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Should You Pay Off Your Mortgage Before You Retire?

Written by Summit Wealth on .

If you are closing in on your retirement date, this question is likely one you've been thinking about. There are two perspectives from which to look at this dilemma:

Perspective #1: Emotionally, it may feel better to pay if off. This is a tough argument to combat as you may get a sense of relief to head into the sunset with no debt on the books. There's much less stress on your monthly cash flow and "debt" is a bad word, or so our parents and grandparents have preached to us.

Perspective #2: Financially, it may not make sense to pay it off. Let me explain. Let's assume you are in a moderate income tax bracket – say 35% combined federal and state tax. Let's also assume your current mortgage rate is 4%, which means after deducting the mortgage interest as an Itemized Deduction, you are actually paying about 2.60%.

• Just because your mortgage is paid off, doesn't mean your home will appreciate in value any faster--so no advantage on this front.

• By paying off the remaining mortgage balance, you are in essence saying that you cannot beat a 2.60% annual return (over time) with any other financial instrument. In other words, you would be pulling dollars out of a balanced, globally diversified portfolio earning 6% to 8% over the long-term, to pay off a 2.60% after-tax debt. Instead, what I am suggesting you do is what all banks do – borrow from their clients (via their checking & savings accounts) at zero to 0.05%/year and lend those dollars to their customers at 3% to 5% / year and earn the spread.

• Here's a question for you: What rate of return does the bank pay you on the dollars you've just handed over to pay off your mortgage? The answer is zero. In other words, once those dollars are in the hands of the bank, you earn nothing on them.

• Say you do pay off your mortgage and eventually need to access your home equity at some point in the future (job loss, illness / health issue, family emergency, etc.). How do you get at your home equity? The answer is you refinance your mortgage and pay refinancing costs to get at your own equity / money.

  • So, not only does the bank pay you a zero percent return on the dollars you handed over to pay off your mortgage, they charge you to get at your own money.
  • Plus, if you lose your job or have a health issue, do you think the bank is going to let you refinance? Maybe or maybe not.

You can see that the answer to the question of paying off your mortgage before retirement is certainly not a slam dunk and depends on your personal financial goals. If this decision is something you are contemplating, please reach out to an SWA advisor as we are glad to help you make the choice that is best for you.

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Tax Professional vs. Tax Software

Written by Summit Wealth on .

Tax forms are arriving in your mailboxes as we speak. As you gather your tax information you may be wondering if you are better off using tax preparation software (and preparing it yourself) or hiring a professional. There are several things to consider when making this decision.

•   Price: This is, of course, the most appealing argument for using tax preparation software. The cost of software ranges from free to $120. The national average cost for 2014 returns completed by a tax professional was $273 according to a survey by the National Society of Accountants. This fee will vary greatly depending on an individual's circumstances and the preparer's experience and training. Keep in mind accountants pay between $1,000 and $6,000 for their software, which is far more sophisticated than the products sold to consumers.

•   Speed: When using software you can complete your return at your convenience once you've gathered all the necessary documents, whereas an accountant will take several days to a few weeks to process your returns. A tax profession will save you time when handling complicated Issues. They are able to answer questions quickly saving you the time and frustration of researching and finding answers to your questions.

•   Simplicity: Good tax preparation software walks you through the process very quickly and easily. For those who have only a few deductions, sources of income, or investments, there is little need to sit down with an accountant to sort it all out. However, when using a professional you are able to develop a relationship so they understand your family's financial situation and future goals. They are able to make tax saving suggestions that a software program is not able to anticipate. Also, tax professionals can answer your questions year around.

In conclusion, there is no "correct" answer to the question of hiring a tax professional or doing your taxes yourself with software. Your comfort and familiarity with IRS rules will be part of your decision, but the complexity of your finances should be the key deciding factor. Those with business income and rental properties will find the expense of hiring an account to be worth their peace of mind and potential tax savings.

Regardless of how you choose to complete your tax return, we are happy to review your returns and work with you and / or your tax professional to uncover tax saving and planning opportunities that fit within your comprehensive financial plan.

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Make a Plan for Retirement!

Written by Summit Wealth on .

I recently read that the average baby boomer (ages 51 to 70) has a goal of accumulating enough of a nest egg to spend (on average) $45,500 a year in retirement income. According to a report from BlackRock, the average retirement portfolio has $136,200 in it, which would provide an average estimated annual income of $9,129, leaving them short over $36,000 per year!

Besides not saving enough, another part of the problem for baby boomers is they are invested far too conservatively. The average American retirement portfolio is 65% in cash, which can't provide the growth needed to achieve investment goals.

Generation X (ages 35 to 50) folks are not faring much better. Gen Xers' median savings for retirement has fallen 15% the last two years from $70,400 in 2012 to $59,800 today. Of those who have managed to set aside money for retirement, 42% have less than $50,000 saved. The bright side is Gen Xers have time on their side to catch up. At age 50, the "catch up" to retirement plan contributions kick in, allowing an additional $1,000 to be put in IRAs and an extra $6,000 in 401(k)s each year.

A hurdle faced by both generations is a lack of a disciplined plan to save for retirement. Less than a quarter of Americans regularly set aside money for long-term savings and just 14% have a formal financial plan.

Regardless of your age, it is never too early or late to create and implement a plan so there are no surprises when you reach the time in your life you want to consider cutting back or quitting work. If you would like us to look over your current retirement plan or want our help to create a new plan for you, please contact us.

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Annuities: The Ugly Truth

Written by Summit Wealth on .

While we understand that annuity salespeople might not agree with everything in this blog, please understand that we do not sell annuities so we have no dog in this fight. Now that our disclaimer has been stated, we can honestly say that there could be some rare instances where an annuity might make sense but, there are likely better options. Let me explain:

• Costs Are High: Annuities tend to be very expensive to use (many with 2% to 4% annual expense ratios) and, when you subtract the expenses, many don't offer much in the way of annual returns. Plus, when you factor in any riders that the salesperson tells you are necessary, less is left for you.

• Taxes Are High: If you happen to be in an annuity and it appreciates, the gain (when withdrawn) is taxed at ordinary income tax rates, instead of tax-preferential long-term capital gains rates. Plus, there is no step-up in cost (tax) basis at date of death like there is in other assets.

• Cash Flow is Not Inflation-Adjusted: While a fixed income stream of $500 / month may sound attractive now, think of what it will look like 20 years from now, once inflation gets ahold of it. Sure, you can purchase inflation protection with some annuities, but at an additional annual cost.

• Low Returns: Due to the current low interest rate environment, the paltry returns offered by fixed annuities (after fees) are nothing to write home about.

• Your Money Is Tied Up: Most annuities will hit you with a surrender charge if you try to get at your money before a set period of time (usually several years). Couple that with some contracts that limit the percentage you can withdraw each year – not a great combination!

• Short Life Expectancy: Your monthly payments are lower by having the benefit be payable over a joint lifetime, if you tried to protect against premature death.

• Long Life Expectancy: Given the fact that women are living to about age 88 and men to about age 86, will these annuity companies be able to pay on all contracts if our life expectancy were to increase by 5 to 10 years over the next 20 years? I'm most concerned about this one.

Needless to say, there are likely a few more reasons why we are not the biggest fans of annuities but they don't need to be explained here. If you have an annuity and would like us to provide you with a "second opinion" about it, please let us know as we are always happy to help.

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A Win for Charities--and for You

Written by Summit Wealth on .

It only took until December 18, 2015 for the legislation to be passed to allow for the direct donation of up to $100,000 of your Required Minimum Distribution (RMD) to charity (for those age 70½ or older). Fortunately, this provision has been made permanent and is now an option for those that wish to donate a portion of their retirement account in 2016 and beyond.

How does this provision work? Here are some of the highlights:

• You must be at least age 70½ at the time of the transfer.
• You can transfer up to $100,000 per person per year. Note that married couples must each transfer from their own accounts.
• The transfer must be made directly to a qualifying charity. Foundations, donor advised funds and charitable gift annuities do not qualify.
• The transfer must come from a Traditional or Roth IRA, or an inactive SEP or SIMPLE IRA account. Employer plans do not qualify.
• This donation can be used to satisfy your RMD for the year.
• You do not receive a charitable donation for the amount distributed directly to the charity.
• You can then deposit the cash you were going to donate to the charity into your taxable account or, you can reduce the amount of your monthly distributions from your investment accounts since you will not be donating as much other assets to charity.

For those folks that are reasonably charitable, this can be a good opportunity to pursue as your Adjusted Gross Income (AGI) will be reduced due to a lesser (or no) IRA distribution. This is a positive since your AGI is used to reduce items like medical and dental expenses and miscellaneous itemized deductions, as well as to determine the taxability of your Social Security benefits.

If this opportunity is one you would like to leverage, please let us know as we are happy to help with the implementation.

North Metro: 763.355.5873
227 East River Parkway
Champlin, MN 55316-5873

South Metro: 612.987.9112
5871 Crossandra Street SE
Prior Lake, MN 55372-3337

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322 Greenhill Lane
Long Lake, MN 55356

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