Do You Know Your Spouse’s Beneficiary Designations?

Posted On June 20, 2016 By Scott Stratton, CFP(R), CFA In Financial Planning /

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Beneficiary designations are important. The people you list on your IRAs, retirement plans, and life insurance policies will receive those monies regardless of the instructions in your will. What happens when you don’t indicate a beneficiary or if the beneficiary has predeceased you? In that case, the estate is named as the beneficiary of the account.

It is usually much better if you have a person indicated as the beneficiary rather than the estate, for the following reasons:

If a person is the beneficiary, they can receive the assets very quickly by completing a distribution form and providing a copy of the death certificate. When the estate is the beneficiary, you may tie up the assets in probate court for months, or even years.
A person can roll an inherited IRA into a Stretch IRA and keep the account tax-deferred. The beneficiary is required to continue taking Required Minimum Distributions, but even doing so, the IRA can last for many years. When a spouse is the beneficiary of an IRA, he or she can roll the assets into their own IRA and treat it as their own. By spreading distributions over many years, taxes may be lower than if you took a large distribution all in one year and are pushed into a higher tax bracket.
When the estate is the beneficiary, they do not have the option for a Stretch IRA. They can either distribute the IRA immediately or over 5 years. Either way, the estate will be paying taxes sooner than if the beneficiary was a person.
The tax rate on estates can be much higher than for individuals. An estate or trust will pay the maximum rate of 39.6% on income over $12,400 whereas a married couple would hit this tax rate only on taxable income that exceeds $466,950 (2016 rates).

For many individuals, a substantial portion of their estate may be in IRAs, retirement plans, life insurance and annuities, where the beneficiary designation is vitally important. In the last two months, the IRS has issued two Private Letter Rulings (PLR) specifically on beneficiary designations and the rights of surviving spouses. A PLR is official guidance from the IRS on how they interpret and enforce tax law, based on specific cases which are brought to the IRS.

In PLR 201618011, a spouse did not indicate any beneficiaries on her IRA. When she passed away, the absence of a beneficiary designation meant that the estate would be the beneficiary of the IRA. The husband was the sole beneficiary and executor of the estate under her will. The IRS ruled that in this scenario, the surviving spouse has the right to rollover the inherited IRA and treat it as his own, even though the decedent failed to designate a beneficiary. This exception is granted only for surviving spouses and does not apply to other beneficiaries, such as children.

On June 3, the IRS issued PLR 201623001, which is of particular interest to Texas residents as it deals with community property issues for married couples. (Texas is one of nine states with Community Property laws.) A man listed his son as the sole beneficiary of his three IRAs. He passed away and his wife claimed that she should be entitled to one-half of the IRA assets because they were community property of the marriage. The IRS ruled that Federal Law takes precedence over state law and rejected her claim.

Both of these rulings show how important it is to know your spouse’s beneficiary designations on all of their accounts. Even if you have a will that is up to date and perfectly legal, it won’t help you if you don’t indicate a beneficiary, or indicate the wrong person. Review your beneficiary designations every couple of years and especially if you have gotten married, divorced, or had births or deaths in your family.

Beneficiary designations are not exciting or complicated. However, a big part of financial planning is getting organized and taking care of these small details. If your beneficiary designations are wrong, it could have a major impact on your heirs and cost thousands in additional, unnecessary taxes.

Should You Get a New Car to Save Gas?

Posted On June 13, 2016 By Scott Stratton, CFP(R), CFA In Financial Planning /

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I applaud frugality and will be the first to tell you that it doesn’t matter how much you make, but how much you spend. Wealth is created by the surplus between those two numbers. So, it would definitely make sense to get a more fuel efficient car, and save money at the gas pump, right? Let’s find out.

Cars are much more fuel efficient today. Electric cars and hybrids are at the forefront of this improvement, but so are diesel engines and small turbo engines. Many car makers now offer a 2.0 liter turbocharged four cylinder engine as their base engine. And this isn’t just for economy cars – the base engine for the BMW 5 series, Mercedes E Class, Jaguar XF, and other midsize luxury cars are all 2.0L turbos.

Coincidence? Not a chance! The world’s largest auto market – six years running – is China, at 23 million vehicles a year. To try to slow the growth of greenhouse gases, China imposes an excise tax on the sale of all cars, based on the size of the engine. At 2.0L, the tax is 5%, but if the car had a 2.1L engine, the tax would be 9%. For an engine over 4 liters, like many V-8s, the tax is 40%. This is a significant incentive for car makers to create small engines that offer more power and improve fuel efficiency.

Given the nice gains in fuel economy for today’s cars, does it make sense to trade in your current vehicle for a less thirsty model? Let’s run the numbers for a couple of different scenarios.

1) According to the US Department of Transportation, the average American driver logs 13,476 miles per year. Let’s consider a significant improvement in fuel economy, from 20 to 30 mpg.

At $2.25 a gallon for gas, the 20 mpg vehicle would consume $1,516.05 in gas per year. The 30 mpg vehicle would require $1,010.70 in fuel, a savings of $505.35. That sounds pretty good! Who wouldn’t like to save over $500 a year?

The problem is how much did it cost to save that $505? If you spent $25,000, it would take you 50 years to make back your “investment” in the new car. The gas savings is a 2% return on your money. In terms of opportunity cost, it seems like a very poor return to spend that money rather than keeping it invested. If you could make just 6% on your $25,000, you’d receive $1,500 in annual gains. With compounding at 6%, your $25,000 would become $50,000 in 12 years, $100,000 in 24 years, and $200,000 in 36 years.

So while it is alluring to “save” $500 a year on gas, you are likely to be better off by keeping your current vehicle and keeping your cash invested. Most people don’t think this way, because they don’t pay cash for their cars. If you start to pay cash for your cars, as I do, it will definitely change your perspective. However, don’t think that just because you take a loan or lease a vehicle that this math doesn’t apply to you. Instead of having an opportunity cost on your cash, you are paying interest on a loan or a lease. Either way, there is a decrease in the future value of your wealth, and whether we look at opportunity cost or interest expense, the decrease in wealth is going to be larger than just the $25,000 price tag on the car.

People are not logical about their car purchases. Cars may be a necessity for most of us, but they are a poor use of money. Most vehicles lose 50% of their value in the first five years. People decide they want a new car and then create a rationalization as to why they “need” it. It’s okay to buy nice stuff you want, especially if you have met your savings and investing goals. But let’s not fool ourselves into thinking that spending $25,000 on a new car is a way to “save money”.

Let’s consider a more extreme example of high mpg, using actual car models:
2) What if you drive a lot of miles, say 20,000 highway miles per year. And let’s say you are thinking about trading in your 2011 Toyota Camry for a hybrid, a 2016 Toyota Prius.

The Prius is estimated to get 50 mpg on the highway, versus 33 for the 2011 Camry. At $2.25 for gas, the cost savings is only $463.64 a year. Surprised it isn’t more? Our intuition fools us here – even though the difference in fuel economy is 17 mpg and we are driving more miles than in example #1, the actual cost saving is less. The difference in fuel consumption in this example is 206 gallons: 606 gallons for the Camry versus 400 gallons for the new Prius.

For a base 2011 Camry in clean condition and 100,000 miles (20,000 per year for 5 years), your trade in value would be only $5,744 according to Edmunds.com. For the 2016 base Prius, the MSRP is $25,095. Is it worth spending $19,351 (plus tax) to save $463 a year? No, it is not!

My recommendation: if you are genuinely interested in maximizing the utility of your hard earned dollars, drive your current car into the ground. If you have a 2011 Toyota with 100,000 miles, you’ve already experienced most of the car’s depreciation. Try to keep it for another 100,000 miles. Keeping one car for 200,000 miles will save you a ton of money versus having two cars for 100,000 miles, or worse, four cars for their first 50,000 miles.

The fuel economy question is a distraction. Looking at the total cost of a new vehicle, depreciation is your largest expense. Don’t get a new car to try to save money at the pump. Get a new car – or better yet a used car – when your current car is all used up. When it is time to get your next vehicle, by all means, consider fuel economy along with the other costs of ownership. Until you have to get another vehicle, it is likely going to be more cost effective to stick with your current car, even if it means spending more money at the pump.

Are Investment Advisory Fees Tax Deductible?

Posted On April 25, 2016 By Admin In Financial Planning / 1 Comment

It surprises me how few questions I receive about the tax deductibility of Investment Advisory fees. I hope that your CPA asks this question as they prepare your tax return, but I fear that some people miss this potential tax deduction. As with many tax rules, this one has quite a number of caveats. Here are three things you need to know:

1. First, we need to distinguish between Investment Advisory Fees (also called Investment Management Fees), Financial Planning Fees, and Commissions. Only Investment Advisory Fees are tax deductible. If you are a client, note that the fees charged by Good Life Wealth Management are Investment Advisory Fees.

Can You Trust Your Financial Advisor?

Posted On March 14, 2016 By Admin In Financial Planning /

Trust is earned and not given. While there’s no shortcut to years of working together and getting to know each other, there is one question that every client should ask their advisor: Are you a Fiduciary?

A Fiduciary has a legal obligation to place your interests ahead of their own. The alternative, of course is a salesperson whose purpose is self-serving: to represent their company and maximize profits. Which would you trust for objective, unbiased advice?

Five Ways To Invest Tax-Free

Posted On February 29, 2016 By Admin In Financial Planning /

“It doesn’t matter how much you make, but how much you keep.” Over time, taxes can be a significant drag on returns, especially for those who are in the higher tax brackets. Today, many families are also hit with the 3.8% Medicare surtax on investment income. If you are in the top tax bracket, you could be paying as much as 43.4% (39.6% plus the 3.8% Medicare surtax) for interest income or short-term capital gains.

Should You Invest Or Pay Off Student Loans First?

Posted On February 22, 2016 By Admin In Financial Planning /

One of the most frequent questions I hear from younger investors is whether they should hold off on investing until they pay off their student loans. College tuition has been growing at a rate much higher than inflation for several decades, and for many students, these costs are financed. It’s not uncommon for a student to graduate with six-figures in debt today.

For many, they view their college loans as the monkey on their back and want nothing more that to get rid of this debt as soon as possible. This intense dislike of debt is probably a good thing, especially if it encourages frugal decision making and a focus on financial responsibility. With retirement being 40 years away, investing doesn’t seem to offer the same immediate benefit as plowing as much cash as possible into eliminating student loans.

The problem with waiting to invest is that you miss out on the benefits of compounding. Let’s say Eager Eddie saves $5,000 a year starting at age 30. Earning 8%, Eddie will have $861,584 in his retirement account at age 65. Waiting Walter delays until age 40 to get started, but then invests double of what Eddie saved, $10,000 a year. Believe it or not, at age 65, Walter will still have less than Eddie, only $731,059. Waiting those ten years cost Walter $130,000, even though he contributed twice as much per year once he got started. When it comes to retirement saving, there truly is no making up for lost time.

By contributing to your retirement plan at work, you may be eligible for a company match. But even if there is not a company match, being able to make a tax deductible contribution will provide an immediate benefit of 25%, 28% or more, depending on your tax bracket.

Some will point out that with interest rates of 6% or higher, that there is no guarantee that their investment return will exceed the rate they would save on paying down their loan. Wouldn’t it be better to take the “sure thing” of saving 6% rather than the venturing into the unknowns of the investment world? The problem with this line of thinking is that your debt will decrease each year, so a 6% interest rate will cost fewer and fewer dollars each year. However, as your investment portfolio grows through contributions and compounding, a 6% return will equate to larger dollar growth rates. In other words, a 6% return on a $500,000 portfolio is ten times more than a 6% cost on a $50,000 loan.

My advice is don’t wait to get started investing. It’s not a choice of either-or; you have to find a way to do both investing and paying off your student loans.

A couple of additional considerations:

If you ever needed money, you could access your investments (with possible penalties and taxes for retirement accounts), but if you put extra towards your loans, you cannot access that money later.
You may be able to deduct student loan interest paid, up to $2,500 per year. This is subject to a phaseout if your income exceeds $65,000 (single) or $130,000 (married). See IRS Publication 970 for details.
If you have Federal loans, make sure you read my article on Four Student Loan Forgiveness Programs, which also explains Income Based Repayment plans.

How to Succeed at Financial Resolutions

Posted On December 28, 2015 By Admin In Financial Planning /

I know that New Year’s Resolutions are often lampooned as pointless and misguided, but I, for one, love the idea that people can change and take steps to improve their life. To me, a resolution is the wonderful intersection of optimism to motivate you and realism to recognize that it takes hard work to accomplish worthwhile goals.

Fidelity Investments has undertaken a New Year Financial Resolutions Study for seven years and found that individuals who started 2015 with a financial resolution feel more optimistic, are more debt-free, and feel more financially secure than individuals who did not make a resolution. The key to succeeding with a resolution, in my experience, is having the ability to translate a desire into a clear objective, determining how to accomplish that goal, and then having the discipline to stick to your plan.

In other words, a New Year’s Resolution is just a small scale financial plan. Here are three categories of financial resolutions and how to best achieve those objectives:

1) That one thing you’ve been putting off. A lot of times, people have something they know they should be doing, but haven’t started. Maybe they don’t know where to begin, are overwhelmed by the number of decisions they will have to make, or maybe there just never is enough time.

Here are some classic examples of financial needs that many organized, otherwise responsible people have not “gotten around to”:

Starting a college fund for children or grandchildren.
Securing a term life insurance policy to protect your spouse or loved ones.
Establishing your will and estate planning documents.

If these are on your “keeps me up at night” list, give me a call and we will accomplish these in no time. You haven’t done this before, but we do this all the time. Start now and you could have these New Year’s Resolutions wrapped up before the end of January!

2) Save more. Many families worry they are not saving as much as they should. For some, it may be setting up an emergency fund; for others it may be saving for retirement, college, or other long-term goals.

Whatever your investment need, you are more likely to be successful when you put your saving on auto-pilot with electronic monthly contributions. When you pay yourself first every month, most people find they don’t even miss the money. Spending often takes up whatever amount we don’t save; if we recognize this, then we can also understand that it is usually very easy to adjust our discretionary expenses when our saving is automatic.

While the 401(k) is the classic example of automatic investing, we can just as easily use the same approach for an IRA, taxable joint account, 529 college savings plan, or any other type of investment vehicle. Saving more doesn’t happen by accident. You can’t wait until next December to do something if you expect to be a good saver in 2016.

3) Reduce Debt. If you are looking to reduce your spending to get out of debt, you can follow the same advice of making automatic monthly payments. Focus on paying down your highest interest rates loans first.

If you’re not sure where your money goes every month, your first step is to get better organized. Technology can be a big help; consider an app like Mint or Quicken to track your spending. Increasing your self-awareness is an essential step towards changing behavior.

A financial planner can help you with all of your financial questions and goals. Besides bringing expertise, training, and real world experience, a planner can also offer two of the most important elements of success: a concrete plan and accountability to stay on course.

If you are thinking about including financial goals in your New Year’s Resolutions, don’t go it alone, give me a call! I’m here to help.

Tax Comparison of 15 and 30 Year Mortgages

Posted On November 16, 2015 By Admin In Financial Planning / 1 Comment

I received a tremendous response from readers about last week’s article comparing 15 and 30 year mortgages (read it here). A number of readers astutely asked how the mortgage interest tax deduction would impact the decision of choosing between the 15 and 30 year note. Here is your answer!

For our example, we are looking at buying a $250,000 home, putting 20% down and assuming a mortgage of $200,000. At today’s interest rates, we’d be choosing between a 15 year mortgage at 3.00% or a 30-year at 3.75%. Here are the monthly payments, not including insurance or property taxes.

15 Year Mortgage @ 3.00%	30 Year Mortgage @ 3.75%
payment $1381.16	payment $926.23
	difference = $454.93

Over the full term of the mortgages, you will pay the following amounts of principal and interest:

15 Year Mortgage @ 3.00%	30 Year Mortgage @ 3.75%
principal $200,000.00	principal $200,000.00
interest $48,609.39	interest $133,443.23
total payments $248,609.39	total payments $333,443.23

You will pay a significantly higher amount of interest over the life of a 30 year mortgage. The interest payment of $133,443.23 increases your total payments by 67% over the amount you have borrowed. And that’s at today’s rock bottom mortgage rates! I should point out that above 5.325%, the interest portion on a 30 year mortgage exceeds the original principal. In other words, the interest would double your cost from $200,000 to $400,000.

You can deduct the mortgage interest expense from your taxes, but the amount of the benefit you will receive depends on your marginal federal income tax rate. Here is the value of the tax benefit for six tax brackets.

15 Year Mortgage @ 3.00%	30 Year Mortgage @ 3.75%
interest $48,609.39	interest $133,443.23
15%: $7,291.41	15%: $20,016.48
25%: $12,152.35	25%: $33,360.81
28%: $13,610.63	28%: $37,364.10
33%: $16,041.10	33%: $44,036.27
35%: $17,013.29	35%: $46,705.13
39.6% $19.249.32	39.6%: $52,843.52

Obviously, the 30 year mortgage provides much higher tax deductions, although they are spread over twice as long as the 15 year mortgage. If we subtract the tax savings from the total payments of the mortgage, we end up with the following costs per tax bracket.

Total Cost, after the tax savings

15 Year Mortgage @ 3.00%	30 Year Mortgage @ 3.75%
15%: $241,317.98	15%: $313,426.75
25%: $236,457.04	25%: $300,082.42
28%: $234,998.76	28%: $296,079.13
33%: $232,568.29	33%: $289,406.96
35%: $231,596.10	35%: $286,738.10
39.6%: $229,360.07	39.6%: $280,599.71

It should not be a surprise that even though the 30-year mortgage provides higher tax deductions, that it is still more expensive than a 15-year mortgage, even when we consider it on an after-tax basis.

For most Americans, the actual tax benefit they will receive is much, much less than described above. That’s because in order to deduct mortgage interest, taxpayers have to itemize their tax return and forgo the standard deduction. As a reminder, itemized deductions also include state and local taxes, casualty, theft, and gambling losses, health expenses over 10% of AGI, and charitable contributions.

For 2015, the standard deduction is $6,300 for single taxpayers and $12,600 for married couples filing jointly. So, if you are a married couple and your itemized deductions total $13,000, you’re actually only receiving $400 more in deductions than if you had no mortgage at all and claimed the standard deduction. And of course, if your itemized deductions fall below $12,600, you would take the standard deduction and you would not be getting any tax savings from the mortgage whatsoever.

While the mortgage interest deduction is very popular with the public, economists dislike the policy because it is a regressive tax benefit. It largely helps those with a big mortgage and a high income. For many middle class taxpayers, the tax benefits of mortgage interest is a red herring. With our example of 3.75% on a $200,000 mortgage, even in the first year, the interest is only $7,437. That’s well under the standard deduction of $12,600 for a married couple, and the interest expense will drop in each subsequent year.

Compare that to someone who takes out a $1 million mortgage: their first year interest deduction would be $37,186 on a 30 year note. Simply looking at the amount of the mortgage interest will not determine how much tax savings you will actually reap, without looking at your other deductions, and comparing these amounts to the standard deduction.

Even if you are one of those high earners with a substantial mortgage, you have another problem: your itemized deductions can be reduced under the so-called “Pease limitations”. These limitations were reintroduced in 2013. For 2015, itemized deductions are phased out for tax payers making over $258,250 (single) or $309,900 (married).

Bottom line: If your mortgage is modest, your interest deduction may not be more than your standard deduction. And if you are a high earner, you are likely to have your deductions reduced. All of which means that the tax benefit of real estate is being highly overvalued by most calculations. There is a substantial floor and ceiling on the mortgage interest deduction and it provides no benefit for taxpayers who are below or above those thresholds.

Ceiling: Pease limits on tax payers making over $258,250 (single) or $309,900 (married).
Middle: receive a tax benefit between these two levels.
Floor: no benefit on deductions below the standard deduction of $6,300 (single) or $12,600 (married).

The 15 Year Mortgage: Myth and Reality

Posted On November 9, 2015 By Admin In Financial Planning /

Everyone seems to be talking about Real Estate again. This month, I sat with three friends, and remarkably, all three were looking at moving and buying a new house. Real Estate is hot right now in Dallas, and almost everywhere else, too. The losses from 2009 have been erased and prices are making new highs. Even if you aren’t looking to move, chances are good that your property tax assessment has moved up significantly in the past two years.

Major corporate offices are being built in North Dallas, bringing tens of thousands of jobs to the area. And those relatively well-paid corporate employees are going to want to live in close commuting distance to work. Home owners have equity in their property, and interest rates, which have remained low, are expected to start creeping up. Many feel like right now is the perfect time to move up to their dream house. It has been a seller’s market, with many houses being sold quickly and often meeting or exceeding asking prices.

Anyone who has read this blog or my book, knows that I recommend home buyers consider a 15 year rather than a 30 year mortgage. Let’s go through those numbers in detail and consider the myths and reality of your mortgage decision.

For our example, let’s assume you are buying a $250,000 house and putting 20%, or $50,000, down. You will finance $200,000 through a mortgage.

At an average current rate of 3%, your monthly payment on a 15 year mortgage (not including taxes or insurance) is $1381.16. The 30 year mortgage will cost you approximately 3.75%, but your monthly payment will be only $926.23.

15 Year Mortgage @ 3.00%	30 Year Mortgage @ 3.75%
payment $1381.16	payment $926.23
	difference = $454.93

A lot of people will look at the 30 year mortgage and will say that it “saves” them $454.93 a month. Let’s break that down. On the 15 year mortgage, your first payment consists of $500 interest and $881.16 in principal. On the 30 year note, the first payment includes $625 in interest while only $301.23 is applied towards interest. Most of your payment on the 15 year note is going towards principal, building your equity, where as most of the 30 year payment goes towards interest. So, even though the 15 year note costs $454.93 more, in the first month, it applies $579.93 more towards your principal.

15 Year Mortgage	30 Year Mortgage
payment $1381.16	payment $926.23
principal $881.16	principal $301.23
difference = $579.93

After making 10 years of payments, your remaining balance on the 15 year note would be $76,864.99 and you will have paid $42,604.59 in total interest. On the 30 year, $200,000 mortgage, your balance after 10 years is still $156,223.55, and you will have paid $67,371.29 in total interest. At this point, the person who chose the 15 year note has paid off most of their loan and has the end in sight.

15 Year Mortgage @ 10 years	30 Year Mortgage @ 10 years
Balance $76,864.99	Balance $156,223.55
Interest Paid $42,604.59	Interest Paid $67,371.29

Assuming your home value increases a modest 1% a year, here’s a look at how your home equity would compare after 10 years under both mortgages.

15 Year Mortgage @ 10 years	30 Year Mortgage @ 10 years
Home Value $276,156	Home Value $276,156
Balance $76,865	Balance $156,224
Equity $199,291	Equity $119,932
Difference = $79,359

The nearly $80,000 difference in equity after 10 years shows how the 15 year mortgage is a really another way of “forced savings”. You would have equity to buy another house if you should want or need to move. Or if you’d like to retire, a 15 year mortgage may enable you to have no house payment when you reach retirement age.

So far this is pretty simple. But you may be wondering, what if I were to choose the 30 year mortgage and invest the difference of $454.93 per month? If you did this for 10 years, and earned 7%, you would have an investment account with $78,740. That’s almost the same as the difference in equity in the chart above.

Let’s take this further and assume that you invest the $454.93 for the full 30 years. How would this compare to paying the 15 year mortgage and then investing $1381.16 for the following 15 years?

15 Year Mortgage

30 Year Mortgage

Pay mortgage for 15 years, then invest $1381.16

for the next 15 years, at 7%

Invest the difference of $454.93 for 30 years, at 7%

Investment Value $437,760

Investment Value $554,959

This shows that choosing the 30 year mortgage and investing the difference versus a 15 year mortgage could generate a better outcome over 30 years. So then why would I suggest that home buyers choose the 15 year product instead? Here are two reasons:

1) If you go to a bank, mortgage broker, or realtor and say that you can afford a $1381 per month payment, they are not likely to help you decide between a 15 or 30 year mortgage. Rather, they will assume you will choose the 30 year note and then tell you how much house you can “afford”.

Instead of looking at the $250,000 house in our example, you could afford a $370,000 house with a 30 year note. And you will not be investing the $454 per month difference as in the theoretical example. With the more expensive house comes more expensive costs, including taxes, insurance, utilities, and maintenance.

People who become wealthy look at their housing as a cost, not as an investment. While you can afford a more expensive house under a 30 year mortgage, that doesn’t mean that it is in your best interest to do so, if you have other financial goals such as retirement.

It is vitally important to remember that there is a conflict of interest throughout most the real estate industry. People who are paid commissions have an incentive to put you in the most expensive house and mortgage that the bank will allow them to sell. They do not get paid to help you retire, save in your 401(k), or send your kids to college. It’s remarkable to me that six years after the sub-prime crisis that there has been so little change to the fundamental conflicts of interest in the real estate industry.

2) I don’t know very many people who actually have the discipline to invest the $454.93 a month they would “save” with a 30 year mortgage. More likely, they will increase their other discretionary spending (cars, vacations, furnishings, etc.) that accompany “keeping up with the Joneses” in a nice neighborhood.

The only way someone would be able to make it work would be automate the process and establish a recurring monthly deposit of $454 into a mutual fund or IRA. By the way, the 30 year example above only showed a good outcome because I assumed the investment was made into stocks and earn 7% for 30 years. If you put that money in cash and only earn 3%, the 15 year mortgage produces the superior outcome. The 30 year mortgage only produces a better outcome if you can greatly exceed the cost of borrowing (3.75% in our example). Here’s what it looks like if returns are only 3% over 30 years:

15 Year Mortgage

30 Year Mortgage

Pay mortgage for 15 years, then invest $1381.16

for the next 15 years, at 3%

Invest the difference of $454.93 for 30 years, at 3%

Investment Value $313,486

Investment Value $265,105

My fear of the 30 year mortgage is that it is not used by consumers or real estate professionals to maximize saving and growth investing. If it was, it would be a good tool for increasing your net worth. Rather it is used to maximize the amount of home you can purchase today.

For professions where career income is expected to rise only at the rate of inflation (such as teachers and musicians), your income is not going to increase fast enough to enable future saving when you take on a jumbo-sized mortgage. The result is that all your disposable income will go towards the house, with very little towards retirement, saving, or investment.

If today’s real estate market has you excited, be careful. It’s great that your home value has shot up 20% or more in the past couple of years. That makes it a great time to downsize, but actually an expensive time to buy a bigger house. We are lucky in Dallas that Real Estate prices have remained affordable; in many cities on the coasts, home buyers have no choice but to use the 30 year mortgage because prices are so high. If you start with the 15 year mortgage in mind when you are considering how much house you can afford, it can help you increase your net worth faster.

Vulnerability Analysis

Posted On October 12, 2015 By Admin In Financial Planning /

You’ve worked hard, saved for decades, and have saved a nice nest egg for yourself and your family. One day, you are involved in a serious auto accident and the other party sues you. A sympathetic jury finds you liable for $10 million from the accident. How much of your assets could be seized by creditors?

You probably have never thought about this question, and hopefully, you will never be in such a scenario. However, we live in a litigious society, and if you have wealth, you can be sure that there are thousands of attorneys who would jump at the chance to bring a lawsuit against someone with deep pockets.

What we offer our clients is a Vulnerability Analysis, where we look at all of your assets and calculate what percentage of your assets could be seized by creditors. The goal of our Vulnerability Analysis is to determine the creditor status of each asset and help you substantially shift your wealth into assets which are exempt from creditors.

We will determine how much of a buffer your insurance will offer and show you which of your assets could be attached by creditors. We will make recommendations for moving funds to accounts, assets, and trusts which will offer creditor protection. It’s important to take these steps today, because you cannot “hide” assets from creditors after an event has occurred. By undergoing our Vulnerability Analysis process, you will know you have protected a large portion of your wealth from creditors, if you should ever find yourself in the unfortunate situation of being sued.

Each year, we can update your Vulnerability Analysis and make sure that you are protecting your family. While this analysis is particularly valuable for doctors who potentially face malpractice claims, it is also beneficial for anyone who owns a business or property. And while some professionals are keenly aware of the possibility of being sued, the reality is that almost anyone could be sued, even for the actions of their teenage children.

You may have done everything right for the last 25 years, but if all your assets are in non-exempt accounts, then your vulnerability is 100% today. That’s why the value of financial planning includes much more than just which mutual funds you pick. Our Vulnerability Analysis process is included for our Wealth Management clients; call or email me to find out how you can become a client.

I was the driver of the car in this photo. On June 15 of this year, another driver ran a red light and hit us, totalling the car. The other driver admitted he was at fault, was distracted and didn’t see the red light. Luckily, we all survived. You always think these things only happen to other people, but accidents can happen to anyone. Hope for the best and prepare for the worst.