James C. Molet's Blog, page 8
October 9, 2018
How a phonecall and some paperwork can lead to a sweeter retirement
How does one retire in peace exactly? Contrary to what you might believe, you don’t need millions to retire comfortably. To me, peace in retirement means that I get to live a simple middle class lifestyle without having to worry about big financial obligations.
Simple habits like maxing out your 401K contributions and living on your budget are easy to set in motion. These small steps snowball into a massive payoff that you only see 20 – 30 years down the road.
One move you should make every 10 or so years is refinancing your mortgage. Yes, you can retire even if you haven’t paid off your mortgage if you’ve done your cash flow planning right! That’s where refinancing comes in – to lock in a fixed, low payment that you can afford.
Like the small steps I mentioned above, picking up the phone and speaking to a couple of bankers can have a huge impact on your retirement. And it’ll only take you a few hours – not a whole lot if you consider the lasting benefits of doing so!
Even if you’re not looking to retire, this could be a powerful tool if you’re in a financial pinch. While you could always work with a licensed money lender like Bugis Credit to tide you over a rough financial patch, refinancing can really be a strong sustainable way to reduce your cash outflows!
If you’re interested in how refinancing can pay off for you, keep reading!
Why would you want to refinance?
In short – you want to reduce your interest payments. Paying less interest to the bank is at the heart of refinancing. Having certainty (read: a fixed rate) is also something you might want to achieve with refinancing. Now, you might ask:
I’ve been happy with my rate for years, so why should I change?
Here are just a few reasons:
Interest rates might have changed since you got your mortgage – interest rates go up and down according to economic cycles and central bank policy. So even though you might have received a reasonable rate initially, your rate might be considered high compared to the interest rate environment now.
Your favorable rate might have expired – banks often lure customers in with great rates to begin with. But often your contract will state that you will only enjoy your low fixed rate for a specified period (usually a few years). When your rate “expires”, you’ll often get a new rate that might be based on the prevailing interest rate environment that is a lot less favorable.
Your financial situation might have improved – perhaps your credit and financial situation wasn’t as good when your first got your mortgage. Your bank might have given you a contract with some onerous terms – like a high interest rate, or a variable interest rate. Variability can cause stress especially if you’re not expecting to be earning a regular income for your job.
How banks decide how much you should pay
Typically, banks determine how much (or little) you should pay based on your credit worthiness. If you’re financially secure, meaning you have a stable income, low debt etc. You can expect banks to offer you a lower rate.
Not only that, you can expect that banks will be fighting over each other to get you as a customer!
That means that you have the benefit of shopping around. Let your prospective lender know that you’re talking to a few banks, and I’d bet my top dollar that they’d be interested to know what their competitors are offering you (so that they might undercut them).
One way to quickly work out your credit worthiness is to get your free credit score online. Otherwise, it’s no biggie – your banker will likely do their own checks on your credit report. But be aware that these checks might lead to hard pulls on your credit report, which could lower your credit score!
How to go about refinancing
Here are some steps you should take when refinancing:
Get your credit report – you can find numerous sources that provide your credit report for free. If you’ve got a good score, you can be more confident that you’ll be able to refinance at a lower rate.
Talk to your current bank first – make a call to your current loan officer. Ask them if there is a way to lower your interest rate right now. Usually it’ll mean that you sign a new contract, locking yourself in to be their customer for another decade or so. Your bank already has all your information on file (like your repayment history), so this would be the easiest way to refinance.
Speak to other banks – once you know what your own bank is offering, it’s time to use that as leverage with some competing banks! A short phone call should suffice, and your bankers will do the work to come up with a quote.
Compare rates and decide – once the various banks come back with their quotes, it’s just a matter of comparing their offers. On top of interest rates, you should look at terms like minimum tenure before you can refinance again, penalties etc.
Lastly, watch out for penalties
Ah, there’s always a catch isn’t there! This is why it’s super important to check the terms of your mortgage agreement. Some banks will lock you in by imposing an early repayment penalty. Yes, your new bank will be paying down your mortgage and therefore incurring the penalty. So you must consider if the switch is worth it by comparing the penalty with the amount of money you can save.
F0r that, you can use a dedicated mortgage refinance calculator.
Conclusion
Refinancing is a responsible financial move, and you should look into it every decade or so. This is especially if your interest rate is kicked up a notch (variable rate), interest rates have fallen in general, or you simply have a better financial situation than before.
If you’ve successfully negotiated a better rate, or have any advice on refinancing at all, please let us know in the comments!
October 3, 2018
RWR Simple Retirement Workbook
his workbook, comprised of the Retirement Planner and the Spending Planner, is the companion piece to RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit
Download RWR SIMPLE RETIREMENT WORKBOOK
October 2, 2018
Are You Leaving Your Beneficiaries a Tax Time Bomb?
The following is a guest post from Brett Sause, an 18-year veteran of the financial services profession. Brett is CEO of the Atlantic Financial Group, LLC; and has been awarded both the National Quality Award and the National Sales Achievement Award from NAIFA.
When it comes to retirement – and to passing on whatever wealth you’ve accumulated to a spouse or the next generation – you may think you’ve thought of everything.
Understanding the Tax Implications
But despite your careful planning, it could be that Uncle Sam will be handing you a hefty tax bill while you’re living – or your beneficiaries one when you die.
Even people who have been great about saving for retirement don’t always realize the tax implications of what they’ve done. They may have created a significant tax problem for themselves, and they could be leaving behind a tax time bomb for their beneficiaries.
The scenario is a fairly common one, especially for baby boomers in or near their retirement years.
Someone told you to get an IRA or they told you to open a 401(k) because your employer was offering it as a benefit, and it sounded like a good idea. And those are good ideas – to a degree. An IRA, a 401(k) or a 403(b) helps slice into your income tax bill today, putting more in your pocket now and less in the government’s. But these are tax-deferred plans, not tax-free.
Eventually, the tax bill comes due. When you retire, any withdrawals from those accounts are taxed. And when you turn 70½, the federal government requires you to withdraw a minimum amount, whether you want to or not. People often assume their tax rate is going to be less when they retire, but that’s not necessarily the case.
Those who want to avoid that tax time bomb for themselves – and in some cases for their beneficiaries – could consider other ways to invest their dollars, such as:
Municipal bonds. Municipal bonds are used to fund schools, highways or other government projects. Under the federal tax code, the interest income on municipal bonds is tax free. Usually, the interest also is exempt from state taxes.
Roth IRA. Unlike a traditional IRA, you don’t get to defer taxes on the income you contribute to a Roth IRA. But the upside is that when you reach retirement age, you can generally make withdrawals income tax free. And if you die with money still in the account, your beneficiaries also won’t pay taxes when they make withdrawals (but could still be subject to estate taxes).
Life insurance. Life insurance death benefits pass to beneficiaries income tax free, and it provides other advantages as well. You can use permanent life insurance while you’re still breathing. For example, you can withdraw money from it and you can borrow from it. [The cash value in a life insurance policy is accessed through withdrawals and policy loans, which accrue interest at the current rate. Loans and withdrawals will decrease the cash surrender value and death benefit.] People tend to see the life insurance premium they pay as another bill, not unlike the cable TV or electric bills. Instead, it could be seen as a contribution, much like the contribution to an IRA or a 401(k), because in addition to the death benefit protection, permanent life insurance has living benefits too.
Final Thoughts
It’s always hard to do someone’s planning based on what the future holds. But with our national debt what it is, it’s likely tax rates are going to be higher years from now. So with retirement planning, it often becomes a matter of whether you want to pay your taxes now or pay them later.
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September 27, 2018
3 Habits of Successful Retirees Worth Imitating
Americans are increasingly glum about the odds they will enjoy a secure retirement, and those concerns flow across generational lines.
New research by the nonprofit Transamerica Center for Retirement Studies reveals that 45 percent of Baby Boomers expect to experience a reduced standard of living in retirement. Meanwhile, 83 percent of Generation X workers anticipate they will have a harder time achieving financial security than their parents did and just 18 percent of Millennials foresee a comfortable retirement, the research says.
Sadly, those results aren’t surprising because we often hear from people who have real concerns about outliving their money.
A lot of this is because so many aspects related to a traditional retirement have changed. For one, people are living longer, which means they need either to save more money or find ways to make what they do save last.
Other factors causing anguish are that pensions are a thing of the past for most Americans, and there are constant rumbles about whether Social Security faces a bleak future.
But instead of fretting, those planning for retirement should concentrate on trying to control the things they can. Successful retirees often display three habits that are worth imitating.
They live with some urgency. Instead of sitting idly by, successful retirees seize each and every day to stay healthy and happy. This can apply to all aspects of life, from what you do during retirement to the way you save money throughout your working life. A sense of urgency can call you to action, so you’re more likely to prepare for a great retirement.
They retire based on their financial assets, not age. Traditionally, when people think about retirement, they pick a target age rather than a target amount in their portfolio. But that may not be the right approach. While you might have a certain age in mind, it can be more worthwhile to create a retirement plan that’s based on your finances. That will give you a much better chance of having enough money to last you the rest of your life.
They aren’t afraid to take risks. In many cases, it is best to minimize risks – and that’s especially true with finances for those approaching retirement. But you also don’t always want to live your life on the safe and boring side. One way some retirees minimize their financial risk is to use a portion of their savings to purchase an annuity, which provides them a set amount of income for life, much like a pension. Once you know your retirement income is in order you can be free to take some risks in other areas of your life and pursue your lifestyle goals.
Final Thoughts
Retirement is supposed to be about enjoying yourself after a lifetime of work, not counting pennies as you try to survive. People nearing retirement need to understand that there are steps they can take that will help put them in a more secure position financially so they can thrive and not just survive.
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