The Retirement Trap

Traditionally, we are taught to work hard, save hard, pay off our mortgage, contribute the maximum to retirement accounts and plan on downsizing. Plus, word on the street is that you will be in a lower tax bracket when you retire (which under every tax code I know only means you have reduced your lifestyle). We aren’t alone. Our government is in the business of retirement planning as well — except it is smarter. The federal government holds all the cards, providing tax incentives for us to contribute to retirement plans, requiring us to hand over our money for someone else to use. We carry all the risk and pay all the penalties when we finally need to access our capital. It makes sense. Our country was founded on Capitalism, defined as “increasing cooperation amongst strangers.” Stocks: We give money to other people. They have our cash and we have all the risk. Bonds: We loan money to other people. They have our cash and we have all the risk. The borrower, not the investor in these financial vehicles, can make the situation better. The lender/investor must live with the borrower’s decision. Bank accounts: We give money to a bank. The bank has our cash and we have all the risk. But we get a consolation prize: a pittance in interest. Banks also charge us four times the amount when we need to get cash out of our homes, which for many is our only source of non-taxable money. Then, adding to the insanity, we again pay interest to the bank on our money. Now, here is where people get tripped up. What is your net worth? In the eyes of Wall Street, your net worth is quantified by how much money you have invested in financial products. But realistically, your net worth is a combination of human capital and investment capital. Your human capital is your knowledge and experience, which give you the tools you need to wake up every day to generate income and take care of your family. But as we go through life, we take the one thing we own and control and transfer it into risk capital. We retire, only to realize that everything we worked for is at risk. At a time when we desire safety and certainty, instead we are trapped in retirement accounts: 15-year loans that handcuff us to obligations that may cost twice as much to support coming from a retirement account. In the 1970s and ’80s, our parents or grandparents retired when interest rates were 10 percent; a million dollars meant one day you could live on an income of $100,000 a year. But interest rates don’t stay in one place. Waking up to find interest rates at four percent, people could no longer afford to visit their children on holidays. You have a retirement plan. But do you have a plan for managing your retirement?

Mortgage: Dodd-Frank Brings Changes for 2014

As we close out 2013, the mortgage industry is bracing for significant changes. The new year will usher in updated rules, emanating from the Dodd-Frank legislation, as well as the tightening of FHA loan standards. These changes will make obtaining a mortgage more challenging for some folks. The high-cost loan limits on FHA loans are being lowered in 2014. The present high loan limit is $729,000. The new limit will be $625,500. This will put the FHA high limits in line with the high-cost loan limits. Washington, D.C., and most of its close-in jurisdictions are treated as high-cost areas. FHA mortgages enable a borrower to buy a home with a down payment of only 3.5 percent. There are no income limits on FHA borrowers. The allowable debt ratios will be tightened in the new year. The new rule limits the debt limit to 43 percent of income. This number is derived by taking the overall house payment and dividing it by the required payments on installment and credit card debts. The old limits were 45 percent or higher. These rules pertain to any mortgages that will be sold to Fannie Mae or Freddie Mac, which back up the vast majority of mortgages. One option that some lenders will have is to issue mortgages that are not backed by Fannie and Freddie. These are commonly called portfolio mortgages. A portfolio mortgage is a mortgage that is held in a specific bank’s portfolio, instead of being bundled and sold to Fannie or Freddie. The rules on portfolio loans can be more flexible than the rules for non-portfolio mortgages. Portfolio mortgages are usually jumbo mortgages, which start above $417,000, the limit for non-high-cost conventional mortgages. Among the more flexible rules for portfolio mortgages are higher debt-to-income limits and, in some cases, high LTV loans with no mortgage insurance. Expect strict asset requirements with the jumbo portfolio loans. Also, for the super jumbo portfolio loans (higher than $1,000,000), larger down payments are typically required. These requirements get stricter as the loan amounts increase. One result of the new rules will be seen in the once “more nimble” smaller lenders losing some of their flexibility. The larger banks which have large cash reserves will tend to be more eager to lend the jumbo money. This will be seen in aggressive rates and more flexibility. Bill Starrels lives in Georgetown. He specializes in home purchase and refinance mortgages. He can be reached at bill.starrels@gmail.com or 703-625-7355. NMLS #48502

April 18: Lucky Day for Scammers?

Just imagine robbing a bank on the one day that millions of people have made a deposit amounting to billions of dollars. April 18, or Tax Day 2016, is that one day this year for a certain type of scammer. A particularly pernicious form of fraud, tax-related identity theft is when someone uses sensitive personal information (such as your Social Security number) and files a fraudulent tax return in your name to collect a refund. According to recent statistics, scammers filed more than five million returns in 2013 using stolen information, costing the IRS $5.8 billion in fraudulent refunds. Most victims don’t realize that anything is amiss until they file, only to be notified that a return has already been filed in their name. I’ve experienced this firsthand. Last year, someone filed a fake tax return under my Social Security number. At first glance, I was hoping someone was generous enough to pay my taxes for me — my lucky day! But by no fault of my own, the outcome is much more cumbersome. I can no longer file a tax return electronically. I had to actually, physically, go down to the IRS office just to get a copy of my transcript to refinance my mortgage. My identity, like that of millions of Americans, was compromised by scammers seeking to defraud Uncle Sam. And there are plenty of scammers out there. Recent reports indicate that more than 900,000 people received phone calls, seemingly from the IRS, asking them to verify their bank account number for their refund or demanding payment. Nearly 4,550 victims have collectively paid over $23 million as a result of this scam. Scammers have made Tax Day go from unpleasant to nightmarish. Now, not only do we have to write a check, but we also have to worry about who else, besides the government, could be reaching into our wallets. To decrease the chances that you too will be scammed, follow these simple steps: • The federal government will never call you demanding payment on taxes owed. (They are far more likely to send a guy in a nice leather jacket with a set of handcuffs.) Never give your personal information, including your Social Security number and date of birth, to anyone over the phone. • Get a shredding machine and make sure that your devices — laptops, cellphones, etc. — have encryption tools to protect your account numbers and other personal information. • Seek out a financial professional who can properly calculate what you owe in taxes and suggest ways to reduce your payment and avoid a large refund, which can attract scammers. Don’t let April 18 get you down. Remember: Tax Freedom Day — the day when the average American stops earning money to pay taxes and starts earning money for him- or herself — is right around the corner, on April 24. *John E. Girouard, author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” is a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors in Bethesda, Maryland.*

Points in Our Favor: 2015 Mortgage Rates Looking Good

When it comes to predicting mortgage interest rates, during certain years economists are the smartest persons in the room. 2014 was not one of those years. In 2014, economists theorized that when the Federal Reserve stopped its program of buying longer-term treasuries and mortgage-backed securities, rates would rise. Freddie Mac’s deputy chief economist Len Kiefer said that he expected the average rate to rise to 5.1 percent by the end of 2014. Later in 2014, he pulled back his prediction to 4.3 percent. This prediction was still too high. For 2015, Freddie Mac’s chief economist Frank E. Nothaft – who is also a lecturer at Georgetown University – said he expects to see interest rates climb throughout 2015, averaging about 2.9 percent for 10-year treasuries and 4.6 percent for 30-year mortgages. Some economic forecasters think the Fed’s board of governors will not raise rates in 2015. Their rationale is that the euro, which is racing toward parity with the strengthening dollar, is making U.S. goods expensive for our trading partners. If the Fed raises rates, the dollar would get even stronger, harming the U.S. economy. Because of this and other factors, it seems unlikely that rates will be raised in 2015. Local real estate has benefited from the strengthening economy and low interest rates. When asked for some highlights of the Georgetown real estate market, Michael Brennan Jr. of the Georgetown office of TTR Sotheby’s said, “One of the most remarkable events in Georgetown real estate in 2014 was the rollout of 1055 High. In just seven days’ time, all seven units sold, all cash, all over list price.” Looking at the start of 2015, Brennan said that, as of early February, “There are only three houses listed for sale in Georgetown below $2 million. With available inventory this low, buyer demand will remain strong for our neighborhood in 2015.” The most notable listing so far – the Fillmore School building and property – was just listed by TTR Sotheby’s for $14 million. Clearly, Georgetown continues to be one of the hottest addresses in Washington and in the county. A well-balanced community with strong residential, business, restaurant and workspace components, it also continues to be one of the safest neighborhoods in D.C. With mortgage interest rates flirting with two-year lows, the affordability index is at one of its highest points ever. It looks like 2015 will be an excellent year for real estate and mortgage rates. Bill Starrels lives in Georgetown and is a mortgage banker specializing in residential purchase and refinance mortgages (NMLS#485021). Reach him at 703-625-7355.

Tax Time — It’s Either You or Your Uncle

Did you know that if you pay $10,000 in taxes this year it could easily amount to over $26,000 in wealth over 25 years? Far too often I see clients who unnecessarily give away money, both in taxes and lost earnings that could have earned them a sizeable rate of return over their lifetimes — and a sizeable fortune for many investors. As the end of the year approaches, now is the last chance for many to reduce their 2015 tax burden. Unfortunately, many investors focus on getting a one- or two-percent higher return on their portfolio or perfecting the target price on their stock while leaving the 20 to 30 percent of what they can control on the table for their accountant to handle. We all know we can’t control the markets, interest rates, the economy or numerous other life events that can wreak havoc on our portfolios. But what we can control is how many of our hard-earned dollars we give away each year to Uncle Sam — and our ability to control this typically diminishes as we age. There are many lists and articles out there extolling the top five things you can do to reduce taxes by year-end, such as maximizing retirement contributions, paying January’s mortgage payment in December, bunching medical deductions in one year and tax-loss harvesting. But here are a few other suggestions that may be new to you. • If you have inherited a Roth IRA or an IRA and you don’t take a required minimum distribution like those individuals over 70, you will be subject to a 50-percent penalty. • Medical expense deductions have risen to 10 percent of your adjusted gross income versus 7.5 percent for certain income groups (other than retirees). • If you are a military family, you are eligible to put your Servicemembers Group Life Insurance benefits in a Roth IRA. • If you have lost a family member who was receiving a federal government pension, your unrecovered after-tax contributions are deductible in the year of death. This is a huge benefit commonly overlooked, especially in our community. • If you have made a statement of charitable intent or a promised future gift, consider setting up a charitable gift fund in a high-income year, even though the gift can be made over time. • Finally, beware of the hidden tax inside your mutual funds. In a volatile year like 2015, many investors will see their portfolio lose value, then wake up April 15 to a surprise: a tax liability. “The hardest thing to understand is the income tax,” said Albert Einstein. About this, and so many other things, he was right. So this holiday season, take a few minutes to seek out the help of a professional — or go online and look up “overlooked tax mistakes.” Because once it’s gone, it’s gone. Author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” John E. Girouard is a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors in Bethesda, Maryland.

Wall Street’s Double or Nothing

The odds of Leicester City Football Club winning the Premier League were 5,000 to one. If you had bet your entire retirement on Leicester, your retirement date just moved up by about 50 years. The S&P 500 Index is now officially in the second-longest bull market run in history. That sounds great … until you remember that it was immediately preceded in 2008 by the second-worst financial catastrophe in history. In less than a year, the S&P 500 lost half its total market capitalization, roughly $7 trillion. Over the past seven years, from the 2009 bottom to recent levels, the index roughly tripled. But if you had long-term investments eight years ago and rode the roller coaster down and back up again, your compound annual rate from 2007 until now drops to less than four percent. Although the S&P looks like a sure first-place winner, the odds are that this horse may be running out of steam. When rebalancing your portfolio, it’s important to understand the difference between compound interest and average return. Ignore the past-performance charts that show a three-, five- and 10-year average return; they are meaningless in building wealth. Stocks and bonds go up and down; only fixed vehicles compound. Here’s how Wall Street’s double or nothing game works: A stock worth $100,000 that gained 100 percent in year one would grow to $200,000. However, if it lost 50 percent the second year, it would be worth $100,000. Your statement would reflect a 25-percent average return while your actual compound return was zero. Let’s look at it a different way. In 2011, the average annual appreciation for the Dow Jones Industrials from 1900 to 2010 was 7.1 percent (which is how the Dow reports). So if one took a simple calculator and calculated what $1,000 invested over 110 years at an average of 7.1 percent would be, the number turns out to be $1,891,654. However, the Dow rose from 66 in 1900 to 11,578 in 2010, which reflects an actual compounded return of only 4.8 percent. Applying the same math example, the actual return of $1,000 invested in the Dow was only $156,363. That’s an error of $1,735,291. Now that’s a lot of retirement money. The problem is, calculators and financial programs project future values using compound math and the investing public believes the numbers. The house is winning and we are losing. If you make that mistake, the only way to make up for it is to bet on Leicester winning. John E. Girouard, CFP, ChFC, CLU, CFS, author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” is a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors in Bethesda, Maryland.

Bad News Is Good News For Mortgage Interest Rates

Mortgage interest rates continue to hit new lows as the economy plods ahead slowly. Rates declined in reaction to disappointing job growth, according to a report released on July 6. The number of non-farm payroll jobs for June was up by 80,000. The consensus was 100,000 jobs. Some Wall Street firms raised their guidance to 125,000 after the release of a stronger ADP employment report the previous day. As the report confirms, the reason for this market reaction is the economy’s tepid recovery. Rates simply are unlikely to move higher with a slow moving economy. Additionally, the Federal Reserve Bank may be prompted to do some quantitative easing. The markets are already pricing in more stimulus by the Fed. Mortgage rates are at historic lows. Purchase mortgage rates 30-year fixed rate mortgages are priced in the mid-3 percent range. Fifteen-year fixed mortgages are below 3 percent. Rates for 5/1 and 7/1 adjustable rate mortgages are below 3 percent. For every 200,000 borrowed at 3.5 percent on a 30-year note, the payment is $895 a month. At 5 percent, the payment would be $1,069 a month. This represents a savings of $174 monthly. With the low interest rates, a borrower can get a larger loan than was the norm just a year ago. In order to get approved for a loan, a borrower needs debt to income ratios of around 40 percent. With historically low rates and home prices coming off their lows, the affordability index is excellent. Other monthly reports were less than upbeat. The manufacturing index went down to a reading of 49.7 percent, below the 50 percent threshold considered the equilibrium. Readings below 50 percent are considered bearish. A factor contributing to this decline is the worsening of the EU economies. Exports are important to the manufacturing sector. Goldman Sachs has reduced its target GDP for the Q2 GDP to 1.5 percent, one-tenth lower than their previous prediction. Will rates still go lower? There is always the possibility. If one of the EU states stumbles in the weeks and months ahead, more money could flee to the safety of bonds. This could spur even lower rates. Meanwhile, rates could tick higher, too. Locking in at today’s low rates seems like the prudent thing to do. Take advantage of the historically low rates and refinance, or consider buying that house or condominium. Bill Starrels lives in Georgetown. He is a mortgage loan expert specializing in refinance and purchase loans. Bill.starrels@gmail.com or 703-625-7355.

Hitting Delete on Social Security Provisions

The Social Security Handbook has 2,728 separate rules governing benefits. But that’s just the handbook. The Social Security Administration operating system has thousands more rules and interpretations, putting to shame the 72,000 pages often cited by political candidates about the Internal Revenue Code. It’s no wonder that most retirees give up between 20 and 30 percent of the benefits they are entitled to; the rules and guidelines are overwhelming. And it’s no wonder that nearly half of all retirees accept a reduction of between 20 and 25 percent of their full retirement benefit and forgo a whopping 32 percent increase in income by not waiting until age 70. With help it is extremely difficult to get it right — but getting it right on your own is nearly impossible. A 62-year-old couple has over 100 million combinations of months for each of the two spouses to take retirement benefits, take spousal benefits and decide whether or not to file or suspend retirement benefits. For couples with significant age differences the number of combinations can be even more daunting. It was just a few years ago that the financial industry doled out advice and recommendations based on a simple, unsophisticated break-even calculation. But ever since a retired SSA employee began writing a weekly column, the general public and the financial services industry have begun to understand what in the past only the rule makers understood. The result of these revelations is that many of the strategies that have been brought to light have become Congress’s most recent victims. The last major change was during the Reagan Administration, when, in an effort to stem the tide of budget deficits, a bipartisan solution was devised to tax retiree benefits instead of cutting them. This achieved the same result in a more politically expedient manner than an outright reduction. Now, unlike an IRA that one contributes to before taxes and pays taxes on later, we have to pay taxes both going in and coming out. In a provision labeled “closure of unintended loopholes,” the recent budget compromise eliminates two popular claiming strategies for those born after January 1, 1954: file and suspend; and filing for a restricted claim of spousal benefits. For many couples, this strategy translates to a six-figure windfall. For anyone born after 1954, you just lost a great benefit. The cold hard truth about government money is that you don’t own it and you cannot control it. But for those of you eligible for Social Security, you should do your homework. For everyone else, Congress still has 2,728 rules and hundreds of thousands of provisions that it can simply hit the delete key on to solve their problems. Author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” John E. Girouard is a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors in Bethesda, Maryland.

DC Market is Getting Hotter: Get Pre-Approved Now

Over the last several months, I keep hearing DC realtors saying the same thing, "Buyers are wanting to buy, but there is very little inventory on the market to sell." In desirable areas, multiple offers seem to be common once again and buyers are getting frustrated loosing out in these competitive situations. According to a report released by the national housing research firm, Metro study Report, the volume of DC metro listings on the market has dropped down to 3.6 months of supply from a peak of 11 months existing supply back in 2008. The limited home inventory in our area is likely to continue through 2012 with strong local job growth, decreasing short sales and foreclosures, and a lack of new buildings coming to market. The best advice for someone looking to purchase is to get pre-approved. Don't wait till you find the house of your dreams, as it may be too late. Do it up front - maybe even before finding a realtor . With the implementation this year of the Dodd Frank bill and FHA (Federal Housing Administration) tightening lending guidelines, sellers are sure to scrutinize, more than ever, a buyers' ability to get to closing. Nobody wants to accept a contract from a wishy washer buyer, even if they may be offering a little more. Getting pre-approved lets the seller know that you are credible, with FICO scores and income that meet the strict criteria of today's lending climate. The benefits of getting pre-approved are many, First, it saves you time and heartache by looking in the right price range. Second, as described above, it makes you a stronger candidate when you do make an offer, thereby increasing your negotiating power. Here are some great tips in starting the pre-approval and buying process: 1) Determine how much you can afford up front, Remember that when you hear the total monthly payment make sure you are looking at the approximate after tax payment. If your lender tells you that you can not qualify for what you want to buy think about a family member co-signing., 2)Have a lender run your credit report to check your scores, sometimes the credit scores you get on line can vary from the scores lenders get from mortgage credit reporting companies, good credit scores are important if you want a good rate, Sometimes it can take as much as 6 months to improve your scores so act now before you start looking for a house. 3)Make sure you enough for a down payment and closing costs. Have your lender calculate what you need for cash in the bank. A rising numbers of young people struggling to buy their first home are being forced to ask their family for help with down payment and closing costs, Work out an arrangement where one day you will pay them back with interest, With FHA and conventional financing you can put down as little as 3% these days!!!! 4) Hire a real estate agent: As a buyer of a home, especially being a first time buyer, you will want to have an agent represent you on your purchase. A buyers agent that you hire will have your best interest in mind and help you in evaluating the value of the property and negotiating the best possible price and terms in making an offer. Additionally your agent can help you with the many facets of the transaction process, connect you with a reputable lender and inspector and other service people. The buyer agent is paid from the transaction by the seller. One of the best ways to select a Realtor to help you find a home is through a referral from a friend, work colleague or neighbor. Another is by going to open houses and talking to the different agents holding the various homes open. Finally, since a full mortgage approval is taking somewhat longer these days it is to your advantage when you make an offer to shorten your financing contingency to 21 days or sooner. Being pre-approved can allow the lender to speed up the loan process and get the appraisal ordered immediately once you have a ratified sales contract. If you can accomplish a faster close date your offer will be looked at more seriously by the listing agent and seller if there are multiple offers. Gregg Busch is a licensed mortgage loan officer and Vice President of First Savings Mortgage. Gregg has over 20 years of mortgage banking experience and can be reached at Gregg@Greggbusch.com.

Mortgage Interest Rates Defy Most Experts

The mortgage market is defying almost all economists’ short-term forecasts. Most expected bond yields and mortgage yields to be on the rise in 2014. This has not been the case. The 10-year Treasury yield hit its high-water mark at 3.03% on Jan. 2. At the end of May, it was at 2.46%, very close to a low for the year. These numbers basically caught all by surprise. Interest rates with no points on 30-year fixed-rate mortgages have been hovering around 4% on purchase-money conventional loans. Rates have been in the high 3s on government-backed 30-year fixed-rate FHA loans. On 15-year fixed-rate purchase loans, rates recently have been close to 3% with no points. Rates on adjustable-rate mortgages are also quite low. On a 5/1 ARM, with the loan fixed for the first five years, the rates are in the high 1s with no points. Also important is the LIBOR index. The London Interbank Offered Rate is defined as the benchmark rate that some of the world’s leading banks charge each other for short-term loans. The LIBOR index is used by most of today’s adjustable-rate mortgages. When an adjustable-rate mortgage is reset, the margin (usually 2.25%) is added to the index value; this determines the new rate going forward. As of the end of May, the one-year LIBOR index was 0.549. The new rate is: 2.25 + 0.549 = 2.799%. This is why folks with adjustable-rate mortgages are happy these days. In June 2012, there were criminal settlements against major European banks in connection with a LIBOR rate-fixing scheme that propped up the LIBOR index. The U.K. invoked the Financial Services Act of 2012, which brought the setting of LIBOR rates under U.K. regulatory oversight. The scandal has made it nearly impossible to track good historic data on the LIBOR index because normal market forces were not at work. One of the catalysts for the currently low bond yields is weakness in the eurozone economy, with further stimulus announced by the German Central Bank. Another is the revised fourth-quarter GDP, which showed negative growth for the first time since 2011. It is hard to predict where bond yields and mortgage rates are headed in the near term. One thing is certain: current rates are very attractive for folks looking to purchase or refinance a home. Bill Starrels lives in Georgetown. He specializes in refinance and purchase mortgages (NMLS #48502). He can be reached at 703-625-7355 or bill.starrels@gmail.com.