Posts by Erich Schwerd

Financial Planning Case Study Six

Posted by on Apr 2, 2018 in Financial Planning | 1 comment

The purpose of financial planning is to attain financial security,which everyone defines differently.  In the ideal situation, we start early, establish goals, develop a plan, and consider as many contingencies as possible.  For example, we just helped some twenty something’s with a retirement plan, permanent insurance, and an emergency fund. Assuming they stay the course, they will have few money concerns.

At 25, they were able to get a universal life insurance policy with a death benefit of $800,000, for only $50 a month.  Now, that is a great death benefit for the children that they do not even have yet! In addition, however, the policy accumulates cash value.  In the first years, that value is zero, but after 10 years or so it starts to build up, and this gives you flexibility.  You can borrow against the policy if you need to, or take cash value and reduce the death benefit.  If you do nothing, the accumulated value could exceed the original death benefit. Every case is different, and who knows what types of policy will be available.  The point is, the earlier you get insurance, the lower the cost.

At $100 a month over 40 years, assuming a 7% average annual return, they will each have $274,301 in their Roth IRA accounts.  This will be tax free money in retirement!!  This assumes that they never increase that contribution.  Once they contribute to a 401k at work, they will have more than enough money for retirement.  And, they will be able to enjoy a good lifestyle, because they know their savings are on track and their life insurance is covered.

$50 a month to an emergency fund will help them cover unexpected costs, like a new refrigerator or a broken window.

Assuming they purchase reasonable homes and cars, they will have a financially secure life.

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Planning on buying a home this summer?

Posted by on Apr 2, 2018 in Financial Planning | 0 comments

There are a few things to keep in mind. The standard way of going about purchasing a home is to ask the bank how much you qualify for, picking the neighborhood you want, and getting a 30-year mortgage. There are many pitfalls with this process. The better way to do it is to first calculate for yourself how much you can afford. You know your budget. Keep in mind that houses are glorified cardboard boxes, in constant need of repair. We never consider the annual maintenance of a house when we purchase, but we should. I have to put on average $6000 into my house every year just to keep it from falling down. Then of course, you have taxes and insurance, and no one tells you to be mindful of that. After considering those factors, see what your potential monthly mortgage payment can be, and then discover how much you can borrow based on that payment. It will be less than the bank wants you to borrow, but you will easily make your payment and you will be able to go on vacation and eat dinner.

One area where you don’t want to be mindful of the mortgage payment is on the term of the mortgage. Everyone gets a 30-year mortgage. But a 15-year mortgage is the way to go. Using a $100,000 loan, consider a 4.5% interest rate. For a $200,000 or $300,000 mortgage, just multiply the number in the example. Every $100,000 borrowed at 4.5% interest gives you a $507 mortgage payment over thirty years. Now, your total interest paid is $82,000. On a 15-year mortgage, the rate is actually lower. Assuming 4%, but it could be less than that, your payment is $740 a month, and you pay a total of $33,000 in interest. You paid $50,000 less for the same house!! Or $100,000 less, or $150,000 less.

If you are considering buying a house, I recommend buying one that you truly can afford with a 15-year mortgage.

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Financial Planning Case Study Five

Posted by on Mar 21, 2018 in Financial Planning | 0 comments

The purpose of financial planning is to attain financial security, which everyone defines differently. In the ideal situation, we start early, establish goals, develop a plan, and consider as many contingencies as possible. For example, we just helped some twenty something’s with a retirement plan, permanent insurance, and emergency fund. Assuming they stay the course, they will never have a money care in the world. However, it does not always work out that way. One contingency that we do not plan for is disability. Disability can occur at birth or later in life through physical or psychiatric trauma. The personal care for a disabled person is the most important task. Financially, we want to make sure we can continue to provide for the disabled person and include protections against potential creditors and bad actors that may be trying to take advantage of the disabled person. Special needs trusts and supplemental needs trusts can provide the protections required. Trusts must be managed for preservation and income. They also outline specific uses or intent for the funds to help prioritize goals. In special needs trusts, the management of the trust asset is even more rigorous due to rules and regulations, and the specific needs of the disabled. We are very experienced at managing trusts of all kinds, as well as handling the financial planning needs of beneficiaries, including disabled beneficiaries.

According to Money magazine, October 2016, there is now an easy way to protect a disabled child’s future. ABLE accounts let you save up to $14,000 a year for anyone who became blind or disabled before age 26 without counting as an asset that would eliminate Medicaid and SSI benefits.

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Financial Planning Case Study Four

Posted by on Sep 17, 2017 in Financial Planning | 0 comments

The purpose of financial planning is to attain financial security, which everyone defines differently.  In the ideal situation, we start early, establish goals, develop a plan, and consider as many contingencies as possible.  For example, we just helped some twenty something’s with a retirement plan, permanent insurance, and an emergency fund. Assuming they stay the course, they will never have a money care in the world.  However, it does not always work out that way.

A situation that we see all the time is student loan debt and credit card debt that is financially disabling.  It is not uncommon at all to see student loan payments that equate to half or even all of a monthly paycheck!  The client’s goal in that situation is to make more money. Our goal is to develop a strategy to step by step lower monthly payments by reducing debt in an organized manner.  Restructuring debt might mean lower payments, but it means you pay more over a longer period.  We do not follow that approach.  We target debt payments to reduce the monthly payment and reduce the overall term of the debt.

This has you paying less money overall, over a shorter time period.  With hard work and determination, and using a variety of strategies, we have reduced many thousands in debt within 5, 7, and 10 years.

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Saving for College with 529 plans

Posted by on Dec 5, 2016 in Education | 0 comments

We ALWAYS recommend that parents save for college via a 529 plan.  Current US student loan debt is valued at 1.2 trillion dollars.  Every little bit of money that can be put towards college will help students graduate with less of a loan payback burden.

How does a 529 plan work, and is it right for you?  Investments in a 529 plan earn dividends, interest, and capital gains on a tax deferred basis.  Withdrawal is generally tax free if used for qualified education expenses.  
Qualified educations expenses are amounts paid for tuition, fees, and other related expenses that re required for enrollment and attendance at an eligible educational institution, including books, supplies, equipment, and activity fees.  Room and board, insurance, and transportation are NOT qualified expenses.  Also note that payments for the academic period must be paid in the academic period.  You CANNOT claim a credit, such as the lifetime learning credit, for any tax free funds that were used.  However, you can coordinate benefits, by paying for a portion of qualified expenses with 529 plan funds and filing for the credit for a different portion of the expense.  
For more information on 529 plans and Coverdell education savings accounts, see IRS publication 970.  For your specific situation, please be sure to consult your own CPA or tax professional.

Eligible educational institutions are listed at the department of education website, and include most US based universities, American universities abroad, and many non-US colleges and universities.

How does a 529 plan affect financial aid?  It depends.  A grandparent or other third party owned 529 plan is not reported on FAFSA at all.  FAFSA stands for free application for federal student aid.  However, a distribution from that fund would be considered income to the student and would be assessed at 50%, reducing the students’ eligibility for financial aid.

A parent owned 529 plan counts as a parent asset and is reportable on FAFSA.  However, only 5.64% of parents’ assets are counted as part of the “expected family contribution”.  Distributions for qualified expenses are not counted at all.  A student owned 529 plan is reportable and 20% of the value is calculated as an expected family contribution.  Distributions for qualified expenses are not counted.

The best 529 plan to have is the parent owned plan.  The good news is that anyone can contribute to that plan, so grandparents can contribute to the parent plan, they don’t have to have their own plan.  Other friends and relatives can contribute to the parent owned plan as well.  

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