Issue: #  65  MAY 2014
Bautis Financial
Dear ,
 

Welcome to May 2014 issue of The Wealth Chronicle!

 

MAKING THE BEST FINANCIAL DECISIONS

 

A lot of the wisdom out there on how to get ahead with your money is great.  

 

Things like

  • Spend less than you earn
  • Don't pay excessive fees
  • Pay yourself first
  • Don't put all of your eggs in one basket

are all great pieces of advice, but are always repeated.  Here are five additional tips that are less widely known but can still be beneficial to your financial health.

 

Build in safeguards with your investments

The last thing you think of when stocks are rocking is rolling back your exposure to the winners.  But if the past two bear markets taught you anything it's to rebalance your portfolio and book profits along the way.  Start with areas that have far outpaced the S&P 500 since the bull began in 2009

 

Here is another way to keep your portfolio safe in times of trouble.  Look for funds that over the past decade have lost less than the broad market in months when stocks have tumbled, while still outperforming over the past 10 years. 

 

When it comes to saving for college take advantage of the tax benefit

The 529 account offers the tax trifecta for saving for education planning

  1. Your money grows tax-free
  2. Withdrawals for qualified education expenses are tax-free
  3. Many states offer upfront deductions or credits if you choose your in-state plan

Don't just focus on the US stock market

Equities in the slowest growing nations have done the best since 1900, partly because these shares tend to be cheap.  Europe, the projected biggest tortoise for the next two years, typically trades at a premium to the S&P 500; today its P/E is 10% lower than the P/E of the S&P 500.

 

Here is another reason to diversify internationally.  You've heard of the 4% rule, which limits how much you tap from your nest egg each year.  A new study found that this strategy works 66% of the time for retirees with a 50% stock / 50% bond domestic portfolio.  Diversify globally and the success rate jumps to 78%.

 

Utilize the best retirement plan you've never heard of

Health Savings Accounts (HSAs) allow you to sock away money for medical tabs, but their real appeal is as a long-term savings plan for retirement where according to Fidelity, couples may need to set aside as much as $220,000 for health expenses.  Contributions up to $6,550 annually to a HSA are pre-tax.  Money grows tax-sheltered, and withdrawals for medical expenses are tax-free. 

 

"Sneak" into an IRA

Earn $191,000 or more as a couple, and the direct route into a Roth IRA (probably the best financial invention ever) is closed.  Fortunately, there is a legitimate workaround.  Make a contribution to a non-deductible IRA, then immediately convert to a Roth (The usual contribution limits apply: up to $5,500 per person or $6,500 if you are older than 50). 

 

Unfortunately personal finance is not a subject in high school and college.  But by following the basics and taking advantage of the right options available it's not hard to get ahead.

 

QUANTIFYING THE HIGH VALUE OF FINANCIAL ADVICE

 

 

How much of a boost in net returns can financial advisors add to client portfolios?  According to Vanguard, maybe as much as 3%.  In a recent paper from the Valley Forge, Pa.- based mutual fund and ETF giant, Vanguard says advisors can generate returns through a framework focused on five wealth management principles:

 

  • Being an effective behavioral coach.  Helping clients maintain a long-term perspective and disciplined approach is arguably one of the most important elements of financial advice.  (Potential value add: up to 1.50%.).  In this interview fellow advisor Carl Richards explains how the concept of fear and greed cause the average advisor to buy high and sell low
  • Applying an asset location strategy.  The allocation of assets between taxable and tax-advantaged accounts is one tool an advisor can employ that can add value each year.  (Potential value add: from 0% to 0.75%.).  Here is a link to a paper that explains how important asset allocation is to your portfolio returns.  The paper concludes that it is much more important that market timing or security selection.
  • Employing cost-effective investments.  This component of every advisor's tool kit is based on simple math: Gross return less costs equals net return.  (Potential value add: up to 0.45%.).  Read my whitepaper on fees associated with 401k plans.
  • Maintaining the proper allocation through rebalancing.  Over time, as its investments produce various returns, a portfolio will likely drift from its target allocation.  An advisor can add value by ensuring the portfolio's risk/return characteristics stay consistent with client's preferences.  (Potential value add: up to 0.35%.)
  • Implementing a spending strategy.  As the retiree population grows, an advisor can help clients make important decisions about how to spend from their portfolios.  (Potential value add: up to 0.70%.).  This concept is the premise for creating The Retirement Fitness Challenge and how to prevent outliving your money.

WHY YOUR SHOULD MAKE YOUR BED EVERYDAY

 

There has been a lot of coverage of college commencement speeches this year.  First there was Rutgers with Condozella Rice excusing herself, then Erik Legrand was invited, then dis-invited, then invited again.  We saw Peyton Manning throwing footballs on the lawn of the University of Virginia.  But the best advice I saw this year to new graduates was from a Navy Seal who gave the commencement speech at The University of Texas.  He gave 10 pieces of advice to new graduates that he learned while going through 6 months of Seal training.  His first piece of advice was to make your bed everyday.  The video is 20 minutes long, but you won't see anything more inspirational or motivational.

 

University of Texas at Austin 2014 Commencement Address - Admiral William H. McRaven
University of Texas at Austin 2014 Commencement Address - Admiral William H. McRaven

 

 

REVERSE MORTGAGES: TAPPING YOUR HOME FOR RETIREMENT INCOME

 

 

The Reverse Mortgage has long been viewed as a last resort for older Americans with home equity but little cash.  Regulators and financial services firms are hoping that changes and reverse mortgages become a mainstream financial strategy.  You should be cautious about jumping in.  First the basics: A reverse mortgage is a type of loan which allows seniors to access the equity in their homes without having to pass credit or income requirements. The qualifications for a reverse mortgage include the owner being at least 62 years old, that the home is occupied by the owner and that the owner has equity in the home.

 

The loan can be taken as a lump sum, lifetime payments, or a line of credit.  It doesn't have to be repaid until you move or die.

Total Annual Loan Cost
Although the interest rate on an HECM mortgage is set by the government, and the origination cost of an HECM loan is limited to 2% of the value of your home, the total cost of the loan can still vary by lender. Furthermore, in looking for a lender, borrowers must consider third-party closing costs, mortgage insurance, and the servicing fee. To assist borrowers in comparing mortgage costs, the federal 'truth-in-lending law' requires mortgage providers to present borrowers with a cost disclosure in the form of the total annual loan cost (TALC). Do be sure to use this number when comparing loans from different vendors; just keep in mind that the actual costs of a reverse mortgage will depend largely on the income options selected.
 
Interest Rates

The interest rate on HECM reverse mortgages is tied to the one-year U.S. Treasury security rate. Borrowers have the option to select an interest rate that can change every year or one that can change every month. A yearly adjustable rate changes by the same rate as any increase or decrease in the one-year U.S. Treasury security rate. This annual adjustable rate is capped at 2% per year or 5% over the life of the loan. A monthly adjustable rate mortgage(ARM) begins with a lower interest rate than the ARM and adjusts each month. It can move up or down 10% over the life of the loan.

 

A reverse mortgage is typically structured so that the total loan amount, including interest and fees, will not exceed the value of the home over the life of the loan. However, if the proceeds from your home's sale exceed the balance of the loan, then you, your spouse, or your heirs will receive the difference. Should the sale not cover the loan balance, then, in most cases, the lenders insurance will cover the difference.

 

As with conventional mortgages, reverse mortgage lenders make money the old-fashioned way: through interest, origination fees and points. The interest rate varies according to the market. However, closing costs are significantly higher with reverse mortgages.

 

In addition, borrowers continue to be responsible for real estate taxes, conventional homeowners insurance and home repairs, and have the added burden of paying for mortgage insurance, too.

 

Why would borrowers have to pay mortgage insurance? After all, that insurance is required for regular mortgages if borrowers don't have a large enough down payment, and its purpose is to protect lenders in the event of a default. With a reverse mortgage, there's no such risk to lenders.

 

But other risks exist. Mortgage insurance guarantees the lender will receive its full repayment. For example, a decrease in the property's value adversely affects the lender's reimbursement. Mortgage insurance also covers the lender in the event the mortgage is held over a very long period of time and accrued interest exceeds the value of the home.

 

Read more - http://retirementfitnesschallenge.com/reverse-mortgages-tapping-your-home-for-retirement-income/

 

 

 

 

Please contact me if you have any questions about the articles above or about your personal or business finances.

  

Sincerely,

Marc Bautis
Wealth Manager

 

office: 201-842-7655
cell:    201-221-6895
fax:     201-754-9760
Disclaimer:The information contained in this newsletter is for information purposes only and may not be suitable for your specific financial situation.  You should consult a financial advisor before making any investment decisions relating to the information contained in this newsletter

What's Inside?
Making the best financial decisions
Quantifying the value of advice
Why you should make your bed everyday
Reverse mortgages
Marc Headshow w Skyline, 9-2011
MEET MARC  

Marc Bautis is a Wealth Manager specializing in working with young families as well as retirees and those nearing retirement. He understands that everyone wants to not only protect their principal, but also be sure that their money lasts.  He is committed and proud to deliver independent advice, always in the interest of his clients.

Marc is the creator of the Retirement Fitness Challenge™,  a program designed to be sure his clients enjoy the retirement years as they have always envisioned them.  Marc's program is designed to prevent outliving your money but also to minimize expenses during retirement and find the best time to start taking Social Security benefits.   Marc is also the author of a recent book The Retirement Fitness Challenge: Shape Up Your Finances and Make Your Money Last a Lifetime, which is available on Amazon.com.

Marc is a graduate of Seton Hall University.  He is a Bergen County native, from Lyndhurst, where much of his extended family still resides. He currently lives in Glen Ridge with his wife Katie, new daughter Charlotte and Old English Bulldog, Winnie.

 

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