It’s Time to Get Fiscally Fit
Wall Street’s Double or Nothing
Georgetowner • May 20, 2016
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.
April 18: Lucky Day for Scammers?
John E. Girouard • March 24, 2016
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.*
Tax Time — It’s Either You or Your Uncle
John E. Girouard • January 11, 2016
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.
Hitting Delete on Social Security Provisions
Georgetowner • November 19, 2015
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.
The Retirement Trap
John E. Girouard • October 26, 2015
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?
Student Loans: Bankrupting the American Dream
John E. Girouard • September 17, 2015
my children’s student loans are forgiven … if I die. You heard me right. If I take out a Parent Plus loan and I die, the student loans will be forgiven. Unfortunately, this isn’t an attractive financial planning strategy.
As freshmen move into college dorms across the country, many parents and students will be thinking about the crushing weight the associated debt will have on their futures. Both my children went to private universities, adding up to close to a staggering $500,000 in tuition and fees. That means I have to earn nearly twice that amount to afford to pay taxes before paying off their student loans. For most Americans, this is unsustainable. Worse, it is literally killing the American dream.
Student loan debt has risen to $1.2 trillion, outpacing credit card debt. Recent reports, studies and surveys show that young Americans are putting off buying homes, starting families and opening businesses because of crippling student loan debt. Parents are also sacrificing: putting off retirement and thereby adding to our nation’s unemployment woes.
While our economy is struggling to bounce back from the recession, and every presidential candidate is campaigning on jobs and the economy, it is the cost of higher education that should be at the top of the agenda. It is the elephant in the room that no one wants to face.
Parents should not ignore student loan debt as an economical way to give children the best inheritance possible and keep their own financial plans on track. The government has plenty of options to help. There is the American Opportunity Tax Credit, debt forgiveness for public service, scholarships grants, Coverdell accounts, 529 plans, Parent Plus loans, Stafford-subsidized loans and the D.C. tuition assistance grant. (You may need a graduate degree just to figure out the fine print.) But, at the end of the day, these programs are like pistol shots at a ballistic missile. Further, it has been argued that their existence has accelerated tuition increases.
Why is the solution more debt on the backs of American taxpayers? The IRS allows people to invest pre-tax in retirement accounts knowing that they will generate more revenue when they take it out. (While this may help offset the cost to society, the biggest beneficiary is Wall Street.) Why is education any different? If we were to allow education to be a pre-tax payment, since college graduates earn more on average than non-college graduates, it would be a win-win for the students and for our economy. On top of that, placing reasonable caps on tuition deductions may put downward pressure on tuition costs as universities compete to attract the best and the brightest.
Along with the simple steps parents can take to make student loan payments a manageable part of their financial plans, there are simple steps we should be taking as a country to address this crisis. Until we do, student loans will continue to bankrupt our wallets and the American dream.
Mortgage:Bad News Is Good News
Georgetowner • January 29, 2014
Bad news for stocks can be good news
for mortgage rates. Spurred by slower
growth in China and unease in emerging
markets, the stock market has been in a correction
When the stock markets tank, bond markets
are often one of the safe-havens. Ten-Year
Treasury notes closely mirror movement in the
mortgage backed securities markets and often
sends mortgage rates lower. This has translated
into good news for mortgage interest rates.
Current mortgage interest rates are at the
lowest they have been for a few
months. The trend appears to be
that rates are drifting even lower.
If a borrower has locked in a
loan over the last several weeks
and the loan is not closing immediately,
they should go back to
their lender and ask if they have a
price renegotiation policy. Most banks do have
a policy which allows a one-time rate change. It
doesn’t cost anything to ask.
In recent weeks Ten-Year Treasury notes
reached a high of 3%. Currently Ten-Year
Treasury notes are around 2.72%, a drop of over
twenty-five basis points in the first part of the
year. This is a large move.
The new Dodd-Frank rules have kicked in
for the banking industry. These rules have put
further limits on the institutions and how they
must qualify a borrower for a mortgage. No
one seemed to think the rules were easy in 2013,
and now the new rules are tougher. Ratios have
been contracted to a total allowable debt ratio of
43%. Credit lines now must be counted against
a borrower even if they are untouched. A lot of
homeowners do have lines of credit which have
no balances which may be a determent to their
ability to refinance or buy a second home.
The Dodd-Frank rules pose a downside risk
for the housing market. If these regulations
restrict the supply of credit, some households
looking to purchase a home could find themselves
shut out of the market, which would
weaken demand. A lot of observers
think the Dodd-Frank rules
may slow the recovery in the housing
Time will tell if the current
downturn in the equities markets
persists or moves to the sidelines.
If it becomes sustained for a period
of time, it will tamp down economic growth
prospects for 2014. This would potentially help
keep mortgages lower.
One of the most important reports around
the corner is the employment report on February
7. Most expect a strong report in January and
revised (higher) numbers for December. The
report will be the foundation for the near term.
Bill Starrels lives in Georgetown. He specializes in
residential mortgages. He can be reached at 703-625-
7355 or firstname.lastname@example.org NMLS#485021
Touting Local Lending, EagleBank Hits Mortgage Milestone
Nico Dodd • January 17, 2014
This September, EagleBank passed a milestone of $1 billion in mortgages. With 17 branches in the Washington metropolitan area and the bank’s 18th on the way in January, EagleBank is showing serious strength as the largest community bank in the Washington metropolitan area.
The Georgetowner discussed this milestone with EagleBank chairman Ronald Paul. Paul was a founding board member of EagleBank. It was founded in Bethesda, Md., in 1998.
“We’re the largest community bank in the metropolitan area based on deposits,” Paul said. Investing in the community is important to Paul. “We’ve been active in staying local,” he said. “And, to me, that’s an important part about business. That’s what’s going to support our economy.”
“We promoted a bill [which calls for local governments to switch deposits from national to local banks] in Montgomery County, and we have one proposed in the District,” Paul said. “For every dollar the District government deposits in EagleBank, we’ll match it with two dollars in lending in that marketplace. We’re working with Jack Evans in the District for it.”
“You know, we put money into a restaurant in Bethesda that hired 68 employees, in which a third of those were unemployed,” Paul said. “So, obviously the big banks are not going to do that. That’s why Eagle has been as successful as it is. If it weren’t for a community bank like EagleBank, that restaurant would probably have never opened. Those 30 people might still be unemployed. And that’s why it’s so important for us to be supporting these community banks.”
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.