As a financial advisor, I have many clients ask me if they should use extra money to pay down their mortgage or invest the money. Let’s take a closer look, my savvy LGBT friends, at the math to see what makes sense.
The following is a hypothetical, purely for demonstrative purposes:
If you have a $250,000 fixed rate, 30 year mortgage at 4.25% interest, your total amount that you will pay over 30 years will be $456,018.
If you add $200 a month to your payment to be used towards the principal, you will pay off the mortgage in 23 years. Your total amount that you have paid will be $399,455.
Pretty good, right? You’ve saved yourself $56,563 in interest payments. That’s some real money!
What happens if instead, you invest the $200 a month in a tax free vehicle, such as a ROTH IRA?
For this hypothetical, we are investing $200 a month, over the course of 23 years (the amount of time we would be paying extra on our mortgage) with a 7% annual return on your investment. Keep in mind, this isn’t picking or recommending a specific investment, this is a hypothetical return. Whew.
So… $200 a month/23 years/ 7% annual return will get you: $133,059.
Holy cow! That’s quite a bit of money. Much more than the $56,563 that you would save if you were to pay more on your mortgage.
In this situation, where you invest the money, you are $76,496 richer!
This difference is even greater if you take into consideration the interest rate tax deduction you get every year. When you file your taxes, you have a line that allows you to enter how much you’ve paid in real estate mortgage interest.
Part of the amount that you pay in mortgage interest gets deducted from your taxes on your return. In effect, because you may potentially lower your taxes because of this deduction, your real out of pocket costs on borrowing that money isn’t the 4.25% on our hypothetical loan. It can be less than that. It depends on a myriad of factors, such as your income, etc. However, lets’ assume for a hypothetical, that your REAL cost to borrow money after your tax deduction is only 3%…
$250,000 mortgage/3% interest/extra $200 month – You still pay off the mortgage in 23 years, but you only save $32,927 in interest. This widens the gap between paying down the mortgage/investing even more!
The invested money will get you $133,059. The mortgage pay down will save you $32,927. That’s $100,132 more in YOUR pocket after 23 years. I don’t know about you, but I’d rather have the $100,132 extra.
Disclaimer time: These are hypotheticals. Tax deduction is a hypothetical amount. ROTH IRA’s are something to discuss with a financial advisor to see if they are a good fit for your needs. You get my drift. We are playing with numbers. Also, this information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Want to play with some numbers yourself? Check out these financial calculators
As always, speak to a financial advisor about the best course for you to take.
Sharon L. Herman AAMS, ADPA is the CEO of Silver Key Wealth Management
The opinions expressed in this material do not necessarily reflect the views of LPL Financial.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Financial Partners. IFP is a registered investment advisor. IFP and Silver Key Wealth Management are separate entities from LPL financial.
Ms. Herman may only discuss and/or conduct transact securities business with residents of FL, MI, GA, NJ, VA, TX. www.finra.org. www.sipc.org
Hello my savvy LGBT investors! Here’s a handy formula that I think you’ll find helpful. It’s called the rule of 72
Credit: Kristy Hall The Rule of 72 helps you figure out how long it will take to double your money
It’s pretty easy. First, take your rate of return on your investment.
For this example, let’s say you are getting a 10% return.
Divide 72 by that number.
In this case 72/10 = 7.2
The answer (in this case 7.2) is the number of years it will take for you to double your money.
Let’s do another one!
So it’s 9 years to double your money. So those people who have “safe” investments, like CD’s, that pay .5% interest? It will take them 144 years to double their money!
That’s why you don’t want to put your long term money into short term investments!
I’m not saying that market volatility doesn’t play a role. It does. Certainly some years your portfolio will perform different than others. You may get 20% one year and -10% in others. Again, depends on you and your investments. But it’s handy for illustrative purposes. The rule of 72 is purely a mathematical concept and does not guarantee investment results nor functions as a predictor of how an investment will perform. It is an approximation of the impact of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double in value. Why do you want to know this?
First off, you look pretty impressive at cocktail parties. But more importantly, you can use another rule of thumb that I like to use for an “off the cuff” calculation.
Many consider the safe standard to withdraw money from an investment account is a rate of 4%.
Now this isn’t written in stone. It can be higher, it could be lower. It all depends on what your investments are and risk tolerance. The 4% is a “be safe” sort of guideline. You can use this to figure out how much money you will need for retirement.
Of course, this is a ballpark estimate. I have to emphasize ballpark.
Another example: If you need to pull of $30,000 a year off of your investment accounts, that means you’ll need to have $750,000 saved.
Using 4% as our draw rate:
30,000/.04 = 750,000
Where 30,000 is how much you want to take out of the account each year
The .04 is the 4% draw rate
The 750,000 is the resulting amount of principal with which you need to start.
Like I said before, this is not a hard and fast rule. Things like risk tolerance and investments in your account will make a difference. Certainly don’t use this formula as a substitute for a real financial plan. It might make you feel better about the amount you currently have saved. Maybe it will have you strive to save more.
An ADPA (Accredited Domestic Partner Advisor) designated Financial Advisor can assist you with your financial planning and investment needs.
Sharon L. Herman AAMS, ADPA is the CEO of Silver Key Wealth Management, and affiliated with LPL Financial. www.silverkeywealth.com
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Silver Key Wealth Management, a registered investment advisor and separate entity from LPL financial.
Ms. Herman may only discuss and/or conduct transact securities business with residents of FL, MI, GA, VA, NJ, TX. www.finra.org. www.sipc.org
Life insurance is not a fun topic. It means that someone has kicked the bucket or you are planning on someone kicking the bucket. Usually people don’t like to dwell on if they have enough insurance. But let’s be good to our partners, my savvy LGBT friends and figure out pretty quick if we have enough insurance. Here are three things to look at:
• How much is your mortgage and how much longer to pay it off?
o This is usually the biggest debt a person has
• How much outstanding debt do you have as a couple?
o Outstanding credit card debt, car loans, etc.
• Do you want to provide living expenses for your partner or children?
o Are they going to miss your income? Do you want to leave them something to get by until they are settled? Do you want your children’s college expenses taken care of?
Add up the numbers and the time frame. This gives you a “quick and dirty” amount of life insurance that you’ll need and for what time frame. Most of these items can be covered with a term life insurance policy. Term life is something that you purchase as an individual.
Insurance can be complicated. You may have a need for more or less, depending on your individual situation. I suggest meeting with an ADPA designated financial advisor to help you better understand your individual needs.
What is the biggest fear you face if you unexpectedly pass away?
Many folks out there think of stocks when they think of investing. Well, my wise LGBT friends, that is only one piece of the puzzle. One of the most overlooked investments is the individual corporate bond.
Photo credit: 55laney69
When a business wants to raise a large amount of money, they issue bonds. You purchase the bond and the company pays you a predetermined amount of interest (usually monthly, quarterly or yearly) for a set amount of time. At the maturity date of the bond, you get the principal back. So basically, you are acting as the bank and making a loan to a company.
Why own them?
Good question! Here’s the answer: They may help add stability to your portfolio. It’s nice to know how much interest you will receive and when you will get it. Plus when the stock market is volatile, you know you have a holding in your portfolio that is giving you a consistent return.
Here is an example:
A bond may pay 6% interest and has a 20 year term to maturity. That means that on a $10,000 investment you will receive $600/year x 20 years = $12,000 interest over the life of the bond, plus you get back the initial $10,000 that you invested. That’s a 120% return on your initial investment plus your principal back! (This is a hypothetical example for illustrative purposes only and is not representative of any specific investment. Your results may vary).
Other stuff you should know:
Sometimes companies have severe financial hardships or go bankrupt. If they do, they can default on their bonds, which means that you can lose your future interest payments and/or the principal that you put into your bond investment. So if you are looking at purchasing bonds, look at their credit rating. AAA is the best rating , anything that is BB+ or below is considered to be a “junk” bond and is very speculative.
Can you sell bonds early? Yep, you can. The value of the bond can fluctuate, though. It may be worth more, the same or less than when you purchased it. So if you do sell it before the maturity date, you may lose money or make money. Many factors can affect the price of a bond, including interest rate changes, credit quality of the company and what the stock (equity) market is doing.
It is best to speak to a financial professional before you venture into the world of bonds! See if they are right for you and your current financial situation.
There are five common retirement planning mistakes that many people make
Train Wreck!! Photocredit: Tom Brandt
1. Changing investment strategies based on emotions.
It never feels good when the market goes down. And seeing your account value go down is never pleasant. The emotional side of you wants to stop the pain. In other words, pull your money out of the market. Then when the market goes up, you want to be a part of the party and put money in! Analyze what you are really doing when this happens. You are selling an investment low, then buying it back when it costs more money. Does that make sense? Would you sell your house when the price went down and then buy it back when the price went up because it was worth more? No. No you wouldn’t do that. So why do that with good investments?
2. Not being honest about retirement costs
I see this all of the time. People want to retire so much that they choose to tighten the belt when they budget for retirement. They hack things out of their life right and left on paper. Then they try to live it and find that the parameters are totally unreasonable. If you like to travel, then you like to travel. If you like to golf, then you like to golf. Don’t stop working too early just to be done, then punish yourself for the rest of your life. A few extra years of work may make the difference between having that annual vacation for the next 20 years or not. Think about that.
3. Not starting to save early enough
Don’t be this person! By saving earlier in life, you don’t have to put as much away each year to reach your retirement goal! All due to the magic of compounding.
Starting at age 25, if you invested $3500 a year at an 8% return, you would have over $1,000,000 at the age of 65. That’s it! Only $3500 a year!
If you wait until age 45 to start saving, then you have to invest $20,000 a year for 20 years to get a million dollars. That’s quite a difference. Don’t ignore the power of compounding. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
4. Not practicing good asset allocation
You need to spread the love in your portfolio, so to speak. Putting all of your investment dollars in one basket is never a good idea. This year’s hot performing asset class might be next years worse. Seek balance in all you do, including investing. Consider seeking the help of a financial professional for advice. Asset allocation does not ensure a profit or protect against a loss.
5. Leaving your 401k behind
You got a new job. Yay for you! Don’t forget about that 401k that’s been sitting there. You took the time to invest in it. Take the time to explore your distribution options. You can be losing out on the opportunity to grow your nest egg if you ignore your money! A good retirement plan is like a garden. It needs to be tended to and watched over to thrive.
Hello my LGBT friends! I hope this blog post finds you well.
In my last blog, I spoke about getting a game plan together. Now I’m going to talk about investing.
My belief – buy quality investments and be well diversified.
Your underlying investment strategy will only be as sound as the investments you buy. You wouldn’t build a house on quicksand and expect it to be sturdy, right? Same goes for your investment portfolio. Have a good foundation.
When looking at stock type of investments, look for companies that have been in business for a long time (I usually look at companies with at least a 10 year track record) and have a history of increasing dividends. That may be a good indicator of a company with a good financial record.
Don’t buy stocks in just one sector. Spread the love! You may want to pick companies from different sectors to balance out your portfolio. If you are starting out, I don’t recommend having more than 5% of your portfolio in any company. So even if you really like Coca Cola, Pepsi and Snapple, you might not want to buy all three of those companies. They do the same thing – make beverages. If you do decide to buy all three of those companies, buy them in smaller amounts so that sector doesn’t go over 5% of your portfolio. Make sense?
OK, my LGBT friends! First things first! You need to develop a game plan. What are your financial goals? Do you want to retire at a certain date? Take a dream vacation? Provide an education for your children or grandchildren?
Even Godzilla had a game plan!
Photo by: futuristmovies.com
You need to know what you want to accomplish before you set out and start to randomly invest money
If you were going to bake a cake, you’d make a list of ingredients that you need. Then you’d probably check your cupboards to see what you already have. After that, you’d go to the store and buy the rest. It wouldn’t make sense to go to the store and buy random ingredients and hope you end up with the right things to bake a cake…. Same goes for setting up a plan for investing your money. Write down what you want to accomplish and when and choose investments that match your timeframe and risk tolerance.
You need to be patient with your investments!
There are quite a few investments to pick from in the investing universe. – Stocks, bonds, mutual funds, alternative investments. Diversity is key. You need to be disciplined about saving money and patient with market returns. Don’t abandon a plan because of short term market setbacks. I suggest you speak to an LGBT financial advisor with an ADPA designation to assist you with your plan, if you are seeking professional assistance!
Your game plan should be looked at periodically. Have your goals changed? Are there life events happening that change our long or short term goals? If so, then maybe your investment strategy needs to change with it.
The ADPA (Accredited Domestic Partner Advisor) accreditation is a specialty designation that can be earned through the College for Financial Planning.
The accreditation addresses the unique financial planning needs of lesbian, gay, bisexual, and transgender (LGBT) individuals, as well as heterosexual couples who have chosen not to marry. Specifically covered are factors and situations that cause financial planning for domestic partners to be different from financial planning for legally married spouses, including wealth transfer, taxation, retirement planning, and estate planning issues; as well as alternative planning strategies for these situations. www.cffpinfo.com/adpa.html
There are differences in financial planning for couples that live in states that do and don’t recognize same-sex marriage.
Working with someone who is specially educated and certified to know and understand these differences can help domestic partners and married couples pursue their financial goals in a more optimal manner.
What do I want to do? I want to help the LGBT community grow their wealth. I want to provide the resources to help them do that. I want folks to know they have a place to go to and a person that they can consult to get the financial and investment advice they desire.
I want to help them, their partner/ spouse and their family. Click here to READ MORE