The Hidden Lesson for Homeowners and Financial Advisers from Stockton’s Bankruptcy

The Hidden Lesson for Homeowners and Financial Advisers from Stockton’s Bankruptcy 

News of the official approval of Stockton, California’s bankruptcy has been center stage this past week. Judging by the media coverage so far, many see it only as the story of the most populous American city ever to enter Chapter 9 bankruptcy. However, this event contains an underlying important financial lesson for American homeowners and the financial professionals who advise them.

 

As we are told, the city of Stockton finds itself in this unfortunate situation because of the housing crisis. Apparently, the bulk of Stockton’s revenue comes from property taxes levied on homeowners, but due to plummeting real estate values, recent revenue has fallen short.

Stockton city officials unfortunately failed to understand – or took for granted – a fundamental and incredibly important financial lesson: It is not prudent to plan financial sustenance around the assumption that the value of a house – or any other piece of real estate – will remain constant, or increase, for that matter.

This is just basic common sense which you probably already knew. I’m afraid, however, that millions of American homeowners are making the same mistake, to some extent, by basing their future financial sustenance – retirement income in this case – around a similar assumption about the equity in their homes.

In fact most folks would even argue – wrongfully – that the safest means of supporting one’s income needs in retirement is by building equity in your home. Of course, we all hope that over time the value of our houses increase so that we can build more equity. But that’s a dangerous proposition around which to base your livelihood, isn’t it? The result that impacted Stockton could also affect you – what happens if the value of your home decreases through no fault of your own?

Hopefully, this critical lesson will become apparent to the millions who may be ignoring reality or, quite frankly, are being led astray by unrealistic financial advice. If you'd like to manage your equity based on solid, realistic, factual, and savvy ideas, you'll be interested in my book, Savvy Strategies for Turning Your Mortgage into a Goldmine. 
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The Incredible “Claim Now – Claim More Later” Social Security Strategy

The Incredible “Claim Now – Claim More Later” Social Security Strategy

Maria and Carlos are your typical hard-working middle-class couple. Maria decided to take an early Social Security almost four years ago at age 62, for a reduced payment of about $750 a month. Had she held out, she would have reached her full retirement age (FRA) this year at age 66, when she would have received around $1,000.  

Carlos, on the other hand, decided to continue working until he turns 70 in order to receive the highest possible monthly Social Security benefit check, which is projected to be about $2,100 – meaning he would receive about $1,600 today at age 66.

The incredible thing that this energetic, youthful-looking duo didn’t know is that they are perfect candidates for a Social Security windfall, now that Carlos is reaching age 66, his full retirement age.

“Claim Now, Claim More Later” is one of many Social Security strategies that I explain in my complimentary report, “Secure Your Future.” This approach allows a spouse who’s reached his or her FRA to claim spousal benefits without impacting his or her own benefit accruals. To qualify to use this strategy, you must be married, both spouses must have accrued enough credits to qualify for Social Security in their own right, and the spouse that uses the strategy must have reached his/her FRA.

Carlos is, therefore, the perfect candidate: he’s about to be 66, and Maria earned enough work credits to qualify for her own benefits. The incredible thing is that by claiming as Maria’s spouse, Carlos’ own benefit accruals will not be affected in any way. Yes, he will still earn his delayed retirement credits through age 70 as he plans. So, in effect, this strategy is essentially giving him about $500/month over the next four years until he switches to claiming maximum benefit of about $2,100/month on his own record.

The other great thing about this strategy is that although Maria’s benefit is reduced ($750 vs. $1,000) because she applied early at 62, Carlos’ spousal benefit is still based on half of $1,000, not $750. And since Carlos is at his FRA, he does not have to worry about losing any portion of his monthly benefit because of his work earnings under Social Security’s earnings cap restrictions.

Until I sat down with them, Carlos and Maria had no idea anything like this was even possible – which leads to the larger question of how many of us are leaving valuable Social Security money for which we qualify on the table?  

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Would you like more information about "Claim Now – Claim More Later"? Download a complimentary copy of Secure Your Future! Call us today at  877.656.9111 or visit us on the Web to schedule your no-strings-attached consultation!

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!

“File and Suspend” your Social Security benefits to boost your household income now - and later

“File and Suspend” Your Social Security Benefits to Boost Your Household Income Now – and Later

What you don’t know matters just as much as what you do know! And in most of the cases that I’ve witnessed – in the personal finance arena, of course – it seems to be what we don’t know that prevents us from achieving our goals.

Jack, age 66, has been married to 63-year-old Maggie for nearly 44 years. Maggie never worked outside the home, but Jack has worked for a local company for the past 36 years. In recent months, some things have changed that have created the need for the couple to bring in a little more income. Maggie thought that since he’s reached 66, his full retirement age (FRA) for Social Security purposes, Jack should apply for his benefit to meet their needs.

There was a problem, though. Jack wants to work for four more years – waiting until he reaches 70 to retire – so that he can receive the maximum Social Security benefit possible. Understandably, there was a bit of tension between the usually happy couple. The great news, however, is that it was completely unnecessary. You see, Jack and Maggie didn’t know that they were perfect candidates for the “file-and-suspend” strategy of claiming Social Security.

First of all, although Maggie hasn’t worked outside the home and therefore has no work record of her own, she qualifies for benefits on Jack’s record, now that he’s reached his FRA. In fact, she could have qualified once she reached the age of 62, although her benefits would have been reduced since she’s younger than her FRA.

The second piece of great news for this couple is that Jack can stick to his plan of working four more years without losing any benefits. He will still earn the 8 percent increment over the next four years.

Here’s the strategy: Jack files for benefits but does NOT collect anything. Sounds kind of odd, but they are two different things, filing and collecting. Although Maggie qualifies for benefits based on Jack’s record, Maggie cannot collect her benefits until Jack has filed but not necessarily collected his benefit. So Jack files and immediately suspends his benefits – so he wouldn’t actually collect anything in his name. Jack’s benefit today is about $1,700 a month, but because he’s suspending it, he will grow it by 8 percent a year until he reaches 70, at which time he’ll begin collecting about $2,300 a month (in today’s dollars). Maggie, on the other hand, gets to collect a reduced spousal benefit of about $680 immediately.

It’s a great ending for everyone. Maggie brings in an extra $680 a month to tackle their needs today. Jack continues to earn delayed retirement credits, therefore increasing his benefit. Interesting isn’t it? To learn more about this and other incredible ways to maximize your family’s Social Security benefits download our complimentary special report. What you don’t know indeed matters!

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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!