Mortgage rates fluctuate. Just because they are low one year doesn’t mean the same pattern will reoccur in the coming years. If you have purchased a home within the last 5-7 years, it is assumed that you have built up some equity. For this reason, you might be considering refinancing. While this is a step many take and it does help to lower your payments and additionally save you money on interest, there are some pitfalls. Below are three refinancing mistakes you could potentially make which will end up costing you more in the long run.
Mistake #1: Skipping out on Closing Costs
Specifically defined, when you decide to refinance you are basically taking out a new loan to replace your other loan. Because this loan is new, you will be charged a closing cost in order to finalize the paperwork. Typically, this cost is approximately 2-5% of the loan’s value. Therefore, if your loan is valued at $200,000, the closing fee will be between $4,000- $10,000. Although there is an out for those who don’t want to pay this bulk right at the front, there is a catch. To make up for what they are losing here, lenders will often slightly increase the interest rate. In the end, you may end up paying more money over an extended amount of time.
For example, if you take out a loan for $200,000 and are given the option of a 4% interest rate plus a $6,000 closing fee or an interest rate of 4.5% with no charge, the latter may seem the better choice. After all, it is only an increase of .5%. However, that small percentage over a 30 year loan could end up costing you thousands of dollars in interest. Before deciding the best route, calculate the numbers to determine which outlet allows you to save money.
Mistake #2: Lengthening the Loan Term
Many people decide to refinance in order lower their payments. Along with this, many will decide to stretch out their loan in order to decrease the money they must pay on a monthly basis. This may seem like a good idea at the time; however, it is important to remember that the longer your loan lasts, the more you are going to pay in interest.
Let’s say you take out a loan for $200,000 with an interest rate of 4.5%, your payments would be around $1,000. Keeping with this payment route for five years, you will have paid more than $43,000 in interest and paid approximately $20,000 off the principal amount. After the loan is completely paid off, you will have paid $164,000 in interest.
If, however, you decided to refinance the remaining $182,000 balance left on your loan for another 30 years, your interest could drop to 4% and your payments would only be around $245 a month. Although your monthly payments and interest rate have been lowered, the amount of interest you will pay has essentially increased due the longer expansion of time it will take you to pay off the loan. As a result, in the end the refinancing will save you less than $2,000. Therefore, in most cases, lengthening your loan is not worth the extra money you will end up paying in interest.
Mistake #3: Refinancing With Less Than 20% Equity
There is a big possibility that when you refinance, it will increase your mortgage rate if you have not built up a sufficient home equity. As a rule, it is not advisable to refinance if you have less than 20% equity value in your home. This is due to the fact that lenders will require you to pay a private mortgage insurance premium. Such a payment is for the lender’s protection against the possibility of default.
With a conventional mortgage, you will have to pay a private mortgage insurance premium valued around 0.3-1.5% of your loan. Such premiums are directly attached to your payments. Therefore, even if you are able to obtain a low interest rate, having that additional money added into the total will overshadow any money you could potentially be saving.
Refinancing is something you should never jump into without first doing your research, knowing all the numbers and calculating everything to discover the best route. While it may be tempting to focus simply on the improved interest rate, never forget to look at the entire picture and know all the additional elements of refinance which may result in more money coming out of your pocket.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Why the Brexit Should Not Rattle Investors
Wall Street has rebounded so many times, so quickly.
Provided by Stephen H. Wagner CFP®
Uncertainty is the hobgoblin of financial markets. Right now, investors are contending with it daily as the European Union contends with the United Kingdom’s apparent exit.
Globally, many institutional investors have responded to this uncertainty by selling. Should American retirement savers follow their lead?
They may just want to wait out the turbulence.
The Brexit vote was a disruption for Wall Street, not a new normal. Yes, it could mean a “new normal” for the European Union – but the European Union is not Wall Street. Stateside, investors respond to domestic economic and geopolitical indicators as much as foreign ones, perhaps more.
As Wells Fargo Investment Institute head global market strategist Paul Christopher remarked to FOX Business on June 24, “We’re getting used to the shock of the vote and [the] surprise. But does it change anything fundamentally about the market? No.”1
Central banks may respond to make the Brexit more bearable. They are certainly interested in restoring confidence and equilibrium in financial markets.
Post-Brexit, there is no compelling reason for the Federal Reserve to raise interest rates this summer, or during the rest of 2017. You may see the European Central Bank take rates further into negative territory and further expand its asset-purchase program. The Bank of England could respond to the Brexit challenge with quantitative easing of its own, and interest rate cuts.
“There is no sense of a financial crisis developing,” U.S. Treasury Secretary Jack Lew told CNBC on June 27. Lew called the global market reaction “orderly,” albeit pronounced.2
The market may rebound more quickly than many investors assume. Ben Carlson, director of Institutional Asset Management at Ritholtz Wealth Management, reminded market participants of that fact on June 24. He put up a chart on Twitter from S&P Capital IQ showing the time it took the S&P 500 to recover from a few key market shocks. (Sam Stovall, U.S. equity strategist at S&P Global Market Intelligence, shared the same chart with MarketWatch three days later.)3,4
The statistics are encouraging. After 9/11, the market took just 19 days to recover from its correction (an 11.6% loss). The comeback from the “flash crash” of 2010 took only four days.
Even the four prolonged market recoveries noted on the chart all took less than ten months: the S&P gained back all of its losses within 257 days of the attack on Pearl Harbor, within 143 days of Richard Nixon’s resignation, within 223 days of the 1987 Black Monday crash, and within 285 days after Lehman Brothers announced its bankruptcy. The median recovery time for the 14 market shocks shown on the chart? Fourteen days.3,5
The S&P sank 3.5% on June 24 following the news of the Brexit vote – but that still left it 11% higher than it had been in February.5,*
The Brexit is a political event first, a financial event second. Political issues, not economic ones, largely drove the Leave campaign to its triumph. As Credit Suisse analysts Ric Deverell and Neville Hill wrote in a note to clients this week, “This is not a shock on the scale of Lehman Brothers’ bankruptcy in 2008 or, if it had happened, a disruptive Greek exit from the euro, in our view. Those types of events deliver an immediate devastating shock to the global financial architecture that, in turn, have a powerfully negative impact on economic activity.” Aside from the political drama of the U.K. exiting the E.U., in their opinion “nothing else has changed.”4
The Brexit certainly came as a shock, but equilibrium should return. Back in 1963, the admired financial analyst Benjamin Graham made a statement that still applies in 2016: “In my nearly fifty years of experience in Wall Street, I’ve found that I know less and less about what the stock market is going to do, but I know more and more about what investors ought to do.”6
Graham was making the point that investors ought to stick to their plans through periods of volatility, even episodes of extreme market turbulence. These disruptions do become history, and buying opportunities may emerge. Wall Street has seen so few corrections of late that we have almost forgotten how eventful a place it can be. The Brexit is an event, one of many such news items that may unnerve Wall Street during your lifetime. Eventually, equilibrium should be restored, and, as the historical examples above illustrate, that can often happen quickly.
*The S&P 500 is an unmanaged index, and cannot be invested into directly. This past performance is no guarantee of future results.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 – foxbusiness.com/markets/2016/06/24/after-brexit-carnage-should-rejigger-your-investment-portfolio.html [6/24/16]
2 – time.com/4383915/brexit-treasury-secretary-jack-lew-financial-crisis/ [6/26/16]
3 – tinyurl.com/jx2brl3 [6/24/16]
4 – marketwatch.com/story/brexit-vote-more-a-political-than-a-financial-one-and-thats-important-2016-06-27 [6/27/16]
5 – equities.com/news/what-does-brexit-mean-for-individual-investors [6/27/16]
6 – blogs.wsj.com/moneybeat/2016/06/24/the-more-it-hurts-the-more-you-make-investing-after-brexit/ [6/24/16]
Full retirement is not as common as it used to be. Many adults now reaching retirement age are choosing to do what is termed worktirement. Put simply, instead of leaving the work force entirely, many people over 60 are choosing to continue to work, at least part time. Although this is sadly mandatory for some seniors as their Social Security and IRA or 401(k) do not provide sufficient income, for others, it is simply a great way to stay active while also providing an additional income outlet.
Because of the increase in those considering worktirement, SmartAsset recently conducted research on nearly 500 of the largest cities in the US to discover the best locations for worktirement. Within the bounds of this research, ten separate metrics were used including data from their “Best Places to Retire” study and four metrics used to gauge the job market seniors face in each city. Information concerning unemployment rates among senior seeking a job, the average annual housing costs, and the number of doctor’s offices per 1,000 residents were also examined for each city. Each city was then assigned a score from 0-100 based upon its performance across the ten metrics.
As a result, several key findings were discovered:
- South Dakota rates very high. Two of its largest cities can be found within the top ten list. This is due to the states booming job market and senior-friendly tax environment.
- America’s interior dominated the high rankings on this list. Three Texas cities fell in the top ten category (and six fell in the top 15). Additionally, like South Dakota, two Tennessee cities also made the top 10 list.
- Low taxes were a key factor in the gravitation of retirees. Many of the top cities were income-tax-free states. This could partially be due to the fact that more retirees results in the development of more infrastructure and amenities to support retirees.
- California is not the greatest place for retirees. Although this state is home to approximately 12% of the US population, high housing costs and taxes pushed them lower on the list.
Below are the top 10 cities for those considering worktirement:
- Rapid City, South Dakota
Because of its wonderful location on the eastern slopes of the Black Hills, merely miles away from Mount Rushmore, Rapid City is a draw for many tourist. However, retirees are also drawn to this area due to employment. For those wanting to continue working after retirement, Rapid City provides a variety of opportunities as the employment level is just 0.9%, the fourth lowest of the 494 cities in the study. Additionally, the effective tax rate for a retiree annually earning $42,000 is only 6.7%. There is no state income tax and sales tax of only 6%. Because of this, Rapid City has the fifth lowest effective tax rate of any major US city.
- Tyler, Texas
The Rose Capitol of the World presents appealing statistics for those working after retirement. Not only is Tyler home to the largest rose garden in America but it also has a median annual housing cost of $10,000; $3,500 less than the average home among other cities. Additionally, the unemployment rate among seniors is only 3.5%.
- Johnson City, Tennessee
Because the median annual housing rate in only $8,184, Johnson City is a great place for retirement as housing is often the biggest expense seniors face after retirement. The additional bonus of a low unemployment rate of 3.8% among seniors is another benefit to living in this beautiful city.
- Victoria, Texas
The tropical climate of this city located near the Gulf of Mexico is a wonderful retirement location for those who enjoy the sun and mild weather. However, the weather is not the only perk of Victoria. With an effective tax rate of 7.6% (includes sales and property tax) on a senior earning $42,000 annually, Victoria has the 46th lowest rate in the SmartAsset research.
- Sioux Falls, South Dakota
Returning again to South Dakota, Sioux Falls provides its senior citizens with low income taxes and a low unemployment rate of 2.2%. This ranks the city as having the 20th lowest rate among the cities researched.
- Billings, Montana
Seniors living in this city benefit greatly from one of the strongest regional economics in the country. With a 2.3% unemployment rate among senior citizens, Billings rate is the 22nd lowest in the country. Additionally, the city is known for numerous recreational opportunities. With 1.25 recreational facilities or businesses for every 1,000 residents, the city ranks in the 22nd position for having the most facilities for seniors. It is important to note however, that Montana is among the few states to tax Social Security income. Therefore, the total effective tax rate is slightly high at 12.6%
- Knoxville, Tennessee
Located near the beautiful Smokey Mountains, Knoxville not only provides seniors with a beautiful landscape but also great features for worktirement. Scoring in the top 200 in all the metrics used in this research, this city proves to have positive variables all across the scale.
- Abilene, Texas
Returning once again to Texas, we find another city which is great for those who want to continue to work after retirement. With an unemployment rate of 1.6% among senior citizens, the 7th lowest in the country, it is safe to say that almost every senior who wants to work will be able to find a job in this town.
- Roanoke, Virginia
This city is the only city east of the Appalachian to rank in the top ten. Roanoke not only provides a beautiful place to live with countless attractions all around, but also has an annual housing rate of $9,372. This is very low considering the house rate in other eastern cities (for example Washington D.C at $17,508). The unemployment rate is also below the national average at 3.9%; therefore, it will not be too difficult for senior citizens to find employment.
- Scottsdale, Arizona
Last but certainly not least is the most Western city on the top 10 list. Providing a warm climate, Scottsdale is a wonderful location for senior citizens who enjoy warm weather and a laid back culture. Out of the 5 metrics used to gauge the quality of life in each city, Scottsdale ranked in the top 50 all across the scales and ranked 11th for having a high population of people over 65 (approximately 20%).
No matter where in the country you desire to live, there are many places which are ideal for people desiring to continue to work after retirement. Not only does such a move help to provide additional financial support, but it also helps seniors stay involved with their community.
Becoming an investor while you are still young is an advisable step towards preparing for the future and retirement. But investing can be tricky and many young millennials are finding it difficult to begin putting money away. Elements such as loans and little economic growth within the workforce create financial strain for young adults which could hinder them in thinking about their future retirement. These elements coupled with the following three common investment mistakes are factors which could greatly hinder young peoples’ financial future.
1. Not Having a Good Understanding of the Market
Before you consider investing in anything, it is important to know the basic facts. The saying “Knowledge is Power” could not be more true when it comes to investments. Doing your research now could help you avoid mistakes which may not show up until later. In order to know which investment is right for you and your future desires, it is vital to understand the different aspects of the market such as stocks and bonds. Each of these are designed differently and should be chosen carefully depending on the goals you have for your life.
Additionally, it is important young people do research into things such as the asset’s performances and the fees which go along with it. It is important to look at the fee percentage not only based upon what it will cost you now, but what it could potentially cost when your investment is larger. Neglecting to do research now could result in you paying higher fees once your investments grow.
The Great Recession resulted in significant loss for many investors. But those who lost their investments were not the only ones impacted; millennials were and are still affected by the recession. Because young adults saw their parents lose their investments when the economy plummeted, many are now afraid to put much value on investments. In their minds, it seems like a great gamble at which you could easily lose. According to a 2014 report only 5% of millennials are in favor of an aggressive approach in the realm of investing. It was discovered that over a third of young adults prefer to take a conservative or somewhat conservative strategy. While this may seem like a safe road to take, it does result in their chances of high earnings being diminished greatly.
3. Deciding to Forgo Investing
The media has often labeled millennials as “super savers.” However, a recent survey from Wells Fargo has proved just the opposite. It was discovered that 45% of young adults have yet to begin investing for the future and have delayed making plans for their retirement. This is largely due to the fact that many are attempting to pay off student loans before beginning the investment process. Although it is a good idea to pay off loans quickly, the delay in investing could potentially hurt millennials in the future.
Take it One Step at a Time
Many believe that in order to invest successfully, one must have the means by which to sink thousands of dollars into stocks and bonds at one time. Nevertheless, small investing over a period of time can result in great success. By investing $25 per pay period into your researched investment, you are taking the perfect step towards long-term financial security. Additionally, you can also make it your goal to increase your investment contribution by a particular percentage on a monthly, quarterly, or yearly basis. Simple steps like this may not seem like much in the beginning; however, steady investment over time may result in benefits that will be yours in the future.
Investing involves risk including loss of principal. No strategy assures success or protects against loss. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Even though the year is already in full swing, 2016 may mark the year you begin retirement. No matter when your retirement begins, it is never too early to start preparing yourself for your new lifestyle. In other words, putting your financial elements in order so you can transition effortlessly out of the workforce. However, making such a transition may sound overwhelming; where do you even start? In order to help you make a smoother transition, below is a checklist to make sure you cover all your basis before retiring in 2016.
1. Check Your Post-Retirement Budget
A difficult element many people experience when first beginning retirement is the change in their income. Once the flow of money starts slowing down, it can create gaps in your budget. In order to avoid such a major shock when your finances change, it is important to plan. Have an idea of what expenses you will have and whether you have enough money set aside in order to maintain your intended lifestyle. Additionally, if you are several months away from retirement, it is advisable to take your budget through a test run in order to experience the change and perhaps discover areas which will need readjusting. A trial run will help you to see issues before placing yourself square in the middle of retirement.
2. Run the Numbers on Social Security
The amount of benefits you will receive depends in part on how old you are when you apply for Social Security. If for example you decide to begin taking Social Security at age 62, your payments on a monthly basis will be small. However, if you decide to wait until 70, your benefits will increase. In order to have a better understanding of how much you will receive through Social Security, it is important to calculate the figures and have a clear understanding of how much you will receive before you retire.
3. Plan for Health Insurance
When thinking about health insurance, there are several things to consider. Three-months prior to turning 65, you are eligible to file for Medicare. But if you are planning to retire before this age, you need to make sure you have enough money to cover the gap. There are a couple of outlets which could potentially provide you with a healthcare outlet before 65. First, if you were covered by your employer’s insurance, you have the option of getting COBRA coverage. Second, you could purchase a plan from the federal healthcare marketplace.
Additionally, if you have a health savings account, you need to decide how you are going to handle that money. If you are pleased with the plan you have presently, you can leave it with your employer until the need for that money arises. You could also choose to move that money into another HSA account. Once you turn 65, you can withdraw the money for anything without paying a penalty. It is important to know that you will pay regular income tax on this money if it is not used for medical expenses.
4. Look Ahead to Next Year’s Taxes
While 2016 is not even halfway over and you have already been through the task of paying taxes for 2015, it is never too early to start thinking about how tax time will change once your retirement begins. An important element you need to plan is how you will withdraw from your investment and retirement accounts.
As a rule, it is usually better to begin withdrawing from accounts which are taxable. Money you receive from investments will be subject to taxation at the capital gains rate. Therefore, if you have had your investment for longer than a period of one year, the tax rate will fall within the range of 0-20%. The actual percentage will depend on your annual income.
The next outlet from which to withdraw is your tax-deferred accounts. Examples of such accounts include your 401(k) and your traditional IRA. When you withdraw money from these outlets, the money will be taxed; however, it will be at your regular rate. If you have accounts such as a Roth IRA which is not taxed by the federal government, it is a good idea to pull money from this account last. By withdrawing in this order, you are using your taxable money first then slowly working towards money which is not; therefore, allowing for less taxes to be paid as your retirement proceeds.
5. Don’t Forget About RMDs
One important thing you need to take into consideration concerns your tax-deferred accounts. If you decided to wait a little longer before retiring it is important for you to know that once you turn 70 ½ you must take required minimum distributions from any of your tax-deferred accounts. This includes any employer-sponsored retirement plans, traditional IRAs and SIMPLE IRAs if you are self-employed.
If however, you neglect to take a minimum distribution at the appropriate time, a 50% tax penalty will be applied to you. This is a large sum and could eat into your retirement funds tremendously. Therefore, if you are approaching this age, it is important to handle your money in such accounts as to avoid a large penalty.
Although managing your finances during retirement may seem like a daunting task, taking careful steps such as the ones listed above will help relieve some of the stress and allow you to enjoy your retirement even better.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Please consult your financial advisor for additional information concerning your specific situation.
As you are reaching the age when retirement is not far away, you may begin to feel a little stressed worrying if you have enough of a nest egg to retire without many issues. If up until now you have been diligent in putting money aside for retirement, you probably feel as if you are in good shape. However, if retirement saving has not been a priority, now that you are in your 50s there is no time to waste. In order to help you become more prepared for your retirement, check out the following steps you should begin taking right now.
1. Play Catch-up
If you are in the age bracket of 50 or older, you actually receive a bonus when it comes to saving for retirement. If you have reached the maximum annual contribution level on your IRA or 401(k), catch-up contributions will assist you in saving even more on an annual basis. Although the rules of catch-up contributions are subject to change, as of 2015, you are allowed to save an additional $6,000 in your employer’s plan and another $1,000 in your IRA. Therefore, taking advantage of catch-up contribution allowances while you are in your 50s, will allow you to save approximately $30,500 towards your future retirement.
This is a hypothetical example and is not representative of any specific situation. Your results will vary.
2. Rethink Your Portfolio
Although it is often advisable to invest some of your money in riskier investments, once you near retirement age, it might be a good idea to rethink your portfolio and also rebalance your investments. This is especially true if you have not saved much for retirement thus far. In order to begin expanding your retirement funds, it is advisable to shuffle your investments around and consider assets (such as bonds) which provide a little more security for your money.
3. Crunch the Numbers on Social Security
Social Security is often used as a supplement to a person’s savings. However, in order to have an idea of how Social Security will play into your financial wellbeing, it is important to calculate numbers in order to fully know how much you will actually receive. For example, if it is part of your plan to start drawing on Social Security at the age 62, the youngest age at which you can draw, it is important to know that the benefits you receive will be comparatively smaller. However, if you decide to wait until full retirement age before you begin withdrawing, you will receive 100% of your benefits. Additionally, if you are able to wait until sometime between the full retirement age and 70, you will also receive a bonus. Due to the differences in payouts depending on your age, it is important to carefully check the numbers before deciding a time at which to starting drawing Social Security.
4. Knock Out the Rest of Your Debt:
If you are still carrying around debts such as student loans or credit card debt, it might be a good idea to go ahead and eliminate those before you begin retirement. Getting rid of your debt will help you save additional money when you retire and eliminate many of the expenses you have been working into your budget for so many years. However, it is important to note that although getting rid of such debt is important, it should never hinder you from putting money aside for your retirement. While paying your debt off is good, your retirement fund is just as equally important.
5. Consider Long-Term Care Insurance
Long-term care is specifically designed to pay for some or all of your medical expenses should you need care such as nursing home care or home health aid. Medicaid can also help to pay for these expenses should they arise; however, you may end up spending most of your assets in order to qualify. If you have built up a solid retirement fund, then a long-term care policy will help you to get the most out of your money and ensure all the hard work you put into building a nest egg doesn’t go to waste. A good thing to keep in mind when considering long-term care is that the younger you are when you apply, the lower your payments will be.
6. Practice Living on a Post-Retirement Budget
A huge mistake people in their 50s often make concerning their retirement is not setting realistic goals for what they will need. After all, it can be quite a shock once you move away from a steady salary and start relying fully on your savings and Social Security benefits.
In order to assure this difference in income does not cause great difficulty, it is advisable to take specific steps before entering retirement. First, it is important to calculate your intended retirement expenses then plan a budget which helps you to pay your monthly expenses. Second, it is a good idea to take your budget through a trial run. Getting an idea of how your budget will actually work when you retire is a good way to catch issues before it is too late. If you see the monthly budget you have allotted will not be sufficient, you may need to look at places where expenses can be cut down or even consider ways to expand your income-earning years such as through worktirement.
Although you may be several years away from retiring, it is never too early to begin making preparations. Early planning and research will help to make the transition into retirement a little smoother. Additionally, in the realm of finances, having a specific plan for your money will help you to avoid many of the pitfalls which occur with who neglect to take the necessary precautions to assure their retirement goes as smoothly as possible.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. You should discuss your specific situation with the appropriate professional.