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Do you continue to do what we know doesn’t work? January 18, 2008

Posted by shaferfinancial in Uncategorized.
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I have been having some interesting discussions out in “blogville” on the issue of equity management and financial planning.  Bascially, there are many folks who not only defend the status quo advice but are unwilling to even consider alternative ways of thinking.  Now I am used to that when talking to some lay people about mortgages, investing, and wealth creation but what has struck me is the vehement unwillingness for so called “experts” to look at the actual results of the financial advice being given by these folks.  They have rules that seem to be set in stone no matter what data is given to them bringing into question those rules.

For the last two generations the mainstream financial advice goes something like this:

Debt is bad, so first you must lower your spending until you have removed all debt (except your mortgage).  Next you must take the difference between your new spending level and your income and pay down your mortgage and invest in mutual funds (preferably inside a tax-deferred vehicle).  This will allow you to retire with no mortgage and much invested $$ that you can live on.  From here the advice is really about how to increase your rate of return from mutual funds or maybe include an annuity or cash value life insurance.

Now this advice sounds great, especially when you show people that the stock market has returned 12% over the last 40 years, and how making monthly investments into your account can increase the value by dollar cost averaging, and how skipping that expensive cup of coffee every morning can turn you into a millionaire.  It is a great theory.  But this advise has been around long enough to measure its success.

Here is where the rubber meets the road.  Since we have all these folks who were given this advice, we should have lots of very successful retirees and near retirees who have no financial retirement worries, right?

The median (half above, half below) amount in retirement accounts for those 55-64 years of age is $88,000.  Wow, doesn’t seem like much does it.  Median total assets for this age group is $248,700.  80% of folks have less than $300,000 in total assets.  Much of the difference between total assets and amount in retirement accounts is in the form of home equity.  See those people were listening and paid off their mortgage before retirement.  Where is their million dollar retirement accounts financial planners like to talk about?

Here is some more data that is not talked about.  Average returns for individuals investing in mutual funds is 9-10% less than what the market has returned.  Maybe this explains the missing $912,000.  Well partially anyway!

Now a majority of current retirees have a defined benefit plan.  However only about 39% of those that retire this year have a defined benefit plan, instead they have to rely on social security and their 401K/IRA savings.  And the percentage of folks with a defined benefit plan goes down every year in the future.

Folks there is troubling brewing in retirement land.  Not that there isn’t already issues.  Living here in Florida we watch as many retirees see their retirement incomes eroded due to inflation and rising expenses for new needs like medicine.  Many of these folks live in mortgage free homes.  They are now falling for the newest scam….idea called reverse mortgages.  Some, the smart ones, are selling their homes to access the home equity and turn it into retirement income.  

This is the result of the financial advice given to this generation of folks. 

Yet, many, no most, of the “experts” are still giving the same advice.

Oh, I know they will say these folks just didn’t listen, or lacked discipline, or had some bad luck.  They will point out the rare success story, but the bottom line is the numbers don’t lie.

$88,000 in retirement funds! 

Even Financial Planners Don’t Understand Risk October 26, 2007

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Even Financial Planners Don’t Understand Risk

I recently had a conversation with a friend. He had taken his mother, who is in her 70’s, to see a financial planner after the death of her husband.  She has a very moderate amount of funds and little income outside of social security.  She also owns her home outright.  First of all the planner had not prepared for the meeting, despite having a week advance notice.  But what was most disconcerting was his first reaction to her planning.  He tried meekly to test her for risk aversion.  Then he suggested that stocks and REIT’s should play a big part in her planning.

Holy Smokes!!!!

Let there be no doubt that this women can not afford to withstand a market downturn.  It would devastate her financial position.  She needs guaranteed income now and for her lifetime.  To leave her money to the whims of the market is, in my opinion, criminal.  Secondly, 1/3 of her money is in qualified plans.  Since she has little income, she can roll out significant amounts over the next two years without having to pay much in taxes.  Thirdly,  she needs to have a plan for her home.  She is not against selling it.  That would almost double the amount of money she would have.  Yet, there was no discussion of this.

Thankfully, my friend insisted on a written strategy and a year for his mother to adjust to her new reality without her husband.

Just for the record, there is a strategy that is appropriate for her.

Roll out as much of the money out of qualified plans she can without triggering income tax issues over the next year.  Buy an annuity with a lifetime income guarantee or a immediate annuity.  This would guarantee her lifetime income.  Sell her home sometime in the near future (1-3 years), hopefully the real estate market will improve in that time. Use that money to buy into someplace like Westminster Shores  http://www.westminsterretirement.com/html/westminster_shores_-_st_pete.html

or decide to rent and buy another annuity with the funds from the sale of her home.

Guaranteed lifetime income, no market risk, tax avoidance.

The only sound advice for a woman in her financial position.


Next Seminar October 24, 2007

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NOVEMBER 15th 6-8 PM  Tampa Palms

Become Your Own Banker

Learn how to significantly improve your wealth/ future retirement income

by using already existing assets.

Tampa Palms, Compton Meeting Room

RSVP 813.910.8020

This educational seminar teaches you how to put all your assets to work for you, in a safe, reliable way.  Reduce you risk.  Improve your wealth. Create more future retirement income.  Learn how the strategies that banks employ can be put to use in your own personal finance situation.

If you think you need to do something about your future retirement income.

If you want to reduce your risk.

If you are tired of doing exactly what the banks and Wall Street want you to do.

If you want retirement strategies that work for you, not Wall Street or the Banks.

Then don’t miss this seminar. 

How to buy a home in a declining real estate market October 18, 2007

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How to buy a home in a declining real estate market?

It is a given fact that real estate values, in most parts of the country, are feeling downward pressure.  There are also buyers, all over the country, who are making large financial decisions without the aid of a professional mortgage planner. Let me share with you a very simple plan that can turn $15,000 into $42,361 for home buyers.Let’s assume that there is a home on the market for $400,000 for which a buyer wants to put a purchase contract on. Generally speaking, there will now be a conversation between the real estate agent and the buyer about what price to offer the seller. A good real estate agent is likely to have comparable home sales to look at to determine a likely appraised value of the home and they will begin to nail down a price to offer the seller. Let us now, ever further assume, that the buyer is going to ask the seller for a $15,000 reduction and that the seller will accept that reduction.My contention to you is that in this example they are missing a very critical piece of the puzzle. The price of the home really has the most significance to a cash buyer. This buyer is going to get a mortgage. There is a far better way to structure this transaction then to ask the seller for a price reduction.

Buyer A: Buyer A has received an acceptance, of their $385,000 offer, to purchase the home from the seller. Buyer A then goes to a loan officer who offers them a 30 Year Fixed Rate Mortgage at a rate of 6.5% with $1,800 in closing costs.

Buyer B: Buyer B has talked to me, a mortgage planner, prior to writing the offer. I have shared with them that, in a real estate transaction, the mortgage is significantly more expensive then the home. Therefore, I have advised them to bring the mortgage into the negotiation. In this example Buyer B offers the seller a full price offer of $400,000 but asks the seller to provide $15,000 to pay towards the buyers closing costs and pre-paid expenses. I then take that $15,000 and buy them a permanent buy-down rate of 5.75% and also pay all of their closing costs and pre-paid expenses.

Benefits to Buyer B: As you can see Buyer B has received significant savings from the counsel in the following ways:

They received a better interest rate at 5.75%

This lower interest rate gave them a mortgage payment that is $79/month lower

This lower interest rate also saved them a whopping $42,361 over the life of the loan

This particular structure also gave Buyer B a $9,600 tax deduction that they otherwise would not have had! (consult with your accountant, tax laws change frequently) It is my strong opinion that by using a mortgage planner, instead of the usual loan officer or even a telemarketer on the phone, home buyers can save themselves thousands of dollars.

What is a mortgage planner? October 8, 2007

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What do you mean you are a mortgage planner?  That is a common question I get when I tell people what I do for a living.  I love that question because it gives me a chance to talk about mortgages as a financial instrument instead of a scary large debt.  Mortgages are the largest financial instrument most people get involved with.  Yet, most people haven’t been taught how a mortgage can interface with their financial goals.  At best, most people know that they want to get rid of their mortgage as fast as possible.  While others treat it as the key to a savings account for personal consumption.

My financial background has allowed me to fully appreciate a mortgage for what it can do to help me create wealth.  That’s right your largest debt also creates your largest amount of wealth.  37% in fact for the typical American.  That is the amount of the median families total net worth that is inside their homes in the form of home equity.  More than triple what the typical family has in retirement accounts!!

So what’s the problem?  Well, what I and other “Mortgage Planners” do is to demonstrate to folks how to properly structure mortgage debt and home equity to maximize folks largest asset; their home.  You can’t get that knowledge from some telemarketer on the other side of a 1-800 line.

For example:

Did you know that your home equity is giving you a 0% rate of return? 

Did you know that the fastest way to have a paid off home is NOT by making extra payments to your mortgage?

Did you know that lenders will foreclose on homes with the largest amount of home equity first, over homes that have little home equity?

Do you know how to take advantage of current income tax law to significantly reduce your taxes?

Do your circumstances favor a variable rate loan or a fixed rate loan?

Do you know how to turbo charge your reitirement savings and reduce risk at the same time?

All these questions and more can be answered by a mortgage planner.