Coffee to Car Payments

Investment terms you should know.

Bull Market is a random market movement causing an investor to mistake himself for a financial genius.

Bear Market is a 6 to 18 month period when the kids get no allowance, the wife gets no jewelry and the husband gets no sex.

A long term investment is a short term investment that failed.

Economics is an extremely useful method of employment for economists.

It is important to have an idea what portion of your nest egg you are going to need to allocate to safe money instruments that will allow you to live off of your net worth at some point without compromising your desired lifestyle.

All I want for Christmas

"What do you want for Christmas? "

"I want a stick and some string."

OK.  Maybe that's a little drastic but, when I was little, I usually got a couple of toys for Christmas and a few clothes.  I was happy and Mom and Dad probably spent $30.  Now it's a race between toys and technology to see who can make you go broke the fastest.  My iPod has as much memory as my old laptop.  I think "Tickle Me" Elmo and Steve Jobs met up a few years back and started it.

Somehow, you still have to save for the future as in an education fund.  It can be challenging to juggle short-term wants and long-term necesseties.  How much do you need to save?  What if they qualify for a scholarship or financial aid?  Can they use the money for something else like a down payment on their first home?  What if they want to just let the money accumulate for their retirement?

When structured properly, an over-funded cash value life insurance policy can provide the flexibility for your children to use the money when they need it the most but, the key advantage is that the cash value is excluded from the aid formula when they apply for financial aid.

Black Friday

Last Friday, the day after Thanksgiving, I got up around 8 am.  Not so for a lot of people.  Stores have been opening early on the biggest shopping day of the year for as long as I can remember but, this year takes the cake.  The Jordan Creek Mall in West Des Moines opened their doors at 12:01 am.  I was watching the news this morning and thousands of people actually showed up.  There were even waiting lines to even get into some of the stores.  For most retailers, "Black Friday" is the most important day of the year.  I was reading in the newspaper on Thanksgiving Day that they were expecting the blackest Friday in years.  Black in this case actually carries a good connotation.  Most businesses operate "in the red" all year until the holiday shopping season.  Black Friday is the day that they begin to be profitable for the year.  This demonstrates just how important it is to a business to have the cash flow to survive.

For the small business owner, an offset mortgage on their home may provide them with additional options to smooth out the highs and lows in the income from their business.  In the good months, they can park large amounts of cash against their mortgage balance that will take the form of equity to sustain them through the leaner months.   

I still like to do my shopping around Dec 20th.  It makes my gifts more spontaneous because I don't have time to overthink things.

Buy term and invest the rest in what?

  It is often challenging when you are younger to decide the best course of action to get started investing in retirement.  You find yourself being told something different by everyone you talk to.  One popular suggestion is to buy term and invest the rest.  This could be a more cost effective method than the cash value life insurance I mentioned in my last post but, then the question becomes "Invest in what?".

I did a comparison between two term policies with the same insurance companies.  I did one with return of premium and one without.   The difference is, as you may have guessed, if you don't die during the term with one policy you get all of your money back.  With the other policy, you don't.  I used a 30-year-old male, non-smoker, in excellent health with a $250,000 death benefit and a 30-year term.  The premium for the first policy was $28.53 per month while the second was $21.66.  The difference was $6.87 per month.  So again, the question is "Invest in what?".

Anyway, just buying the first policy and getting your money back at the end was equivalent to buying the cheaper policy and faithfully invest the difference of $6.87 every month for 30 years and getting an 8.02% return year in and year out.  While that may be achievable and realistic, the odds are that you would need a much greater return than that to cover commissions and transaction fees.

Your ability to build your nest egg will likely increase over time but, a policy like this might be the first block in a solid foundation for your overall plan.  It would provide protection for your family while you were working and all your money back at the end.

Happy Thanksgiving!!!

Hope this makes you smile.

A Roth IRA alternative

  A popular planning dilemma is that of choosing between a traditional or Roth IRA.    There is no one-size-fits-all approach to investing but, proper structuring  and over-funding of a whole or universal life policy can serve a dual purpose.  It can enable your family to sustain their standard of living if something happened to you while you are still working.  But these policies also accumulate cash value that can be turned into a tax-free income in retirement through systematic policy loans.  Again, when structured properly, they would receive the same tax treatment as a Roth IRA with some added benefits.

• There are no income limits that prohibit you from contributing  if you make too much money.
• There are no contribution limits as there are with a Roth IRA.
• You maintain the death benefit for as long as your family needs it.
• You can still participate and even max out your contributions to a traditional IRA to receive immediate tax savings.

Back to the question of which to choose.  Everyone says to go with a traditional IRA if you think you'll likely be in a lower tax bracket when you retire.  That is good advice if your investments earn a mediocre return but, what if they do really well?  The money that you eventually withraw will be 100% taxable and could result in you being taxed on a portion of your Social Security income as well.  Think about that for a second.  Look at your most recent paystub.  The lion's share of the FICA tax that you see listed is supposed to fund your Social Security.  Yet, if you do too well investing on your own, they can tax that income again.  Personally, I would prefer a Roth IRA or alternative to this anyday.

Be sure to consult somewhat who understands how to structure these policies properly if that is what you decide to do.

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My Uncle Kenny

There is no purpose driven blogging here.  I was in a meeting all day yesterday and had my cell phone turned off.  I didn't even check my messages until the end of the day.  I saw that my Grandma had called twice around the noon hour.  I knew something was wrong and, I felt bad because I was just calling back 4 hours later.  She told me that my Uncle Kenny had died.

Uncle Kenny was 61 years old.  He was brain injured as a child; however, he had certain abilities that you and I will spend a lifetime trying to acquire.  The parts of his brain that were injured affected his ability to feel pain.  Grandma told me he once walked around for two weeks with a shoulder out of joint and never said a word.  Apparently he was also unable to inflict pain.  He lost his ability to say a bad word about anyone.  Seriously, I never heard him say a bad word about or to anyone and believe me he could talk.  Also, it didn't matter if he was your uncle or if he was meeting you for the first time.  You were greeted the same way.  His right hand shook yours and his left patted you on the back.  He shook your hand and patted your back a little longer that most people.  He never said so but, it was like he wanted to make sure you were okay before he let go.  He also liked to hug. 

Anyway, he got to die just the way he lived.  Yesterday he was raking leaves at the church and then he died during the night.  He felt no pain; however, to anyone who knew him, he finally inflicted a little.

Retirement Income and American Pride

I found this very interesting. 

Kip Esquire describes himself as "a lawyer who doesn't practice, an investment banker who does no deals, an academic who doesn't teach, and a policy wonk who belongs to no think tank. He's 40 and lives in NYC. " and had this to say about voluntary partial privatization of Social Security:

Social Security and "What Americans Want"

All any American wants is a program that guarantees a basic income in retirement and for most of us it needs to be something we contributed to (FICA tax) or it would just be called "welfare".   Fortunately there are other ways to guarantee not only a basic income but a lifestyle we can actually enjoy in retirement.  Most of us are just as concerned about the return of our money as the return on our money.  Yeah, it's a Will Rogers quote but it's true.

The Voice of Experience

A few weeks back I was sitting at lunch at Noah's Ark talking with a realtor about how we may be able to work together.  We talked about how the subprime mess was really making it hard to work with first-time homebuyers.  These people drive the real estate market more than anyone else.  The Home Ownership Acclerator is not the answer since you need at least 20% down to qualify.  It is a better fit for those who have accrued equity in a home and are putting that money down on their second or third home.  We decided after an enjoyable two-hour conversation that it probably comes down to education.  There are responsible renters out there who could probably buy a home very easily but are waiting to make sure that they don't bite off more than they can chew.  They just need a little help with the process.  Meanwhile, people who can't come up with first and last months rent are able to buy a home with no money down. 

So I went back to my office and mulled it over that afternoon and the next morning.  I thought I might have an idea.  So I got out my calculator just in case.   I compared the home you could buy on a 15-year note to one you could buy on a 30-year note.  I compared your equity position in five years.  I factored in modest appreciation.  Last, I even figured in real estate commissions to sell the property in five years and move up to a bigger, nicer home.  The bottom line was that you would have more money in your pocket to put down on your next home if you buy the home you can afford on a 15-year note.

How much home can you afford?

Just last night I was celebrating the end of another productive day.  A quiet gentleman came in and stood next to me and ordered a draft.  He said nothing except that the TV was a little loud.  He stood there for what had to be 20 minutes and I just got this feeling that there was a lot of wisdom there that I would like to hear.  Finally, he turned to me and I just knew he was going to say something.  "How many ounces is this?" he asked.  "9" I replied and then we both went back to minding our own business.  Then he ordered what would be his last draft for the evening.  We began to talk a little, moving from subject to subject.  Finally, we got around to the mortgage market and he began to liven up a little.  He and I found we shared some common ground on the issue.  He said "When I bought my first home, you had to have 20% down and you couldn't borrow more than 2.5 times your annual income."   " When did you buy your first home?" I asked.  "1955."   Now I know that if I refused to do business with anyone who didn't have 20% for a down payment, I might be passing on some good borrowers in the process but, I liked the 2.5 times your income part.

"Liar Loans" are part of the problem.  Originally, stated-income programs were designed for people who possibly have taken full advantage of tax deductions or shelters and are not able to prove their income.  In short, their tax returns do not accurately reflect their purchasing power.  These programs were not designed for people to lie about their income just so they can get the house they want.

This morning I came to the office and thought about these two gentlemen and thought I might have an idea.  I got out my calculator just in case.  You can buy a home with no money down but, borrow no more than 2.5 times your annual income and use a 15-year note.