Wednesday, August 28, 2013

Getting a Mortgage Education

We took out the mortgage on our first home in 2008, just before the bottom of the housing market fell out and the financial crisis started in full.  I’ve heard a lot of blame put on the banks for not presenting enough information about mortgages during this time, but I’m somewhat surprised by this.  I tend to wonder just how much effort many people made to actually inform themselves regarding mortgage matters and make use of informational materials made available by lending institutions.

Maybe we were just lucky, but we received plenty of information about our mortgage and what responsibility we were undertaking by committing to such a financial agreement.

Mortgage Disclosure Book
Yes, we were actually provided with an entire disclosure book, and this was in 2007, before the housing market collapse and foreclosures in mass numbers began.  This book outlined associated loan fees, discussed appraisal information, went over insurance requirements, reviewed a variety of loan types -- even giving examples of how adjustable rate mortgages could be affected by rate increases -- and provided a borrower’s bill of rights and a “consumer caution and home ownership counseling notice”!

In the back part of the book, there were even a few additional packets explaining adjustable rate mortgages. 

Good Faith Estimate
Our lending institution also provided us with a good faith estimate before we took on our mortgage that gave us a general idea of what the breakdown of costs would be for our loan.

Not only did this estimate provide a breakdown of mortgage and mortgage-related fees, but it gave us a monthly payment analysis, general loan information such as term, rate, amount, and type of loan, and a “funds to close summary” that gave us an estimated total of how much money we would need to bring to closing.

Mortgage Calculator and Amortization
Finally, it really helped to become familiar with our mortgage to see exactly what we would be paying over time as well as a total amount paid once our mortgage timeframe was complete.  Using a lender provided amortization sheet, enabled us to see a payment-by-payment breakdown of principal versus interest over the entirety of our loan.  Then, by using an Internet mortgage calculator, we could manipulate our mortgage to see what would happen if we paid more over time in an effort to reduce total interest owed on our loan by decreasing the payoff time.

With all these tools at our disposal, we felt comfortable with the loan we were taking on and were well informed regarding the financial responsibility we were undertaking with the purchase of our home.

Friday, August 23, 2013

Why I’m Planning to Take Social Security Early

I love my children and I want them to have a secure financial future.  And while it might not happen, I’d like to further this financial future by way of some sort of inheritance I could pass along to them.  While it’s impossible to see the future and how our family finances will progress along the way, I hope that doing my best to plan for this future could allow me to set our children up well upon our passing.

Part of this planning entails deciding when to take Social Security…that is, if it’s still around by the time I retire in 30 years or so.  However, if it is, my children might appreciate me taking Social Security earlier rather than later for several reasons.

Less Reliance on Other Assets
If I’m able to live off of my Social Security benefits -- or at least use them for a majority of my expenses in retirement -- my dependence on other assets such as retirement accounts and savings could be diminished.  This means that upon my passing, while my Social Security benefits may disappear, the assets that I’ve been able to protect and maintain by relying upon Social Security instead will hopefully be left for my children, something that I’m sure they will appreciate.

Lower Benefits for Me, but Benefits Nonetheless
But taking my Social Security benefits early in an effort to utilize them ahead of other assets could mean that I end up with lower initial payout amounts compared to if I waited to an older age.  However, part of me feels that while waiting to take benefits could have me reaping higher payout amounts down the road, it’s kind of like gambling.  While it might pay off, what if I die at an early age?  I -- and I assume my children as well -- would rather have me get lower benefits than no benefits at all.

The Future of Social Security
My children are likely to pay the same amount of money into the Social Security system regardless of when I take it, so why should they care if I take it early?  In fact, they might prefer me to at least get something out of it if it’s still there by the time I retire, since they might not have the same opportunity.

If the future of the Social Security systems is as “up in the air” as it is right now at the time of my own retirement, it might be worth getting money what I can from it early on.  My ability to get even partial benefits from Social Security could alleviate the strain on other assets, which brings me to my next point. 

A Greater Inheritance for the Children
I didn’t have children not to help them and try to leave them some sort of legacy.  If I only wanted to help myself, why have children?

While nothing is guaranteed in life, especially when it comes to old age and inheritances, I think that by taking Social Security early, I might be able to leave me children more in assets by consuming money from a system that I’ve already paid into and that will return the favor (hopefully) until I die.  As long as I’m financially secure enough to make up any funding gaps between what my Social Security benefits provide and what my expenses consume, I might choose to take these benefits early in an effort to leave me children more in inheritance as long as they are financially responsible adults who I can trust to use the money wisely and to their or their family’s benefit.

Wednesday, August 21, 2013

I’ve Done Nothing to Further My Stock-based Retirement

An article on CNBC.com noted that “The average contribution rate in 401(k) plans, which grow tax-free until withdrawal, remained steady during the period, at 10.5 percent, according to Vanguard's 2013 How America Saves report.” 

For the past six years, I’ve put nothing into the IRA that I rolled over from my 401(k) when I left the hotel business.  However, just because I haven’t made monetary contributions to this fund, it doesn’t necessarily mean that I haven’t made a few moves that have allowed our retirement plan to continue to grow.

DRIPs
I like DRIPs -- or dividend reinvestment plans -- because such a plan has allowed me to continue to grow my retirement savings without putting an extra cent of my own money into the equation.  My DRIP is broadly diversified between large cap stocks, bonds, cash, and foreign and domestic holdings.  Its share value moves with the movements of the market and the fund pays regular monthly dividends that equate to about 6 percent of my fund total annually and that are reinvested into the fund as additional shares.  In this way, I continue to grow my retirement account share total without adding any more of my own money.

Diversifying retirement savings
Some people seem to think that the stock market is the only way to go when it comes to retirement, but there are other things that can be done to build a more secure retirement than just sinking money into stocks.  One such move for us has included remaining debt free.  According to creditloan.com, “…the average American’s interest payments on debt at $600,000 over the course of a lifetime.” 

Without dumping this amount of money into paying off debt, we not only don’t have to earn as much income, but hopefully we will be able to put more money toward our retirement savings.  Not only this, but real estate can be another move that can help spread out some of our retirement savings.  After downsizing from our single-family home after the housing market collapse, we were able to convert our equity to help us buy a smaller condo outright.  In this way, we hope to remain mortgage free until retirement, allowing us to pay less on debt and enter retirement without the burden of a mortgage payment.

Developing a retirement plan that works for us
Instead of just thinking about retirement as a stock-based retirement plan paired with a little money from Social Security too, we’re considering a plan that combines several retirement types.  First off, we’d like to draw some of our income from Social Security.  But more than that, we’re hoping to build in some of our income from part-time work, interest from savings, and dividend payouts from our DRIP plan.  In this way, we hope not to have to put so much money into a stock-based plan, preferring to break our retirement income into various streams.  For example, I’d be happy if we derived our retirement income something comparable to the following breakdown:

  • Social Security -- 40%
  • Part-time work -- 15%
  • DRIP payouts -- 30%
  • Interest from savings -- 15%
In this way we’re diversified among our various income streams, and we could rely upon the drawing down upon of these assets should we encounter unexpected expenses of some sort or come up short at times with our interest or DRIP payouts.  At the same time, we avoid putting all our eggs in one basket when it comes to stock-based investments.

Saturday, August 17, 2013

The 3 Numbers that can Alter My Retirement…or can They?


When it comes to retirement, there can be so many variables.  From health issues and life expectancy to cost of living, location, investments, and savings, there are any number of factors that can play heavily into deciding when to retire.  However, just about everyone considering retirement is bound at some point to consider Social Security (unless they’re on a particular pension plan or in a similar situation where they might not receive Social Security) and when the best time to take benefits is.

I know I’ve considered this aspect of retirement planning, and I’m still in my 30s.  And when I review my estimated benefits, there are three main numbers that stick out when it comes to Social Security…ages 62, 66, and 70.  It might seem that these retirement ages could heavily impact retirement, and depending upon one’s situation, it could.  However, there might not always be as big a financial difference between these numbers as some experts might have us believe.

Retiring at age 62
As I’m sure that many do, I prefer the thought of retiring at an earlier age.  While I enjoy my work, being able to do a bit less of it is certainly appealing.  Therefore, age 62 would be a great age for a full retirement.

There are two main issues to this.  First off, as someone in his mid-30s, I don’t expect this age to even be an option by the time I retire since there is already talk of pushing the retirement age higher.  The second hiccup to this aspect would be that I’ll be retiring after 2033, the date the Social Security Administration notes as the year in which the trust fund would only be able to pay about 75 percent of currently estimated old-age benefits.

According to a recent US News and World Report article, “For each $1 in benefits you'd get when claiming at age 66 (the so-called full retirement age for most people right now), you'd receive only 75 cents if you claimed at age 62…”.

Based upon that calculation (and praying that fixes are made to the system by 2033) and using an estimated benefit amount of $1,000 a month from age 62 to 80, at today’s numbers, I’d receive 216 payments (18 years x 12 monthly payments) x $750, which would total $162,000 in benefits were I to retire at age 62. 

Retiring at age 66
Age 66 might be the more standard retirement age right now when considering full retirement.  This is when full benefits start to kick in for current retirees without any early retirement penalties.

Using the estimated benefit amount of $1,000 a month from age 66 to 80, and the US News & World Report estimates, I’d receive 168 payment (14 years x 12 monthly payments) x $1,000, which would total $168,000 in benefits through age 80.

Retiring at age 70
Then there is retirement at age 70, an age that many of us probably feel is just a little too late.  But is it worth waiting to take Social Security benefits until this age to get the higher benefit amounts?  Well, if I was guaranteed to live longer it might; but otherwise, I would be delaying taking payments but still likely have the same life expectancy.

So even with higher benefit amounts, this might not make as big a difference in overall payouts as I might think.

Using the estimated benefit amount of $1,000 a month from age 70 to 80, and the US News & World Report estimates, I’d receive 120 payments (10 years x 12 monthly payments) x $1,320, which would equate to $158,400 in benefits by age 80.

Selecting the right age
So when looking at retirement age numbers when it comes to Social Security, while there might seem like there is a big difference between payment amounts, compared to a set life expectancy date, the overall numbers may not be as significant as some financial planners might lead us to believe.  While payments might be greater if we wait to take benefits, taking lower benefits amount over a longer timeframe could make up for much of those higher payment numbers.

While everyone’s situation can be different when it comes to Social Security, it’s just something to think about as we try to factor this particular benefit into our retirement plans, and not a viewpoint that we always get from the financial experts.

 
Disclaimer:
The author is not a licensed financial professional.  The information provided in this article is for informational purposes only and does not constitute advice of any kind.  Calculations have not been verified by a professional.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.

Sunday, August 11, 2013

Haven’t Started Saving for a Kid’s College? Don’t Freak out Just Yet!


Not everyone has the time or the ability to fully fund a child’s college education before they start their schooling.  And even if they do have a plan for helping their kid or kids with college, it doesn’t have to be the old standby.  Such a plan doesn’t necessarily have to revolve around starting to save when the child is born or be all about funding a huge 529 plan.  In fact, there might be a simpler option, and one that could work better for certain situations.  It involves reviewing your current debt obligations, payments, timeframes, and amounts.

Consider the Timeframe
While you might not have a full eighteen years before your child heads off to college -- or even anything close to it -- this doesn’t mean that all is lost when it comes to your college savings.  Therefore, consider the timeframe you’re looking at.  Will it be five years or less?  Will it be longer than that, and if so how long? 
What will be happening in your life -- both personal and financial -- when it comes time for your child to head a way to school?  Considering not only the timeframe for your child leaving, but when it comes to many of the major events and aspects within your own life as well -- job/career, retirement planning, living situation, personal life -- can make things a little clearer and maybe opened up some college financing options you have yet to consider.

Where are Your Payments Going?
When considering your timeframe for college cost planning, you may want to bear in mind some of those more major life factors for which you’re paying.  There could be car payments, a home mortgage, student loan debt of your own, and other big ticket costs.  Note those payments, their amounts, and the frequency of which those payments are made so that you can consider the next step.

When Will Those Payments End?
Determining when the payments of big ticket costs in your life will end could provide some, if not all of the answer as to how to help your child pay for his or her education.  Let’s consider the following scenario: You have five years left until your child goes away to school.  He has worked summers and has saved up enough to contribute to the costs but not pay for them fully, and you don’t want him going into student loan debt to get a college education.

You on the other hand, have saved little for his education, and have a car payment of $450 a month and a mortgage of $950 a month.  The car will be paid off in three years.  The mortgage will be paid off in another seven.  If you could put the $400 going toward the car payment into a savings account for the two years between when it’s paid off and when your child goes off to school, you’d have almost $10,000 by the time he heads off to school.  Continue putting this payment amount toward your child’s education throughout the four years his education could take, and that’s another nearly $20,000.  And if you have your mortgage paid off in that seven year timeframe, which would be around the time your child would be entering his third year of schooling, you could then put that amount toward the costs of college as well, which would be another $11,400 a year.

Therefore, like I said, not everything is necessarily lost when it comes to helping a child through college just because you didn’t start saving when he or she was born.  Looking at alternative forms of funding and ways to transition certain costs as they end toward paying for college could provide the answer you’ve been looking for to help your child obtain an education.

Friday, August 2, 2013

Is Data the “Oil” of the 21st Century?

Tracking and analyzing data is supposedly becoming the new hot thing these days.  In fact, while watching the IPO of Tableau Software the other day, I heard “data” referred to as the “oil of the 21st century”.

Whether this will indeed be the case or not, is yet to be proven.  However, if it is, I could be in good shape when it comes to our family’s personal finances.  You see, I’ve been tracking and growing a slew of data related to our family’s personal finances for years.  And through this data collecting, I long ago came to the conclusion that it can be quite valuable.  Here is how and where it has helped us in our pursuit of responsible money management.

Inflation data
I’ve been tracking my expenses for almost two decades now and it has helped me to determine all kinds of important trends when it comes to how and where I spend my money.  One key area in which I utilize this data involves inflation.

For example, I use the store receipts that I save from our weekly grocery store outings to determine short-term inflation trends for things like the meat or dairy products we buy.  This way I can make more informed decisions when it comes to things like how to handle soaring beef prices or what sorts of cheeses to buy.  I can also use expense tracking to help me gauge long-term inflation when it comes to health and auto insurance, gas prices or just overall personal inflation in general. 

My tracking doesn’t involve anything fancy, just noting each expense as it occurs on a spreadsheet, what the expense was, and then running monthly and annual expense totals.  From this data I’ve been able to gauge our long-term personal inflation rate over the years at about 3 percent.  More recently (the past year), it’s been closer to 5 percent, much higher than the recent government reported inflation statistics of closer to 2 percent.

Asset decisions
Knowing where my money is and what it is doing -- or not doing -- for me, is data that is critical to helping me make informed decisions regarding my assets and asset allocation.  By tracking my asset performance -- things like how my retirement fund is performing or what my savings bonds are earning -- I can make better decisions as to whether to let that money stay put or move it somewhere else.

For example, with government reported inflation low, I recently cashed in some of my old savings bonds from when I was a kid (I-series bond rates are partially based upon inflation) to put to work in other areas.  I’ve also been able to utilize my tracking data to make decisions regarding things like putting more money toward paying off a higher interest mortgage rather than sticking it in a savings account earning hardly anything.

Cost cutting and budget reallocation
I’ve used spreadsheets to track data related to all kinds of functions and aspects of our daily life.  From vacation, regular expenses, our budget, and utilities, to baby costs, our home-related costs, income streams, relocating, and doing a vehicle gas cost analysis, such information has paid off in numerous ways.

By using our utility data tracking in our previous home, we managed to cut nearly 30 percent from our overall utility costs, taking them from over $300 a month down to about $200.  We used our vehicle gas-cost analysis to decide whether to keep driving our old vehicle or buy a newer, more fuel-efficient one.  We used our baby budget and expense tracker to decide where and how to spend on a second baby.  I’ve used my income tracking to determine whether certain income streams are worthwhile.

So when it comes to data, not only do I have a ton of it, but I find it extremely helpful in finding ways to cut our costs and keep them that way.  Data can be valuable, but it’s only valuable if you know how to use it and use it wisely.