5 Financial Moves For 2019

I was asked this question the other day on my Youtube Channel:

“Where is YOUR income going to come from once YOU retire?”

I think the question was more a challenge rather one of curiosity because of the previous comments. But I proceeded to answer as I do here:

“I plan on having three sources of income in retirement:
1. Social Security
2. Reverse Mortgage
3. Roth Distributions (If needed)

And in that order.”

Then I asked the commentator if anything looked odd by my scenario. And as surely as the sun rises in the east, he/she said, “Reverse mortgage??? No thanks!”

What I was hoping the commentator would say looked odd was that my income combination of Reverse Mortgage, Social Security and Roth will be…TAX FREE!

You pay no tax on ANY of those individual income sources. Which means when they are combined together you still pay NO TAX.

But, as always, that wonderful aspect of my 3 bucket income plan gets overlooked because of the fear of reverse mortgages. Which is too bad because reverse mortgages should play a role in every retirement plan, especially if you are retiring WITH a mortgage in the first place!

According to the Federal Reserve Board’s “Survey of Consumer Finances” 45% of households between the age of 65-74 carry a mortgage. The AVERAGE value of those mortgages was $117k! (I don’t know what the median value was though. But let’s say it’s $100k for simplicity. That’s still a big debt to carry.)

Nearly a quarter of households age 75 or above carry a mortgage and that average debt is still $91k.

The rule of thumb is that it costs $500 a month in payments for every $100k in mortgage debt one has. So, for a 75 year old retiree with a $91k mortgage that is around $500k a month going out the door, each and every month.

The average household in retirement spends around $3800 a month…total. Thus that mortgage payment is a large, if not THE largest percentage of your outgoing cash flow. In fact, the article just cited looks at BLS statistics which claims the average retiree spends $1,322 a month on housing, or one third of their income is consumed by housing costs.

So, what’s the single easiest way to eliminate your mortgage without liquidating assets to do so??? Get a reverse mortgage! Use your equity to help fund your retirement. It’s literally that simple. And if fact, it gets even easier when you realize spending equity means NOT spending investments.

Thus, if leaving assets to your heirs is important would you rather leave a house that appreciates potentially at 3% a year, or investments that MAY appreciate double that?

If you’re not concerned about leaving any assets then the reverse mortgage is even better because you are literally spending down your net worth and will NEVER have to pay it back!.

I think Dave Ramsey and others really hurt people with their misguided takes on reverse mortgages. Dave Ramsey said explicitly they are ‘scams.” That level of ignorance from a well-respected commentator simply boggles my mind. (I did a video here where I tore into Dave’s mis-representation of reverse mortgages.)

Now, I am not here to sell you on reverse mortgages. Whatever works best for you is fine with me. But I am here to tell you that you should educate yourself on them before you simply dismiss them outright.

Here is the best book you can read on reverse mortgages. Wade Pfau is one of my favorite financial planning academics. And his book simply opened my eyes to the value a reverse mortgage can have for retirees. I imagine with will do the same for you as well.

Happy New Year everyone!

So, let’s get right into it. The 5 things you NEED to do this year when it comes to your financial planning.

1. Look at your year-end statements.
I can’t tell you how many people put these statements into a drawer or just shred them without even opening the envelope. Don’t do this!
The information contained in these statements is critical. Obviously, you’ll see account balances but the year-ends show you how much in fees you paid over the course of the year. The statements will also show you cost basis for each holding you have, which is hugely important for this years tax planning. (Remember cost basis info is irrelevant when it comes to an IRA/401k etc.)

Finally, the year end statements will show you how much in taxable interest, capital gains and dividends you received too. Which leads us to number 2:

2. Look at your 1040!
Now, I don’t know what the new tax forms will look like exactly so I can’t give you specific line numbers to review. However, you need to find your AGI AND your Taxable Income too. Remember these are two completely different things. See my video here. It’s only your taxable income that matters when it comes to the actual amount of taxes you pay.

Is your taxable income well below the threshold for the next tax bracket? Say you are married filing jointly with taxable income of $40k. You have nearly $40k more of taxable income before you move from the 12% bracket to the 22%. Are there opportunities here to move to Roth IRAs?
What if you have NO TAXABLE INCOME? Are you taking advantage of this?

Lots of numbers for dividends, capital gains and interest income? Well, you have planning to do! Which leads us to number 3:

3. Look at WHERE your investments are:
If you have taxable income from your investments, the first question you need to ask yourself is WHY??? Should the accounts that yield taxable income better serve you by being placed in your IRAs/401k or Roths?

Do you have tax-exempt bonds in your taxable accounts and stocks in your IRAs? Again, why? Your stocks grow, guess what else grows? Your future taxes! Municipal bonds though don’t grow, they just give you minimal tax-exempt interest. When you look at this in the totality you’ll see that tax-free interest from the municipal bond side does not come close to offfsetting the increasing taxes from the stock/IRA side.

Ideally, we want low income producing stocks in your taxable accounts. High income producing stocks in your Roth and taxable bonds if you have them,(and I’d ask why?) in your traditional IRA. That is asset LOCATION, which has the affect of taking advantage of the tax code to maximize your investment wealth.

4. Pay off debt. YES MORTGAGES TOO!
With the gigantic increase in standard deductions it’s highly, HIGHLY unlikely you’ll be itemizing your taxes anymore. The vast majority of taxpayers, we’re talking over 90%, will no longer itemize. People who don’t itemize do not get mortgage interest deductions. It’s really that simple.

If you’re married filing jointly under the age of 65 you have $24k in standard deductions. Let’s say you have $11k in mortgage interest and say $5k in property taxes. You still need $8k in other deductions to even think about itemizing. Are you tithing? Have large medical expenses? If not, it’s hard to see how you’re going to break that $24k threshold to itemize.

Now, let’s say you do have $30k in total itemized deductions. That’s still only $6k above the threshold for the standard deductions. So, of ALL that mortgage interest you’re paying, you’re only getting of fraction of it deductible anyway!
Thus stop losing money to the mortgage company on the guise of “deductible interest”. Most taxpayers are not deducting anything for the next few years.

One of my biggest pet peeves is financial planners/advisors/wealth managers etc, who charge a fee for investing. There is NO value in this at all. None. You are losing money in this exchange.

The investment advisory industry realizes this too. They know the gig is slowing being exposed. So, what they’re doing is using terms like ‘behavioral consulting” and “evidence-based” to make it seem there is more to their offerings than simply picking investments for you. There isn’t.
Look, I’ve no problem using a service like Vanguard or some other service that charges a ‘reasonable fee” say .50% or less for automatic rebalancing and diversification with a once or twice a year consulting call. But paying someone 1% to put you in mutual funds which cost on average .70% simply doesn’t make sense. Skip the middle man and just go buy the funds directly and be done with it.

It’s actually even worse if the advisor is charging 1% to put you in low cost ETFs too. That guy is literally doing nothing.
Now, if this guy is actually doing financial planning to go along with his investment ‘guidance’ simply tell him you no longer want to pay for the investment management but would rather just pay for the financial planning.

What I tell the folks who consult with me is that twice a year meetings will typically be adequate. Once to review the year end statements. And again, to review the 1040. Those two occasions should prompt you to be thinking of your financial planning indeed.

So, there is my summary of 5 things you should be doing for 2019.
1. Open your year end statements
2. Look at your 1040
3. Know where your investments are located
4. Pay off debt
5. Stop paying investment fees.

Here’s to a wonderful 2019!

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