Is “Building Equity” In Your House a Good Idea?

Is “Building Equity” In Your House a Good Idea?

Just the other day, a couple came in to run their strategy for funding their kids’ college education by me to see what I thought about it. Basically, they are aggressively paying down their mortgage debt so that they can “build equity” – and when the time comes for their kids to go to college, they’ll simply “cash in” some of those “equity dollars” to pay for college expenses.

Millions of Americans are doing something similar. Others are targeting retirement, instead of college funding, whereby, upon retirement, they intend to downsize to a smaller house and, again, cash in on those “equity dollars.” You may have heard or perhaps read somewhere that this is a very prudent approach. Just last month, AARP offered this very advice to Boomers looking toward retirement. 

Here was my response to the couple, as well as to all who are following this school of thought: “Your house is NOT a piggy bank.” Folks who take this approach fail to understand two basic facts about equity.

1. Equity in a house is an illusion until it is turned into ACTUAL cash.

Is it possible that just as this couple’s kids are about to enter college, the equity in their house either significantly diminishes or completely evaporates? You bet! And you don’t have to look very far to see this illustrated, because this is precisely what happened – and is still presently affecting millions of Americans – courtesy of the recent real-estate debacle. Many people will be digging out of that one for years to come.

Many retiring homeowners were hoping to sell their houses, downsize, and then use the equity they had built to augment their retirement living. But all those years of building equity didn’t turn out as planned, did it? Always remember this fact: Equity is no different from any other investment over which you have no control – like stocks.

2. Equity in a house – contrary to what anyone thinks or believes – will ALWAYS have a ZERO percent rate of return.

Yes, I said zero. ZIPPO! You see, most people (and sadly, this includes some financial professionals) confuse changes in the value of a house with a rate of return on equity. That couldn’t be further from the truth. Just because you have a reduced mortgage or your house has been paid off does NOT make your house worth more than your neighbor’s. In other words, your mortgage balance does not determine the value of your house. Home values are determined by the market forces of demand and supply, period.

Your house is not a piggy bank!

Some clients of ours told their friends and family that they had not lost their home’s equity when values tanked recently. This did not imply that the values of their homes had not plummeted. They did, just like everyone else’s. BUT these clients’ equity wasn’t “sitting in their houses” – so they avoided the loss. It was, instead, invested in a side account that is linked to, but not directly invested in, the stock market. Doesn’t that seem more like a realistic plan for actually building something?

One more thing. Most homeowners seem to misunderstand that banks and lending institutions do not make loans solely based on the amount of equity you have in your home, but rather, on your ability to repay them. Try getting a loan when you have no source of regular income but a lot of equity, and see what happens. So think about this for a moment. If you were to suddenly experience a major financial setback, would you wish you had, say, $100,000 SAFELY tucked away in an account you could quickly access, or would you prefer to have $200,000 of “equity” trapped in your house?

As for the couple, I sent them a copy of my book on mortgages, Savvy Strategies for Turning Your Mortgage into a Goldmine, and they are scheduled to meet with me soon.  If you’re a homeowner who’s intent on managing your finances wisely, I strongly recommend that you contact us at (301) 949-4449 or www.LaserFG.com to request your copy of this book.

At the end of it all, most people I meet intend to make the most of their money and other assets, but some follow what I call “financial truisms,” instead of proven, time-tested, common-sense, factual – and above all – realistic strategies. 

401(k) Calculator Deception: Don’t Let Them Take You for an Idiot

401(k) Calculator Deception: Don’t Let Them Take You for an Idiot

Have you ever used one of those 401(k) calculators? You know the one – it lets you punch in information like your current age, your intended retirement age, your contribution amounts, and expected rate of return among others, and then once you hit the “Solve” button, it spews out a number indicating how large a nest egg you’ll have. If you have a 401(k) or other similar employer-sponsored qualified retirement plan, chances are good that you’ve probably used one of these calculators, or have seen similar estimates in a sales brochure or at a benefits seminar.

In my view, all such calculators that I have seen and examined are misleading in two major ways.

First, There Is Absolutely No Mention of Fees/Costs

You see, in those employer-sponsored plans, the fees are deducted from your returns. So say your plan costs 1.5 percent per year, and you expect to earn 7 percent. Your net return – the amount you actually end up with –ultimate income will be 5.5 percent (7 minus 1.5). Did you realize this? If not, it’s a pretty stark difference, isn’t it?

Let me illustrate with this example. To keep things simple, let’s say you invest $20,000 in a lump sum, and have not added anything to it. At a yearly interest rate of 7 percent, your account would have grown to $152,245 in 30 years. Notice, this is true ONLY if the 7 percent is the AFTER-COST return. But in reality, there’s an annual fee attached (let’s assume it’s 1.5 percent), meaning that your account will actually be growing at a rate of 5.5 percent. Are you ready for this? At the end of 30 years, the balance will be $99,679 – that’s 35 percent less! All I am saying is, let the actual numbers tell the true story.

Second, They Only Show You How Much You’ll Accumulate

But they NEVER show you how much of that “huge” amount really belongs to you – and by that, I mean the portion that you and/or your heirs actually get to spend.

To their credit though, most of the calculator programs give you a long, winding, legalistic, small-font disclaimer in gibberish, at the end of the page, like this one from the Profit Sharing/401K Council of America:

All estimates and dollar values are pre-tax. No deduction has been made for the income tax payable on these amounts when they are distributed. It is up to you and your tax advisor to calculate your income tax liability for distributions.

Don’t you find it quite odd that these bright individuals and organizations could design such complex calculators, but somehow neglect to include just one more space for you to type in your estimated tax rate so you can have an idea of how taxes will impact your “sugar-coated” gross distributions?

I wonder if it has anything to do with the fact that most investors, armed with a more complete picture of how things might turn out AFTER-TAXES, would think twice and perhaps turn to other better options? Like non-qualified alternatives that allow for income-tax free access and transfer to heirs and which also do not impose any “required minimum distribution” rules once you hit age 70½.

A Few More Questions to Ponder

Did you realize that you and/or your heirs will have to pay taxes on every dollar that comes out of your qualified employer-sponsored plan? And the tax rate will be whatever it is at the time (in the future) that those funds are withdrawn? And there is absolutely no chance whatsoever that your tax rate will be zero?

How proper, prudent, and respectful is it to you, as an investor, for companies to bury this CRITICAL piece of information in a disclaimer that you are almost sure not to read? More than a little sneaky, if you ask me.

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Call Laser Financial Group at 301.949.4449 or visit us on the Web to schedule a complimentary consultation where we can do a REAL projection of what you can expect to earn with your qualified or non-qualified retirement plan.

How to Be Skeptical – but NOT Stupid – About Your Investments

How to Be Skeptical – but NOT Stupid – About Your Investments

Over the years, as I have spoken at events and consulted with people from across the nation, it has become apparent that some of the proven, common-sense concepts and strategies we prefer and teach here at Laser Financial Group completely rattle conventional thought. How do I know this? Because we usually get looks that translate into something like, “What the heck are they talking about?!”

Consider these three concepts:

1. Instead of investing in the stock market, we recommend our that clients link their portfolios to the market. That way they are guaranteed to not lose even a cent when the market dips, but promise to make gains – up to a cap – when it advances.
2. You can grow your retirement income in an account that guarantees 8 percent per year interest, compounded annually for the next 20 years – regardless of what happens to the stock market. Meaning your income accounts’ value would double in 9 years and quadruple in 18 years – guaranteed!
3. You can use an accumulation vehicle that will allow you to access your income, completely tax-free! And the money may be accessed before age 59½ without any IRS penalties, and without any obligation to repay. You’ll not have any “required minimum distribution” rules to comply with at age 70½ and beyond. And you get to transfer the remainder to your heirs, income-tax free!

If any of these ideas are resonating with you, you may be having your own epiphany right now. But the one thing you should know is that all of our concepts and strategies are based on fact, very practical application, and above all are 100 percent legitimate – we never have and never will base our clients' plans around tax loopholes, because we believe those strategies are just plain stupid.


Should You Reject Something Simply Because It's New to You?


As one would expect, some curious, well-meaning folks try to get validation on our strategies from their financial advisors, CPAs, estate planners etc. And for some reason (which I’m still scratching my head about), a few seek validation from coworkers and friends who are not licensed financial professionals. Some of these so-called professionals become extremely defensive when questioned, and even go as far as attacking our credibility and background, while providing amazingly childish excuses. Here are some of the great ones I have heard – my comments follow, in italics:

• I am aware of what he’s talking about, but you (meaning the client) don’t need it. Really? If the client is inquiring about it, don’t they at least deserve the courtesy of an explanation so that they can make an informed decision about whether it actually may be better for them?
• But you (the client) did not tell me you needed something that does what he’s talking about. Wait a minute – who’s supposed to be the licensed financial professional guiding the discussion? A client often doesn't know what they need until the professional recommends it – this response suggests that the client should already have all the information they are seeking from the financial professional.
• He’s not as experienced as I am. I have been advising your family for years, so you must trust me! Wow – this sounds a lot like the "because we've always done it that way" answer. And since when has that been the right response to trying something new?
• What he’s saying is illegal or untrue, because I've never heard of it. Nobody, regardless of how many years in the business or how experienced they are, knows everything. To equate their lack of knowledge with the illegality or untruth of the idea being proposed – without even doing any research – should be a bright red flag. 

Should Your Financial Professional Be So Arrogant as to Think He/She Knows It All?


If there’s an option that your advisor hasn’t discussed with you but is very quick to dismiss – without any factual argument, you should be very cautious. I often come to find out that the real truth behind the unnecessary and child-like behavior illustrated in the above examples stemmed from the fact that some of these so-called professionals were completely unfamiliar with our strategies. Then there are those who work for firms that do not offer the products and/or strategies in question or are not licensed to implement a particular product.


I recommend that you seek validation and assistance from true professionals who have the decency to be honest with you by making factual, intelligent arguments, and run as far away as you can from those who simply generalize – like the ones I mentioned earlier.


And just in case you were wondering, YES! I humbly admit that I do NOT know everything, but I do know how to tell folks, “That sounds interesting. Let me look into it and get back to you on the FACTS surrounding the issue.”

If you have questions about a particular financial product or strategy  – or would simply like another opinion/evaluation of your current financial plans, please call us at 301-949-4449 or visit us on the Web to schedule your complimentary consultation.

Ready for YOUR New Tax Rate, Come January 1, 2011?...

Ready for YOUR New Tax Rate, Come January 1, 2011?

I am sure you are aware that your current income-tax rate is much lower than what you were paying prior to the passage of what many call the “Bush tax cuts,” which went into effect on June 7, 2001. Among other things, that law created a new 10 percent rate, indexed the then lowest rate on the table of 15 percent, and lowered the 28 percent, 31 percent, 36 percent and 39.6 percent rates to 25 percent, 28 percent, 33 percent and 35 percent, respectively. So, if you were, say, in the 28 percent bracket, the law lowered your rate to 25 percent, and so on.

This law is schedule to end December 31 of this year. So in approximately four months and a few days – unless Congress passes new legislation – tax rates, including yours, are scheduled to revert to the higher rates of before the “Bush tax cuts.” For instance, if you are a single filer with a taxable income of $35,000, today’s rate of 25 percent will go up to 28 percent. Those at 28 percent will move up to 31 percent, those at 33 percent now will become 36 percent, and so on. Here’s my question for you – and though the answer is obvious, I’ll ask you anyway:

Where Do You Believe YOUR Future Tax Rate Is Headed – Beginning January 1, 2011?

If you believe your taxes are going anywhere other than up, I’m afraid you may be living in complete denial. If you believe rates are headed up, why do you – or anyone else – see an advantage in postponing your tax obligations into the future? Next question:

Isn’t It Time YOU Seriously Revamped Your Retirement Strategy?

Recently, a young lady who had just received $70,000 of qualified money from her late father’s estate consulted me about her desire to make the best move with that money – which she intended to save toward her retirement, which is still some years ahead (aka, the future). Prior to our meeting, every other advisor she had consulted recommended that she allow those funds to sit in a tax-deferred status until her retirement, because doing anything else will amount to her paying “too much” in taxes today. That sounds like a good idea, doesn’t it? But does it really hold water? Let’s analyze this together.

This young lady is a head of household, with a steady annual taxable income of approximately $46,000, putting her in a 25 percent bracket based on today’s rate. You see, according to the IRS tax tables for 2010, a head of household with taxable income between $45,550 and $117,650 will pay a 25 percent marginal rate. So if you do the simple math, this gal could claim the entire $70,000 this year and bump up her taxable income from $46,000 to $116,000 and her tax rate will STILL be 25 percent! So how’s she worse off, as all those advisors claim? If things stay as is, come January 2011 – which is just four months away – this same young lady’s rate will increase from 25 to 28 percent! Yet for some strange reason, other financial advisors believe that she’ll be better off waiting?

After looking at the facts of her case with me and getting a better understanding of the situation, she decided that it would be extremely savvy to pay her taxes at today’s rate – of which she is sure – rather than gambling that her future rates might be lower. She can then save her after-tax $52,500 money ($70,000, less 25% tax) in a nonqualified alternative, that under IRS rules allows her access those funds anytime (even before age 59 ½), tax-free. Yes – completely tax-free! In addition, she won’t have to meet any “required minimum distribution” rules once she hits age 70½. And the income she pulls out of this account will not affect the taxation of her Social Security benefits one bit. When she dies, any remainder will go to her heirs, completely income-tax free!

I don’t know about your situation, but this young lady believes she’ll be better off with tax-free income in the future than betting on tax rates coming down any time soon. A word of caution: please don’t just run out there and try to mimic this lady’s solution, because that could be extremely dangerous. You need a qualified professional with a ton of common sense to guide you through your specific situation.

We’d be glad to talk with you. Please call us at (301) 949-4449 or visit us on the web to schedule your complimentary consultation to see if there is anything you can do today to keep more of your hard-earned dollars tomorrow.

Are the Right People Due to Inherit When You Die?

Are the Right People Due to Inherit When You Die?

What, as an investor, do you look for when you review your investment portfolios? Chances are good that you – as most people often do – focus only on the gains or losses to your funds. And usually when your portfolio made gains, everything is great; but, of course, you’re displeased when the opposite occurs. Either way, though, that generally is the end of the review.

Many so-called financial advisors focus their reviews solely on this “how the portfolio is doing” approach. In fact, do you even remember the last time that you and/or your advisor reviewed your portfolio? Did that review include an audit of your beneficiaries – the people/entities you have indicated as heirs to your invested funds, should you die today?

You see, life can and usually does get extremely busy. Aside from the million and one things we must take care of on a daily basis, events like marriages, births, divorces, adoptions, and deaths happen – to name only a few – and things get even more hectic. Here’s the thing, though. I believe that these are the exact reasons that every investor must and should perform a review of their beneficiary designations at least annually, and optimally, as soon as a life-changing event occurs.

Let’s Consider a Few Scenarios

• A gentleman remarries shortly after a bitter divorce, but never gets around to changing his beneficiary from his ex-wife (whom, by all accounts, he despises a whole lot). The man unfortunately dies suddenly – and guess who receives the check? Yes, his ex-wife.
• A woman worked for the state government for more than 42 years and passed away just a year before her retirement. She had accumulated a little more than a million bucks in her retirement account, which she opened as a new – and still single – employee. Her designated beneficiaries were her mother, father, and younger sister. Although she got married 8 years after starting her job (34 YEARS before she died), she unintentionally forgot to update her beneficiaries. All of the $1 million+ went to her sister, because both her parents had passed away more than a decade earlier. Her sister refused to give even a portion of the money to the widowed husband.
• A grandfather forgot to update his beneficiaries to include his youngest grandson, who was 3 years old when grandpa died. As a result, his 8-year-old granddaughter received 100 percent of the money. The issue is that the grandchildren are cousins, not siblings, so as one might expect, family dinners have gotten extremely complicated.

And it’s often seemingly minor things like “how” beneficiaries are actually listed on the form that throws things w-a-a-a-a-a-y off. A mother wanted each of her three children to receive a third of her estate, dividing the portions equally. The beneficiary form read “John, Kim and Michael, equally.” Due to the missing comma after “Kim,” the court interpreted the will as intending half for John and the other half to be shared by Kim and Michael.

You may think that you have things under control or that none of these scenarios even applies to you, but you should probably notice that in each of these cases, the individuals involved must have thought that everything was in perfect order. The only way to be sure that your beneficiary designations are as current as you want them to be is to actually review them.

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For your complimentary consultation that includes a conversation about your desires for your estate once it passes to your heirs, please call Laser Financial Group at 301.949.4449 or visit us on the Web.

Investment Math That Most Financial Advisors DON’T Understand

Investment Math That Most Financial Advisors DON’T Understand

Compare these two equations:

20-10+20=30

15+0+15=30

Now what if I told you that the first equation was LESS than the second? I wouldn’t blame you if your reaction were something like, “You must crazy! How in the world can this guy say that 30 is less than 30?” That has always been the initial sentiment expressed by most people who have heard me discuss this concept.

This is a vitally important concept that you must know – and understand – in order to make any positive headway with your investment portfolio, especially given today’s stock market condition. I am willing to bet that without this knowledge, your chances of becoming financially comfortable during retirement are rather slim to none.

Let me explain.

Let’s assume that you invested $10,000 in the stock market via individual stocks or mutual funds of some sort, and the first year the market gained 20 percent. You gained $2,000, so you’ll end Year 1 with a total of $12,000. Now, all things being equal, if the market happens to lose 10 percent the following year, your balance will whittle down to $10,800, because you lost 10 percent of the $12,000, or $1,200. If the market performs well again the following year and you gain another 20 percent, you’ll end Year 3 with a total of $12,960 in your account.

Here’s the part that will blow you away. It’s what I call the common-sense strategy where, instead of investing the way most people are doing – which is getting them nowhere – you linked your $10,000 to the appreciation of the stock market index with a guaranteed minimum interest rate (let’s assume 0% for this illustration) and an upside cap (which we’ll make 15 percent for this example). What would have happened to the same $10,000 at the end of those same three years? Like they say, seeing is believing – so why don’t we do just that?

In the first year, even though the index returns 20 percent, your gains are capped at 15 percent. So you’ll end Year 1 with a total of $11,500. In Year 2, although the index sinks by 10 percent, your minimum guarantee is 0 percent, so you still have the $11,500 intact. You may be starting to recognize the power of this seemingly simple strategy, but let’s complete Year 3. Say the stock market index gains 20 percent, so you’ll gain up to the cap of 15 percent, which increases your balance to $13,225.

At this point, it should be pretty clear that the common-sense strategy generated the higher balance of $13,225, versus $12,960 under the exact same sets of circumstances, in the same market conditions, following the traditional strategy of investing directly in the market. Aren’t peace of mind and a good night’s sleep better than losing sleep stressing over investment woes associated with the directly-in-the-market approach? And what is even more challenging, in my opinion, is that you have no control over those market forces that are causing you all that stress.

Now you know that the same 30 percent net result really is not the same. The reason I mentioned in the title that most financial advisors don’t understand this basic math is simple. I personally find it extremely difficult to comprehend how such bright and – seemingly honest – individuals could understand the differences in these two approaches and still implore their clients to subject their hard-earned nest eggs to the unnecessary gambling associated with traditional in-the-market investing.

For those of you in the DC area, I will be teaching a workshop that is sponsored by the Maryland Women’s Journal where I’ll be explaining this and other simple, actionable strategies you can implement right now to build a truly secure financial future. The workshop will be held this Saturday, July 17, at the C. Burr Artz Library in Frederick, Md., with encore presentations in College Park on July 24 and in Columbia on July 31. Get details and reserve your free seats now! Invite your friends and family to join you, and be sure to come say hi to me.

If you are outside of these locations you can still request a complimentary consultation by visiting our website or calling 301.949.4449.

“Balanced Investing” Is a Fallacy You MUST Avoid if You Want to Enjoy a Comfortable Retirement

“Balanced Investing” Is a Fallacy You MUST Avoid if You Want to Enjoy a Comfortable Retirement

Sometime during the latter part of 2009, I came across an article on the CBS Money Watch wddebsite, authored by Charlie Farrell: Top Three Financial Moves Before 2010. In my opinion, one of the moves the author refers to as “Balance Your Investments” is completely out of touch with reality for most investors. It may well be that I am a bit slow, and therefore missing something. Let’s see what you think. 

According to the article:

One of the best things you can do to help protect and grow your retirement savings is to implement a balanced investment strategy. And by balanced I mean a basic split between diversified stocks, which carry more risk, and high-quality bonds, which carry much less risk. The reason so many people lost so much money in this recent crisis is because they weren’t balanced. It’s such a basic strategy, but very few people follow it.

With all due respect, Mr. Farrell doesn’t seem to understand that most investors (at least those I meet and hear from on an almost daily basis) are sick and tired of the same old vague talk. See, while there are investors who are out there doing their own thing, so to speak, a large number of Americans have advisors, consultants, pros, experts, and whatnots who are designing and managing their portfolios. These so-called pros tell investors exactly what to buy and what not to buy, and yet most of their investors are still suffering the losses they experienced in the market freefall of 2008. So if balanced investing is, as the author claims, really “such a basic strategy,” is it fair for me to conclude that these gurus don’t know what the heck they are doing?

Not to mention that investors read columns like the one penned by Mr. Farrell and others “who know what to do” in order to avoid going broke with their investments. Yet, these investors continue to get nowhere with their portfolios – some lost unimaginable portions of their life savings. So, please, maybe we just need a break from this kind of advice.

Then, in the follow-up paragraph, the article points out:

Consider that in 2008, the S&P 500 was down about 37 percent and the Barclay’s Aggregate Bond Index, which measures the return of the total bond market, was up about 5 percent. So if you had split your money between these two very basic asset classes, you’d have been down about 16 percent, which was pretty manageable. And by now, your total portfolio would probably be down less than 10%, given the recent recovery we’ve had in stock prices.

If Monday morning quarterbacking were a paid profession, wouldn’t some folks be multizillionaires already? I, for one, am glad it’s not. Here’s what I don’t understand: Why would any investor want to lose even 1 percent of their hard-earned dollars when they don’t have to? Do folks like this author even realize that there is a proven strategy that kept certain investors from losing anything in 2008, yet as the market improves they stand to make money up to their contracted caps? Not one of our clients here at Laser Financial Group lost even a penny during the recent market downturn.

As I have said several times in the past, some people simply don’t know what they don’t know, and that is a very dangerous position to be in because you literally become vulnerable to all sorts of, frankly, toxic advice –just like this bit from Mr. Farrell.

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Call Laser Financial Group at 301.949.4449 or visit us on the Web to schedule your complimentary consultation and explore the best options and strategies to preserve ALL of your retirement investments.