that is) is greater than $25,000 (single) or $32,000 (Married Filing Jointly), you would have to pay tax on up to 85 percent of your Social Security checks. You’re with me so far, right?

Now, here’s the caveat and main thrust of my message: interest from municipal bonds is counted in your “Provisional Income” math – every single penny of it. So when it comes to paying tax on your Social Security benefits, municipal bond interest is no different from the income you receive from your pension, CD, annuity, or IRA.  

The late judge, Learned Hand, of the U.S. Court of Appeals for the Second Circuit, once said, “There are two systems of taxation in our country: one for the informed and one for the uninformed.” From my vantage point, I think if most folks (including some so-called financial advisors) really understood how municipal bond interest impacted them, they’d be asking themselves whether there are certain sources of funds that do not count toward “Provisional Income” math and would, therefore, not cause them to pay any income tax whatsoever.

The answer? Yes, there are! The Roth IRA is one. Certain, properly structured cash-value life insurance policies are another. However, there is a big caution here. Please make sure you consult with an experienced team of financial and tax professionals who truly understand the tax law nuances surrounding these vehicles, as well as your specific situation.

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 Do you have questions or concerns about your finances and retirement investments? Call us today at  877.656.9111 or visit us on the Web to schedule your no-strings-attached consultation!

Choosing a Financial Professional – The Common-Sense Way

Choosing a Financial Professional – The Common-Sense Way

A week or so ago, I was contacted by an old acquaintance who wanted my opinion on whether his 70-year-old aunt should consult with a fee-based financial professional or one who is paid on commission? Before I could respond, he proceeded to inform me that, based on his research, they were leaning toward the fee-based advisor.

Quick side note: Generally speaking, fee-based advisors are paid a percentage of the money that you invest – commonly called money-under-management – for as long as you keep your money with that advisor. Commissioned folks, on the other hand, receive a one-time commission check up front.

As with most things, each of these options has pluses and minuses. But the fact of the matter – and the point I’m trying to drive home here – is that there is no litmus test in this regard, absolutely NONE! Obviously, how an advisor gets paid is important. But let’s leave the emotion out of it for just a moment to consider this: Is the way an advisor gets paid the best barometer of his or her effectiveness/ability to deliver the products/services you need?

Personally, I think other critical aspects should guide whom you hire. How about personal integrity, real-life expertise in successfully delivering the kind of results you’re seeking, and regulatory oversight issues? As I said earlier, the mode of compensation is important, but we must be careful not to let it crowd out other equally – if not more – important issues for consideration.

As my acquaintance admitted, he reached out to me because he was getting a bit confused sifting through the myriad viewpoints around which route his aunt should take.

My first question (after asking him how he’s been) was: What, specifically, is your aunt looking to accomplish? As it turned out, all the “drama” was completely unnecessary because his aunt was interested in buying a Single Premium Immediate Annuity (SPIA). Whoever winds up selling it to her will be paid a commission, because that’s the ONLY way a SPIA pays the professional involved. When the place you’re travelling to doesn’t have a train station, why would you spend hours trying to decide whether to drive or take the train?

Every situation is different, and therefore demands a different evaluation process, but the takeaway here is that there’s no cut-and-dried litmus test on one advisor being better than the next solely based on how he/she is paid – not to mention that, as in this case, such a comparison may be moot.

Now in the interest of full disclosure, in case you were wondering which model I fall under: Depending on the particular service or product for which you engage me, I could be fee-based, commission-based, or charge a flat-fee.

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 Do you have questions or concerns about your finances and retirement investments? Call us today at  877.656.9111  or visit us on the Web to schedule your no-strings-attached consultation!

Who Said It’s Not Possible to Retire with Absolute Peace of Mind These Days?

Who Said It’s Not Possible to Retire with Absolute Peace of Mind These Days?

The retirement landscape today is undoubtedly more challenging than ever: guaranteed corporate pensions now belong to the dinosaur years, and the stock market has been nothing short of chaotic. Meanwhile, we’re living much longer, creating the perfect storm for many of us to run out of savings/income midstream. Truly, this is the foremost threat facing retiring boomers.

Julie and Craig experienced precisely that threat in no uncertain terms. The 60-year-old business-owner duo had been fairly aggressive investors prior to the 2008 stock market tsunami, after which their nest egg shrank by almost 50 percent. Among other things, the couple is looking to retiring in the next 10 years with an annual income of $85,000. Social Security is only scheduled to bring in about $35,000 a year, so their goal is to somehow turn their once-upon-a-time million dollar nest egg – now worth approximately $600,000 – into a yearly income of $50,000 for the rest of BOTH their lives. Given that they’re both from families with pretty long life expectancies – and trust me, they’re not complaining! – they’re rightfully concerned about the longevity of their income.

Here’s the even trickier part. Every advisor they’ve met has told them it might be possible to achieve their desired $50,000/year income – but offers no guarantees. Smartly, this couple said, “We don’t want to just hope for it.”

The Solution

Believe it or not, there are products available today that can easily solve Julie and Craig’s problem. They can make sure their money grows at a certain guaranteed rate for the purposes of their income, while guaranteeing a specific income for their joint life spans, however long that may be, regardless of what the stock market does. Their specific contract guarantees a 6.5 percent annual compound rollup rate. So in 10 years, their $600,000 is guaranteed to be worth exactly $1,216,385.08 in their “income account.” That works out to a guaranteed yearly income of $60,819.25 – for as long as they both live.

It’s as simple as that. What would happen if they decided to retire sooner than 2023? Of course, that would mean a smaller income account value and yearly income. Just to clarify a couple things. These figures are specific and do not depend on what the stock market does. And when one spouse dies, the survivor will keep receiving the same $60,819.25 for the rest of his/her life. So what happens if they both die before depleting their money? Any money left in their “contract value” goes to their named beneficiary. However, if they follow their families’ trend and outlive their “contract value,” their guaranteed $60,819.25 a year will not stop.

The Bigger Question

How come none of the previous advisors they met with discussed this option with the couple? I can only speculate, but perhaps they’re not even aware that a program like this even exists. Or maybe they are captive advisors working for companies that offer a certain limited number of choices – although, quite frankly, many in that position would never admit it.

In the end, Julie and Craig found the peace of mind they were seeking by securing their future. If you’d like more information about how these contracts work in general, as well as some important caveats, please download a free copy of our Set For Life special report.

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 Do you have questions or concerns about your finances and retirement investments? Call us today at  877.656.9111  or visit us on the Web to schedule your no-strings-attached consultation!