How to Give Away Money

It shouldn’t be difficult to give money away, but there are many ways we can help improve outcomes for families who have more than enough assets to last a lifetime. While estate planning is important, let’s make your money go further and have a greater impact by creating a giving plan for while you are alive.

If you are philanthropically inclined, have a favorite charity, or just want your children or grandchildren to benefit from your blessings, we can help you plan how to best distribute your money, minimize taxes, and safeguard your future. Here are seven tips to get started.

1) Put yourself first. It should go without saying that you should not give away a significant amount of your wealth if there is any question as to whether you have sufficient funds to last a lifetime. With increasing longevity and rising costs of healthcare, it is not difficult to burn through a million or two over a 25-year retirement.

We begin with a retirement analysis that includes your philanthropic goals, and evaluates the likelihood your funds will cover your lifetime. The more guaranteed sources of income you have – Social Security, Pensions, Annuities, etc. – the more we can distribute other capital without worries of loss of income. The purchase of an Annuity can give you the confidence to disburse cash during your lifetime without fear of market risk, sequence of returns, or longevity.

We generally do not recommend that retirees aim to impoverish themselves to qualify for Medicaid. States have a 60-month look-back period that determines if you have given away money. In some cases, Medicaid planning may make sense, but we prefer to plan for abundance.

2) Understand the Gift Tax Annual Exclusion. Each year, you can give $14,000 (2017) to any person under the gift tax exclusion. This is well known, but most people don’t understand that you do not necessarily have to pay a tax if you exceed this amount; rather you are required to file a gift tax return, and your gift (over $14,000) reduces your lifetime gift and estate tax exemption, currently $5.49 million per individual.

Although most estates will not exceed these levels, we do know that there are many politicians in Washington who want to lower the estate exemption. So it’s difficult to predict what the exemption will be in 10 or 20 years. The easiest approach is to stay under the $14,000 annual exclusion. Remember that a couple may, combined, give $28,000 to an individual or $56,000 to another couple, such as a daughter and son-in-law.

Additionally, there are medical and educational exceptions to the gift tax. You can pay college tuition or medical bills for anyone, and those amounts are not subject to a gift tax. The best approach is to pay those bills directly to the providers, and not write a check to the recipient, to avoid any implication of a gift.

3) Give now, rather than leave everything in your will. By making donations and gifts today, you can:

  • receive a tax deduction for charitable giving. If you’re in the 28% tax bracket, giving $10,000 a year now could save you $2,800 on your taxes.
  • see your gifts make a difference for your family, causes, and institutions immediately. Your gifts may be more helpful to your children today rather than when they are 55 or 65.
  • discover how those monies will be spent, and learn who will be responsible with a large sum of money. Leaving a large inheritance through a will sometimes backfires, causing reckless spending. Starting a gifting program early may identify these issues and provide planning and education, or identify the need for trustees who can help ensure money is used prudently.
  • avoid the fights, misunderstandings, and vastly expensive lawsuits that so frequently occur with large estates. Don’t cause future problems for your spouse or children by leaving them a mess or a distribution that creates anger and divisions. This is so common and yet most parents think it will never happen to their family.

4) Give appreciated securities to charity rather than cash. You can donate shares of stock, mutual funds, or other assets to charity and avoid paying capital gains tax on the gains on those investments. Besides avoiding capital gains, you also get to deduct the full value as a charitable donation, as eligible. The charity will sell the donated securities immediately, but not owe any taxes to Uncle Sam. It’s a great way to be more efficient in your charitable giving. It saves you taxes, which ultimately means you will have more money to donate and do good.

5) Leave money to charity through your IRA rather than through your will. If you leave a $500,000 IRA to an individual, they will owe income taxes on any distribution, which could eat up $200,000 of the account, or more, if you have state income taxes. If you leave the same IRA to a charity, they will pay no taxes on the account, and would receive the full $500,000 immediately.

Instead, leave a taxable brokerage account to your children; they will receive a step-up in cost basis on those investments and therefore will likely have little or no capital gains on the sale of those assets. Your kids will be so much better off receiving taxable assets rather than the same number of dollars from your IRA.

Change your mind? If you write a charity into your will, and later want to change the amount or name a different charity, you will have to get a whole new will. But if you use your IRA for your charitable bequests, all you have to do is update the IRA beneficiary form, which is quick and free.

6) 529 plan for Grandchildren. Want to help your grandchildren be successful in life, pursue their career goals, and not be saddled with crippling student loans? Consider 529 college savings plans, which will get assets out of your taxable estate and enable tax-free withdrawals for qualified higher educational expenses.

If one beneficiary does not need the account, you can change the beneficiary to another person. You can retain control of this money, while creating a legacy for the future success of your grandchildren, great-grandchildren, or beyond.

Given a choice of having money in a taxable account or a tax-free account, you’d probably prefer the tax-free option, so I am baffled why more wealthy grandparents are not using 529 plans. The younger your grandchildren are, the longer time you will receive tax-free growth. Start early.

7) Insurance. Retirees can protect their ability to fund their giving goals by purchasing long-term care insurance. This can help ensure they do not deplete their assets or have to choose between adequate care and fulfilling their other financial goals.

If you intend to leave $1 million to your alma mater, church, or other organization, it may make sense to purchase a permanent life insurance policy specifically for that goal. Then you can preserve your other assets for your spouse or children while guaranteeing your gift to that institution. Or you could do the reverse – give money annually to charity and leave life insurance to your children or a trust. Individuals receive life insurance proceeds tax-free.

We’ve only just scratched the surface of what is possible to enable you to most efficiently disburse your money and assets. There are a lot of pitfalls that could be avoided with rigorous planning. Many of these strategies will benefit you over a long period of time, which means you’d be smarter to start these at age 58 rather than 78. Don’t procrastinate! Living the Good Life means that abundance finds joy in seeing the benefits our giving can have on the world.

Gifts, Rights, and Duties

What does Good Life Wealth Management stand for? Financial Planning is both an Art and Science, and while we dutifully toil on numbers, it is all in service to loftier goals and ambitions. Investment strategy is the one of the outcomes of our Financial Planning process, but it is certainly not the most important part.

We want to begin with an understanding and appreciation of three things in your life: Gifts, Rights, and Duties. When these are clear in your mind, your relationship with money has purpose.

Gifts certainly include inherited wealth, but we should all recognize how fortunate we truly are to be alive in 2017. I live in a vibrant city in the fastest growing state in the most prosperous country in the world. I was blessed to be born in a good zip code and attend great schools with the support and love of a wonderful family.

I attended two private universities, institutions which did not just spring from the ground, but were gifts to the future from people who were incredibly generous, insightful, and industrious. And some 175 years later, many thousands have benefited from those university founders.

Today, we have the gift of modern medicine, technology, cars, and the internet. And our wealth is invariably derived from all these gifts. It may still take a lot of our own blood, sweat, and tears, but no one in America is 100 percent self-made.

Rights include our constitutional protections of life, liberty, and private property. The ability to achieve financial freedom is an impossible dream – still – in many parts of the world. And while it is easy for me as a white male to take these rights for granted, for many other Americans, those rights did not exist in the not so distant past.

Duty is a recognition of our moral obligations. We have a duty to protect and provide for our spouse, children, and family. We have a duty to our self to plan for retirement and a secure future. We have a duty, I think, to leave the world a better place, and to help the next generation, just as our predecessors built schools and industries and fought for the rights which we enjoy today.

My vision of financial planning does not begin with choosing the “right” mutual fund or ETF. It is rather a holistic strategy to create a roadmap to your goals, as determined by your Gifts, Rights, and Duties.

– If we are to value our money, we must begin with the humility to recognize that most of our success is a gift. We won the life lottery and that 90% of who we are was luck and 10% was through our efforts. (Even intelligence, good health, and a strong work ethic are gifts, not something we earned!)

– We should not take our rights for granted. While there are fundamental rights, financial planning is to make sure you navigate your other smaller rights, such as to tax deductions, a 401(k), a Roth IRA, or Estate Plan. We want to make sure our clients take advantage of the benefits which are available to them.

– Duty to others means that we can take care of ourselves first and foremost. But it also means that we have prepared for the unexpected. That’s why I am perplexed by young families who want my help with investments, but want to skip over estate planning, college funding, or life insurance. That’s not fulfilling your duty as a parent and spouse.

There are two types of happiness: pleasure and fulfillment. Pleasure is easy: it is going to the beach and doing nothing, enjoying a glass of wine, or celebrating with friends. It is basically hedonistic. While we all need to rest and recharge from time to time, many retirees become bored after three months of golfing every day. Pleasure is not the highest form of satisfaction.

Fulfillment is having a purpose and making a difference. In Maslov’s hierarchy of needs, the highest need is achieving self-actualization, or realizing your full potential.

The Good Life, is not about seeking pleasure, but finding fulfillment and purpose. While our financial planning software can crunch the numbers, our conversations are really about How do we use our gifts? What are our rights? How can we best fulfill our duty to others and make a difference? If that is the starting point for our relationship with money, we can have a more meaningful perspective on our goals, values, and impact on the world.

9 Things to Know About GLWM

There are a lot of ways to get financial advice today and you want to know that you’ve made the right choice. How do you decide? We invite your questions and scrutiny and would love to get to know you. That’s the beginning of a trusted advisory relationship.

While you can and should read our disclosure documents and “Form ADV Part 2”, to really get to know Good Life Wealth Management, you need more personal insights. Here are 9 things that will help you better understand who we are and how we help clients like you.

1) The Key Benefit to You
When my clients see their goals defined in milestones and specific actions, they feel confident in their future. Together, we craft a financial plan that is more than just an investment strategy, but a comprehensive road map to accomplish your goals and avoid the hidden pitfalls which could derail your success. That begins with understanding you, and helping refine your goals from intangible ideas to specific, measurable outcomes.

2) Pricing Our Services
We provide objective advice for your best interests, and that’s why we adopted a fee model rather than a commission approach based on transactions. Other advisors have fee structures that are complicated and opaque. We offer two programs with prices that are simple, transparent, and fair:
Wealth Builder Program (under $250,000 in assets) costs $99 a month.
Premier Wealth Management (over $250,000) costs 1%, billed quarterly.

3) Value to You
We provide value to our clients’ finances in many tangible ways, such as reducing portfolio taxes, saving on investment expenses, and implementing tax strategies. We also help avoid pitfalls and unforeseen problems in many areas beyond the obvious portfolio risks, such as being uninsured or under-insured, having a poor estate plan, or not having an efficient college savings strategy.

You could tackle these issues yourself if you have the interest and inclination, but our clients value their free time and prefer to delegate to experts. They enjoy peace of mind knowing that are receiving objective advice that is based on experience, insight, and professional training. We can help couples achieve their financial goals with less friction and improved mutual understanding.

4) Our Practices
As we get to know you and your family and develop your custom plan, you will see how our services directly connect to your goals and concerns. Our clients feel secure with our consistent approach and time-tested methods that are based on evidence and academic rigor, and not sentiment, fad, or conjecture. We take our Fiduciary Oath very seriously, which is why our clients have placed such deep trust in our advice.

5) Why I’m an Advisor
None of my grandparents had any wealth, but they instilled in my parents the values of a strong work ethic and sense of personal responsibility. Through their education, hard work, frugality, and investing discipline, my parents became financially successful and independent. I became an Advisor because I believe all Americans have an opportunity to achieve the American Dream. My passion is educating others on how to make that dream a reality.

6) Community Involvement
Outside of financial planning, I have two long-standing interests. I’m a classically trained musician and perform as Principal Trombone of the Garland, Las Colinas, and Arlington orchestras. Additionally, I play frequently for area church services, and my brass quintet gives approximately 50 concerts a year at area nursing homes through Texas Winds.

My other interest is in animal welfare and ending the pet overpopulation problem here in America. I’ve been an active volunteer at Operation Kindness for 15 years. We frequently foster mom dogs and their puppies, which you can follow on The Foster Dog Chronicles facebook page. I also am proud to serve as a Board Member and Treasurer for Artists For Animals, a 501(c)3 non-profit group that raises money for humane rescue and education.

Good Life Wealth Management donates at least 10% of its pre-tax profits to charity annually. And there’s nothing I’d love more than to increase our giving each year!

7) Qualifications
My expertise sits right in the center of what you need in creating a family financial plan. I’ve developed similar plans for more than 100 clients at my previous firms, so it’s rare that an issue comes up that I haven’t already encountered. I hold two of the most comprehensive designations in finance: Certified Financial Planner (CFP), and Chartered Financial Analyst (CFA). But I didn’t get these just to put up on the wall – my whole life has been dedicated to the pursuit of educational excellence. I graduated first in my high school class of 330 and received my doctorate at the age of 25. My mantra is to never stop learning. The question I ask everyday is how can this information benefit my clients? That’s the prism through how I spend my time.

8) How I Built My Company
Simple – I look at how I’d want to be treated as a client. My family are the largest clients of Good Life Wealth Management, and I personally invest in our Growth Model (70/30). I share this because I know some advisors who recommend one thing to clients and then do something different with their own money, or who don’t have any investments at all. I aim to provide every client with the same care, detail, and diligence as if it were my own money. The Golden Rule isn’t new, but many businesses don’t think this way.

9) Our Business Objectives
Good Life Wealth Management is a small, family practice, where I know every client individually. Our capacity will be only 75 clients and once I reach that level, we will establish a waiting list for new clients. Why? Because we refuse to compromise our level of personal service to you for the sake of growth.

My goal is to be a trusted advisor with each client for life. Our clients share our patient philosophy and appreciate our disciplined approach.

Are we the right fit for you? I don’t know, but I do believe that no one else will care more about your financial life than we will. I am blessed by the trust my clients have placed in me to serve them and love the challenge of working on each unique plan. If you’ve read this far, thank you. I’d love to have you take the next step and begin a conversation about how we can accomplish your goals together. Just send me a message, or call me at 214-478-3398 to get started.

The Price of Financial Advice

You are more likely to achieve your financial goals with my help than without it. Together, we can craft a financial plan that is more than just an investment strategy, but a comprehensive road map to accomplish your goals and avoid the hidden pitfalls which could derail your success. I’ll be there along the way to keep us on course and respond to changing markets, regulations, and needs.

That’s my value proposition. Whether your goals are retirement, college, or making your money work for you, I’ve helped people achieve goals just like yours for more than a decade. Unfortunately, there is often some reluctance to hire a financial advisor, even one who is a Certified Financial Planner professional. Recently, the scandal at Wells Fargo reminded us that that some financial firms still allow short-term profits to take priority over ethical behavior or customer needs.

Years ago, I left the broker-dealer world that was paid by commission to become a fee-based financial planner. I am not a salesman, so why would I want to be paid on a transactional basis? It is a conflict of interests and investors know this. That’s why trust is so low for the financial industry and why many people are still reluctant to seek help even when they need it.

When a survey by Cerulli Associates asked about the most difficult part of working with financial advisors, the top concerns included:

  • Not sure if the advisors are recommending the best products
  • I am not sure if I can trust advisors
  • Costs are not transparent and I don’t know how much I pay advisors
  • I don’t feel like a top priority client for advisors

Boy, that is sad. Unfortunately, these thoughts are probably familiar and you may have had the exact same concerns. Luckily, you can address most of these issues by changing from a commissioned broker to a fee-based fiduciary. As a fiduciary, my legal obligation is to place client interests ahead of my own. In a 2014 survey by State Street Global Advisors, they found the top reasons why investors prefer fees versus commissions:

  • 36%: I know what I am going to be paying upfront
  • 27%: My advisor is invested in my success
  • 20%: I trust that my advisor is not selecting costlier investment products just to drive up commissions
  • 10%: An actively traded account could result in high commissions, costing more than fees
  • 7%: I can deduct investment advisor fees on my taxes

Which would you prefer?
A) I’m not sure how my advisor gets paid or if I can trust him. Am I in the best products or the ones with the highest commissions?
Or B) I know exactly how and how much my advisor is paid. My advisor is paid by me for providing advice over time not a commission for a sale. My advisor has my best interests in mind.

At Good Life Wealth Management, our approach is simple and transparent. We offer two programs:

1) Premier Wealth Management. For investors seeking holistic financial planning and wealth management. Our fee is 1% of assets under management ($250,000 minimum). Most common needs include retirement income planning, portfolio management, college savings, tax and estate planning, and risk management.

2) Wealth Builder Program. For newer investors seeking to build a personally-tailored financial foundation. The fee is $99/month (under $250,000). Most common needs are IRAs, employee benefits, net worth analysis, student loan advice, savings strategies and term life insurance.

The fee conversation often takes center stage for the decision about choosing a financial advisor. But it shouldn’t. We ought to be focusing on what we can do for you and about how working together will put you in a position to be more likely to achieve your goals. Investors work with me because they want peace of mind knowing that I have their back. My clients are very intelligent and could undoubtedly “do it themselves”. But that is not what most successful investors do. Why not?

  • They have better uses of their time. They would rather spend their time on work, family, or collecting cat figurines (or insert your actual hobby).
  • They recognize that they “don’t know what they don’t know”. Most people don’t have the interest in studying finance in their spare time, but even if they did, there remains the risk of missing information and not keeping up with new developments.
  • Leaders delegate to experts. You can’t be an expert at everything. You should have a good CPA, Attorney, and Financial Planner who know you so well that they can anticipate your needs.
  • It’s tough to be objective about money. For couples, conversations about money are often, how shall we say, counterproductive? An advisor brings an outside perspective, expertise, and insight to create a plan that works for both of you.

I remember the first day of ECON 101 at Oberlin – Professor Zinser started the class by writing this on the board: TINSTAAFL. There is no such thing as a free lunch. If you’re looking for financial help, it’s fair to ask what it will cost. That’s because if someone is offering you a free lunch, you know that it may ultimately be a very, very expensive lunch. Know what you are paying your financial advisor. Ask.

If you’re looking for comprehensive planning, or just help with a couple of questions, give me a call. Yes, there is a price for financial advice. I aim to make that cost completely transparent, so you can have the confidence to move forward and get to more important questions about how we can achieve your financial goals together.

Should You Get a New Car to Save Gas?

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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.

Tax Comparison of 15 and 30 Year Mortgages

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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).

What Skills Do You Need to Succeed in Finance?

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Article by Andy Masaki

Success and prosperity come when you master the most sought after financial skills.

Curious to know what those skills are? Want to imbibe them to be a successful man or woman in your community? Good.

Here are the four skills that are essential to being able to accomplish your financial goals. We all have these skills at some level, but often need a reminder of how fundamentally important these skills are to your overall financial well-being.

Skill #1, Organization: Are you on the brink of retirement? If you want to have a peaceful financial life after retirement, then you can’t skip the first step of taking the time to thoroughly understand all the complex, moving parts of your retirement plan.

First, you need to gather all your financial documents and calculate how much have you saved in all of your investment accounts and retirement plans. Download a copy of your most recent Social Security statement from ssa.gov.

Next, evaluate your family’s medical needs and consider what health plans you may need in addition to Medicare. If you or your spouse will be under age 65 at retirement, research what options you may have for health insurance before you are eligible for Medicare.

Third, check your estate planning documents. Make sure all your information and beneficiaries are in proper order. If your plan is more than five years old, have it reviewed by an attorney to make sure your documents are appropriate for your current needs.

Fourth, organize your tax papers and have a talk with your CPA or tax planner. Discuss the possible ways to save tax in light of your retirement.

Fifth, find out details of your employer’s benefits to retirees. Have a talk with the HR and ask about your options. Submit the required documents to the HR so that you can enjoy all the benefits after retirement.

Sixth, create an emergency fund that will help you survive for at least 12-24 months.

Seventh, plan a budget as per your monthly expenses and needs. Make sure you include annual expenses, such as taxes or insurance premiums, and also set aside money for unexpected bills, such as home or auto repairs.

Skill #2, Strategic Planning: The ability to create a powerful strategy for achieving your goals is a commendable skill. This requires you to focus on your long-term goals and create a specific, detailed plan which will get you from where you are today to where you want to be in the future. Keep an eye on the prize and collaborate with your financial advisor to achieve results. Positive outcomes will motivate you and drive you towards financial success. Negative outcomes will force you to revisit your plan and adjust your course as necessary.

Skill #3, Risk Management: Be it personal finance or investments, there will always be some risks. It is essential that you understand the specific kinds of risks you are taking with each investment, as well as the overall level of risk associated with your entire portfolio.

Research thoroughly before making an investment or adopting a financial plan. Read articles, talk with people, and never be afraid to ask questions. If something sounds too good to be true, it probably is.

Apart from investments, there are a few additional things you need to consider. Review your current insurance policies and make sure you know what would be covered and what would not be covered. Make sure you understand your home, auto, and umbrella policies. Check with your financial planner about your individual need for life insurance, disability insurance, and long-term care insurance . Not everyone needs every type of insurance, but if you do need insurance, not being covered can be a catastrophic blow to your financal success. Don’t risk everything to save a little.

Skill #4, Keep Learning: To lead a successful financial life, you need to continue to learn. Tax laws and investment regulations change continually. What never changes is that well-informed investors are better positioned to understand their options and seize the opportunities which can help them achieve their goals. Financial planning is not a one-time event, but an on-going process.

Developing your financial skills is a lifelong process, but it doesn’t have to become a full-time job. Focus on the essential decisions you have to get right and keep things simple. Get organized, make a good plan, scrutinize your risks carefully, and keep learning. If you cultivate these four skills, you will make better financial decisions that can lead to success.

Author Bio: Andy Masaki is an editor with Oak View Law Group and contributes specifically on personal finance topics. You  can also find him fielding queries based on money management topics at various online communities and social media platforms.

Five Financial Planning Steps When Getting Remarried

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For couples getting remarried, there are often additional financial complications and concerns compared to a first marriage. In a second marriage, there may be assets, income, and children which require special consideration. There are many ways to address these thorny issues so that you can focus on moving forward with your relationship and not let financial worries hold you back. Here are five financial planning steps to help: 

1) Redo your financial plan. By working with a financial advisor who holds the Certified Financial Planner designation, you can create a comprehensive financial plan and know that your advisor is not just there to sell you investments or insurance. An advisor is a neutral, third-party expert who can help with your budget, savings, and spending goals as a couple. Your advisor can facilitate this conversation and create an objective plan that considers your joint assets, income, and expenses.  

Specifically, your advisor should help you:

– Prepare a net worth statement detailing all your assets and liabilities.

– Determine when you might be able to retire and what income you should plan for in retirement.

– Evaluate your income and expenses. If you are working, we can determine how much you need to save to achieve your retirement goals. If you are retired, we can calculate how much you can safely withdraw from your portfolio each year. Use this information to develop your joint budget.  

2) Discuss and recognize your differences. Often, couples do combine their finances, and there are some reasons and potential benefits from doing so. However, in many cases, adults who have managed their finances independently for many years will want to keep their finances separate.  This can work well, especially once you decide on the logistics of how to split joint expenses like housing. While you could choose to continue to work with separate financial advisors, we can manage your portfolios separately based on your individual needs. This is increasingly common today, and does not pose any significant difficulty to manage two portfolios and sets of objectives. The benefit of working with one advisor is that you are making sure that your separate finances will be adequate to fulfill your individual and joint financial needs.

3) Update Beneficiaries. Redo your estate plans and be sure to update beneficiaries on 401(k) accounts, IRAs, and insurance policies. It is surprising how often this vital step gets overlooked or only partially completed.

4) QTIP Trust. When couples have grown children from a previous marriage, things can get complicated. There can be a tension between the kids and the new spouse about finances, as well as a concern for the parent that their kids could be excluded from an inheritance if their spouse should outlive them. There are risks when a couple sets up their estate plan to leave everything to their spouse. The surviving spouse might get remarried or choose to exclude the children. Sometimes, there is a concern that spendthrift children could manipulate the surviving spouse and get their hands on the a lifetime of savings.

One solution to this is a QTIP trust, which stands for Qualified Terminal Interest Property. A spouse leaves his or her individual assets to the trust. The surviving spouse, then, is a beneficiary of the trust and will receive annual income to pay for living expenses; they can access principal of the trust only under very limited circumstances, such as for medical needs, as proscribed in the trust instructions. When the second spouse passes away, the remainder goes to the heirs of the first spouse, under an irrevocable designation. This way, the first spouse can be assured they have provided for their spouse and that the remainder will absolutely go to their children. When you establish your estate plan and QTIP trust, by all means, tell your kids what you are doing and what they can expect. Even if they have never said anything, they may be wondering or concerned about your estate plan, and knowing that you have taken care of them will make it easier to accept your new spouse.

Besides establishing a QTIP trust, there are a couple of other ways to set money aside for children or grandchildren. If there are sufficient assets, a simple approach is to leave property and joint assets to the spouse and use beneficiary designations from life insurance or IRAs to leave money to children. For grandchildren, consider setting up 529 college savings plans and naming children as successor participants to manage the accounts after you pass.

5) Maintain Separate Property.  In Community Property states (AZ, CA, ID, LA, NV, NM, TX, WA, WI), assets acquired during the marriage are generally considered to be jointly owned regardless of title.  Only assets which pre-date the marriage are considered Separate Property, along with inheritances and gifts received. The challenge, however, is that assets are deemed to be community property unless you can prove that they are separate. If funds are commingled, contributions received, or dividends and interest reinvested, you may inadvertently cause the separate property to become community property. When a couple is getting remarried, it is important for both spouses to understand their separate property rights and take steps to ensure that these assets maintain their separate property character. For details on how to do this, please see my post, Community Property and Marriage.

Second marriages are increasingly common today, and each one has its own unique set of financial details. Smart financial planning can help provide solutions to these complex issues and ensure that both spouses are protected and able to accomplish their goals as a couple as well as individually.

 

Five Ways to Be Richer in One Year

Breakfast Table

When I tell people I’m a financial planner, I often get a response like “I wish I needed that service”. I know a lot of people live from paycheck to paycheck, including people who have graduate degrees and good jobs. It’s tough to have a conversation about something as far away as retirement when someone is worried about how they’re going to pay their bills two months from now.

No matter where you are today, it is not a hopeless situation; anyone can change their position for the better. It requires a plan, the willingness to make a couple of changes, and the determination to stick with it. If you’d like to be richer in one year from now, here’s how to get started.

1) Get organized. Do you know how much you owe on credit cards or what the interest rate is? How much money do you need each month to cover your bills? How much should be left over to save or invest? Establish a filing system, or use a tool like Mint.com or Quicken so you know how much you are spending and where. Like a lot of things in life, preparation is half the battle when it comes to personal finance. It can feel a bit daunting at first to take an in depth look at your finances, but ultimately it’s empowering because you will discover for yourself what you need to do.

2) Start tracking your net worth. There are two parts of your net worth: your assets (home, savings, investments, 401(k), etc) and your liabilities (mortgage, credit cards, other debt). Your assets minus your liabilities equals your net worth. If you take 30-45 minutes to calculate your net worth every month, it will change how you think. Just like starting a food journal or an exercise diary, tracking your net worth will make you mindful of your behavior. When you create a higher level of self-awareness of your actions, you will automatically start to change your habits for the better. And of course, if you don’t track it, how will you know if you are richer in one year?

3) Plan your spending. Most of us have a fixed salary where our ability to save depends on spending less than we make. People assume that if they made more money, it would be easy to save more. Unfortunately, what I have actually found as a financial advisor is that families who make $100,000 are just as likely to be broke as families who make $75,000. They may have a bigger house or a fancier car, but they’re no richer. If we want to save more, we have to learn to spend less.

The key to spending less is to find a system or process that works for you. For some people, creating a detailed and strict budget is key. For others, it may work best to become a cash consumer, where you leave the credit cards at home and only spend a set amount of cash each week. It can be helpful to comparison shop all your recurring bills and look to switch providers to save money. (For example, home/auto insurance, cell phones, gym membership, electric provider, etc.) Lastly, people are saving money by dropping their landlines, or dropping cable for Netflix.

4) Put your saving on autopilot. Money that you don’t see can’t be spent. You’re more likely to be a successful saver when you establish automatic contributions, versus waiting until the end of the year and hoping that something will be left over to invest. If your company offers a 401(k) match, that’s always your best place to start. If a 401(k) is not available, consider a Roth or Traditional IRA. If you don’t have an emergency fund, set up a savings account separate from your checking account, so you can’t easily access those funds. Even if you can only save $100 or $200 a month for now, that’s okay, because you’re creating a valuable habit. When you get a raise or receive a bonus, try to increase your automatic contributions by the amount of your raise.

5) Don’t go it alone. People are more successful when they have help, good advice, and accountability from another person. That may mean hiring a Certified Financial Planner, joining a Dave Ramsey Financial Peace class at a local church, or finding a knowledgeable friend who can lend an ear. If you’re looking for help with debt and improving your credit, contact the National Foundation for Credit Counseling at www.nfcc.org or by phone at 800-388-2227.

If you make these five changes today, you will be richer a year from now. Habits are important. For most people, wealth isn’t accumulated suddenly or through significant events, but by years of getting the small decisions right. Build a strong financial foundation, then you will find that a financial advisor can help you take the next steps to creating the financial life of your dreams.

The Best Way to Get in Shape

Hop, Skip, Jump

In December, after years of good intentions and a couple of false starts, I finally joined a gym and hired a personal trainer. I meet with my trainer once a week and workout two or three times separately. Previously, I thought I could just get in shape on my own, but it was always too easy to find an excuse why today wasn’t a good day to exercise. And then days become weeks, you find other demands more pressing, and you just never get around to it.

Working with my trainer, Clint, has been great. I’m getting in shape and feel very confident that I’m now on the right path. Looking back, my only thought is that I wish I had gotten started much sooner with this process. Why are people more successful with a personal trainer than on their own? Here’s what a coach has to offer:

1) Knowledge. Clint has spent thousands of hours in education and his certifications demonstrate commitment to being qualified and skilled to help others. As for me, I have neither the time nor the interest to learn this information. Since you don’t know what you don’t know, it’s smart to seek out expert, objective advice.

2) Experience. Clint has worked with many clients and knows what works. While everyone’s individual situation is slightly different, a professional trainer has probably seen a lot of clients who have similar needs to mine.

3) A written plan. We started with a physical assessment to document my starting point, and after discussing my goals and commitment, developed a plan unique for me. Now I know what I need to do on a daily basis in order to reach my long-term goals.

4) The right tools. My trainer selects the most appropriate equipment for me to use and makes sure I use them correctly for maximum benefit and to avoid injury. When you combine discipline and consistency with doing the right things, good results happen.

5) Motivation. We have a workout schedule which has become a habit and routine. It’s rewarding to see our plan working, and when there are occasional set-backs, it’s helpful to have Clint’s patience, support, and encouragement to get back on track.

While I certainly suggest others take good care of their health and bodies, here’s what I want people to recognize: just as using a personal trainer is the best way to get in shape physically, using a financial planner is the best way to get in shape financially. What we offer is very similar. As a CFP(R) practitioner, I help individuals accomplish their financial goals, bringing professional knowledge, years of experience, a written plan, the right tools, and ongoing motivation.

Can you get in shape on your own? Of course it’s possible, but you’re more likely to be successful with professional guidance. You can be sure that athletes and actors always have a personal trainer or a team of trainers. Likewise, many of the most financially successful individuals I’ve met, including multi-millionaire entrepreneurs, board members of Fortune 500 companies, and Harvard-trained surgeons all use a financial advisor. It’s not a question of whether or not they’re not smart enough to do it on their own, it’s that they recognize the value in hiring an expert and the benefit that relationship can bring to their financial well-being.

If you are like I was, having good intentions, but procrastinating getting going, it’s time to give me a call. We will put together a financial plan you can understand and I’ll be there in the months and years ahead to help you stay on track with accomplishing your goals. If you’re waiting for tomorrow, don’t. Aside from yesterday, today is the best day to get started.