Buy one bottle of wine now – Or buy seven bottles when you’re 65?!

I find myself having more and more general financial literacy conversations with people as word gets out about my obsession with the Fee-Only-Fiduciary Financial Planning world. Based off a recent conversation, I was inspired to write this post. For those reading, the younger you are – the better this may serve you.

Two good concepts for people to know about are the Time Value of Money and the Power of Compounding Returns. Finding information on either topic is simply a Google search away, however I’d like to illustrate both concepts – and the power of each – in a way that (hopefully) resonates better than a financial journal. A quick overview of each:

Time Value of Money: A dollar is worth more today than it will be in 10, 15 or 50 years.

Compounding Returns: Your investment portfolio, over a long time horizon, will generate returns. Those returns will then generate additional returns on top of your original investment. What this gives you is, returns on top of returns on top of returns (hence, “compounding”).

Rule of 72: The rule of 72 is an easy, quick way to figure out how long it will take to, at least hypothetically, double your money. If you expect annual returns of 5%, then it will take roughly 14.5 years (72/5 = 14.4) to double your money.

Since the professionals of young and old can enjoy a bottle of wine, let’s use that for our example.

Essential information
•If you are 21 years old and go out to buy one (1) bottle of wine today, keep in mind that if you invested that money instead and got a 5% return each year, you could buy almost seven (7) bottles of wine at age 65.
•If you are 40 years old and looking at a nice bottle of Silver Oak, you could put off the purchase and invest the funds, to afford almost three of those bottles at age 65.

If you would like more detail or would like to discuss your own particular scenario, please get in touch. We love to educate and we love to help.

Footnote: All information assumes 5% annualized return

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“Power of Attorney for College Students”

The time preparing for and the first few weeks of your son or daughter heading offing to college are usually filled with excitement, planning, paperwork, shopping, and adjustments.  One often overlooked important task is asking him or her to sign a durable power of attorney and a health care proxy. This is even more important if heading for a semester or year abroad.

These estate planning documents allow you (the parent) to have the legal authority to make financial and health care decisions should your child become incapacitated while at school. The alternative is needing court approval during a stressful situation. These are incredibly powerful documents and your child should appoint someone they trust implicitly. While we’ve never had a clients’ child suffer a disabling event, the threat is real and numerous horror stories heard.

The health care proxy allows access to medical records and ability to make medical decisions on your behalf. You also have the option to include more specific language regarding organ/tissue donation.

The durable power of attorney allows you to make financial decisions on your child’s behalf, such as, transferring money from a bank account or breaking a lease. This power also provides authority to see grades since schools do not have to disclose this information without a student’s permission. If this is a touchy subject, the power of attorney can restrict a parent’s authority to bills only.

We encourage you as the parent to introduce the subject since kids are focused on roommates, packing and anything else besides this topic. Free updated versions of these documents for each State can be found at www.caringinfo.org.

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Mortgage Dilemma: Should I Pay Down Principal?

  1. How many have found themselves in this situation?

You have a mortgage, you’re looking at your savings account, you see a sizeable sum. From working with a fiduciary financial advisor you already have an emergency fund comprised of high-yield savings accounts, bonds and maybe fixed income funds so you are prepared for any sudden life events. Do you pay down your mortgage? Do you invest? Can you lower your monthly payments? So many choices! These are important questions and I would like to provide some helpful answers, breaking them down into two (2) categories – Math & Emotion.

Math: Math almost always tells us NOT to pay down our mortgage. Here’s why.

  • Is your mortgage balance $1,000,000 or below? All mortgage interest on a balance of $1,000,000 or below can be taken as an itemized deduction on your tax return. Great – why do I care? Because this deduction lowers the true cost of your mortgage!
    • Example: Say you’re in the 28% federal tax bracket with a mortgage at 3.50%, your true cost is only 2.52% per year.1 This is because you are getting a $0.28 cent deduction on your tax return for every dollar of mortgage interest you pay.
  • Can you exceed your mortgage cost in investment returns? With mortgage rates still low, many people are able to earn more than the cost of their mortgage by investing those dollars over the long-term in the market.
    • Example: Take the information above and assume your true mortgage cost is 2.52%. The S&P 500 has provided a 7.2% annualized return over the last 30 years.2 If you paid in full for your home back in 1987 instead of getting a 30-year mortgage, then you just missed out on an extra 4.5% return compounded each year since then.

Emotion: Math is not the only thing that matters.

  • How does having a mortgage make you feel? If your mortgage is the mental road block that has always kept you from feeling financially secure, maybe you do pay down part of your balance regardless of what the math says. Financial security shouldn’t just be something that you’re told but something that you feel. Confident that you and your financial advisor are on the same page, being able to get a comfortable night’s sleep counting sheep instead of running budgets.
  • Recasting – and I don’t mean fishing. If you have cash and you have decided that you will feel best putting it towards your mortgage, see if your lender offers recasting.
    • Recasting allows you to pay down your mortgage with a lump sum and have the lender re-amortize keeping the same interest rate and term. This then lowers your monthly payment for the remainder of your mortgage. Cost of a recast can be around $250 and the minimum amount required varies ranging from a sum of $5,000 up to 10% of the remaining loan balance.

These are some of the key factors in the daunting mortgage pay down conversation, but of course there is always more insight to be given from a Fee-Only, Fiduciary Advisor. Who won’t be getting paid more whether you decide to invest or to pay down, because they are there to help you along your journey and achieve the ever coveted Financial Independence.

1(28% of 3.5% = 0.98%) 3.5% – 0.98% =2.52%

2http://www.buyupside.com/shillerdatainfo/stockreturncalcresultsincludeformsp.php?price_type=Nominal&start_month=06&start_year=1987&end_month=06&end_year=2017&submit=Calculate+Returns

 

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Ideas On How to Save While at College

As September approaches and students begin to prepare for the fall semester, we feel this is an excellent opportunity to share ways that they can be smarter with their everyday expenses.  With limited resources, college students can benefit immensely by learning to stretch their dollars. Aside from the classes they take, the independence of college gives them a place to hone their personal money management – a helpful experience that is arguably as important as the very classes they are enrolled in. Listed below are a few ways that students can be smart with all their hard earned summer wages, their loans, or your occasional allowance:

  1. Avoid buying brand new textbooks.  Useful sites to find secondhand textbooks include:
  2. Visit a local bank. Ask about checking and saving accounts offered for college students.  Some will offer a very low minimum balance requirement and having your account locally will save on ATM fees.
  3. Cut out cable. If they’re staying off campus this could be a huge savings.  Sharing accounts on streaming sites like Hulu and Netflix is a great way to stay up to date on movies and television series without the egregious monthly cost of cable.
  4. Buy a coffee maker.  This may seem silly, but can be a smart financial decision.  It’s amazing how fast those little expenses add up.
  5. Pay all bills on time.  Have them get in the habit of paying their bills on time, every time, to avoid unnecessary late fees.
  6. Use your student discount. Before they purchase an item they need, research if they offer a student discount.  Personally, I found this extremely helpful when purchasing my 1st laptop as well as my car insurance (extra motivation for a high GPA!)
  7. Leave the car at home. Paying for parking, gas, and unexpected repairs can break the bank.
  8. Most important – Create a Budget.  Use your money for rent, bills and groceries first.  Then look ahead to upcoming expenses.  This will give them a reality check on how much they actually have for discretionary items.
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Successfully Managing a Financial Windfall

Financial windfalls come in varying ways, often unexpected or suddenly.  Whether an inheritance, company stock profits or sale, insurance settlement, or lottery winnings…. the unexpected pile of cash can create an initial sense of euphoria and a false sense of security. The vast majority of people blow through a financial windfall fairly quickly.  Whether large or small, it can seem like “play money.” And that is where the danger may lurk.

What should you do if you happen to be the beneficiary of a financial windfall?

10 steps to creating a firewall around your newfound stash of cash

1.First, do nothing. The temptation may be to buy a new car, take a luxury cruise, or upgrade your living arrangements. That can begin an unwise cascade of purchases that may leave you feeling regret. We suggest you wait at least six months before embarking on any life-changing decisions. The time spent waiting and planning allows the “shock” of your newfound wealth to wear off.

2.  Talk to a trusted advisor. Find someone who has your interests at heart, not his or hers. If you are expecting to receive a windfall or have already received an unexpected inflow of assets, let’s talk and see how we can incorporate it into your overall financial plan.

3. Doing nothing also means not quitting quit your job. It may be tempting, but lost wages and the lack of social interaction from your work buddies may lead to remorse, even if you don’t especially enjoy your job. Besides, without work, you run the risk of blowing through your money much quicker than you had anticipated.

4. Reduce debt. It may be time to pay down or pay off high-interest debt. Once eliminated, you no longer have that onerous outflow of interest payments on your loans.

5. If you don’t have an emergency fund, now is the time.  Set aside reserves of at least six months of expenses. Having reserves set aside will reduce your financial stress.

6. Additionally, you may decide to allocate additional funds toward savings and retirement. Everyone is unique, with various goals, personal circumstances, and financial resources. Taking care of your future self can give you immense peace of mind for present day.

7. Think about tax and estate planning. No one is sure what may or may not happen to the tax code this year or next. But it’s critical that we get a handle on the tax ramifications of your inheritance in order to maximize the financial benefit.

For example, did you know that you may be required to take distributions if you inherit an IRA? What if you are already taking required mandatory distributions?

Life changes are an ideal time to update your estate plan, especially if the inheritance increases the complexity of your financial situation.

8. Be cautious. Less-than-reputable salespeople and relatives may suddenly warm up to you, with the unspoken goal of separating you from your cash. That’s why a trusted advisor is critical. If you have a well-thought-out financial plan, it’s much easier to pass on potentially exploitative offers.

9. Consider charitable giving. Do you have a favorite charity? Would you like to help a niece or nephew finance their education? Now is the opportunity to explore the possibility of helping others.

10. Have some fun. There’s nothing wrong with treating yourself. Current goals and dreams can be realized, but also opens up the possibilities of larger goals.

Or, maybe you’d like to spend money catching up on the everyday things of life you’ve been putting off. Everyone has a hot button!

With a financial plan in place that manages your windfall, you’ll feel much more secure enjoying the benefits of your wealth without the nagging worries that you might run through your nest egg with not much to show for it.

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Cyber Fraud

Threats to Data Security Intensify every hour, technology continues to evolve, changing the way we lead our lives. Unfortunately, cyber criminals are evolving just as fast, developing new ways to separate people from their assets. While the most common tactics used to compromise a victim’s identity or login credentials are long-time nemeses such as malware, phishing, and social engineering, they are growing increasingly difficult to spot. The end game with these tactics is, of course, criminal. After gaining access to an investor’s personal information, cyber criminals can use it to commit various types of fraud, including:

  • Fraudulent trading
  • Electronic funds transfer (EFT) fraud
  • Wire fraud
  • Establishing fraudulent accounts

 

Common ways in which identity and login credentials are stolen

  • Malware: Using malicious software (hence, the prefix “mal” in malware), criminals gain access to private computer systems (e.g., home computer) and gather sensitive personal information such as Social Security numbers, account numbers, passwords, and more.

How it works: While malware can be inserted into a victim’s computer by various means, it often slips in when an unwary user clicks an unfamiliar link or opens an infected email.

 

  • Phishing: In this ruse, the criminals attempt to acquire sensitive personal information via email. Phishing is one of the most common tactics observed in the financial services industry.

How it works: Masquerading as an entity with which the victim already has a financial relationship (e.g., a bank, credit card company, brokerage company, or other financial services firm), the criminals solicit sensitive personal data from unwitting recipients.

 

  • Social Engineering: Via social media and other electronic media, criminals gain the trust of victims over time, manipulating them into divulging confidential information.

How it works: Typically, these scammers leverage something they know about the person—like their address or phone number—to gain their confidence and get them to provide more personal information, which can be used to assist in committing fraud. Social engineering has increased dramatically, and many times fraudsters are contacting people by telephone.

 

Tips to protect against Cyber Fraud are outlined in the “Protection Checklist”. Investor Protection Checklist

(Article and Information supplied by Fidelity Investments)

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How Much Are You Really Paying for Your Investments?

In a recent Wall Street Journal article (linked HERE), Andrea Fuller recounts her experience of searching for the fees that she is paying for her financial advisor and investments – the advisor is an employee of one of the largest financial advisory companies. What Andrea did not expect is that this hunt would require a steadfastness and rigor similar to that of Indiana Jones searching for the Holy Grail.

The first place that Andrea looked to find her fees was in her monthly statements. No luck. Next, she explored the company website. Again, no dice. She then spoke with various customer service representatives who were unhelpful and opaque. Ultimately, Andrea spoke with an advisor who shared that her total combined fee (advisory fee + fund expenses) was 1.4% of assets under management. This advisor has yet to provide any documents to her that show these fees in writing.

Does a 1.4% fee sound high? It should. With many “financial advisory” firms, the scope of their work is limited to investments or insurance (i.e. the products they sell!). A 2016 white paper from Personal Capital concluded that average fees for these “financial advisory” firms ranged from 1.07% to 1.98%. This then begs the questions: Are the investment and insurance products that these firms sell superior to other options out there? The answer: Absolutely not. Simply put, the employees of these firms are highly paid salespeople that rely on the ignorance of the general public.

How do you know if your advisor is taking advantage of you? Request the he or she agree, in writing, to disclose all conflicts of interest and to always act solely in your best interest. If they can’t agree to this, consider shopping around for a fee-only advisor that can.

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Robert’s Co-Authored Document on Taxes

With tax season officially upon us, we wanted to take a moment to:

  1. remind everyone to send in their tax documents and information as soon as possible
  2. to share a recent white paper (attached) that was co-authored by Robert Walsh.

View PDF

The paper utilizes real-life case studies and third party analyses to exhibit the value in working with a tax-focused financial planner. For those that get dizzy in the details of the paper, here are three key takeaways:

  • Work with a planner that can strategically place you in the lowest tax bracket at your current income level. No need to pay government more than their fair share.
  • Tax preparation is reactive. Tax planning is forward-looking. If you wait until April of 2017 to look at how you could minimize your 2016 taxes, you’re too late.
  • Proper tax planning attempts to bring a client as close as possible to owing no tax and receiving no refund.

 

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Be Aware of IRS Tax Scams

As we welcome in a new year and many changes, we need to remain diligent of new tax scams pertaining to identity theft and refund fraud.  This is one reason NY State is now requiring your driver’s license number to file your State return.

The IRS recently issued a summary of the most prevalent scams and to help you identify a scam, listed are some reminders of what the IRS will never do.  https://www.irs.gov/uac/irs-warns-taxpayers-of-numerous-tax-scams-nationwide-and-provides-summary-of-most-recent-schemes?_ga=1.99571224.767202215.1399553123&utm_source=Email&utm_medium=Internal&utm_campaign=

You are your first “Line of Defense” against crooks and scammers who are evolving and getting smarter.  Remember it is best to be suspicious and if you receive a phone call from an impersonating IRS representative, Hang Up Immediately. DO NOT give any information.  If you are in doubt about the validity of a call, e-mail, or letter from the IRS please contact us prior to responding.  We will help you to determine if it is a scam and can advise of the appropriate actions to take, if any are necessary.

Please know that The IRS Will Never:

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer or initiate contact by e-mail or text message. Generally, the IRS will first mail you a bill if you owe any taxes.
  • Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.
  • Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  • Ask for credit or debit card numbers over the phone.

We are here for you, please NEVER hesitate to contact us.  Lighthouse Financial Advisors does not want you to worry about the IRS; we want you to enjoy the journey (especially if it includes 70 degree days in January).

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Dimensional Fund Featured in The Wall Street Journal

Dimensional Fund Advisors are featured in the following article The Active-Passive Powerhouse published in The Wall Street Journal.

dfa-wall-st-journal-nov-2016

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Lighthouse Financial Advisors

3 Harding Rd Suite B
Red Bank, NJ 07701

P: 732.747.6697
F: 800.886.0302
info@lfadvisors.com

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Client Relationship Summary – Form CRS
Firm Brochure – Form ADV 2A

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