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

 

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.

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.

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).

Governor Christie struck a deal with Democratic leaders of the New Jersey legislature on October 14 that will raised the gas tax but has corresponding sales, estate and income tax cuts to be phased in over the years.  Below is a synopsis:

• Increase the gas tax by $0.23 per gallon (effective November 1, 2016);
• Finance an eight-year $16 billion transportation program;
• Decrease the New Jersey sales tax from 7% to 6.875% on January 1, 2017 and ultimately to 6.625% on January 1, 2018;
• Increase the NJ Estate Tax exemption from $675,000 to $2 million for decedents dying on or after January 1, 2017 with a complete elimination of the estate tax for any decedent dying on or after January 1, 2018;
• Increase the Earned Income Tax Credit from 30% of the federal limit to 35%;
• Increase the gross income tax exclusion for retirement and pension income; and
• Create a new income tax deduction for veterans.

Details on Estate Tax Phase-Out

Governor Christie sacrificed the second lowest state gas taxes in the United States to shed New Jersey from its reputation as one of the most expensive places to die in the United States.

However, the new legislation does not mention the New Jersey Inheritance Tax, which is imposed on the beneficiaries of a New Jersey estate based on the amount each beneficiary receives and the relationship to the decedent.  Therefore, the current law remains in force, meaning that while transfers to spouses, parents, children, and grandchildren will remain inheritance tax-free, any transfer to someone other than a so-called Class A beneficiary will be subject to the Inheritance Tax (e.g. sibling, aunt/uncle, niece/nephew, friend, etc.).  Further, whereas nonresidents were exempt from the New Jersey Estate tax, any nonresident who owns real estate or tangible property located in New Jersey would be subject to the Inheritance Tax.

 

Retirement Income Exclusion

Under the new legislation, the personal income tax pension and retirement income exclusion will increase over the next four years to $100,000 in 2020, as follows:

Filing Status	2017	2018	2019	2020
Married Filing Jointly	$40,000	$60,000	$80,000	$100,000
Single	$30,000	$45,000	$60,000	$75,000
Married, Filing Separately	$20,000	$30,000	$40,000	$50,000

 

However, the exclusions are eliminated completely for any taxpayer whose gross income exceeds $100,000, including the pension/retirement income.  For example, under the new law, a married taxpayer who received $90,000 in retirement benefits and $15,000 of other income would not enjoy any benefit from the new law.  

 

How Does it Impact You? 

For many, the new legislation is great news!  It means a lower likelihood that retirees/grandparents will move away from their adult children in order to avoid the New Jersey estate tax and will result in lower New Jersey income taxes.  However, the new gas tax increase will likely create an overall higher cost of living for the vast majority of the residents of New Jersey.

As always, it is necessary to review your current estate plan and discuss with us whether any revisions should be made in light of the elimination of the estate tax.  Plans that were based on the current New Jersey estate tax exemption of $675,000 may not accomplish your objectives and could result in unintended adverse consequences.