Financial Planning, Investments, Insurance, Asset Managment

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Frequently Asked Questions

Below you will find some of the questions I am often asked.  I am a little uneasy giving these answers because there are often several possible responses.  I have, therefore, tried to give general guidance.  This is not an adequate substitute for a personal consultation with your financial advisor, but I hope it will provide some insights.

Perhaps, but keep in mind that your ultimate time horizon on your investments isn’t the day before you retire, but the day after you die.  If you retire at 65 and die at 85, your portfolio needs to last 20 years while keeping up with inflation.  So a somewhat more conservative approach may be appropriate but shifting to a super conservative strategy, may cause you to run out of money before you run out of life, providing you with a less secure retirement.

There is no answer to this question.  It depends a lot on your circumstances, but Income and Capital Gain Taxes play a significant role in the effectiveness of your investments.  All other things being equal, and they never are, an order of priority to consider is…

If your company offers matching in a 401k or similar retirement plan, contribute to that plan to the extent of the employer’s maximum match.

A Roth IRA, which provides for tax-free growth and access to your retirement funds.

Some Life Insurance policies have investment characteristics and allow for tax-free growth and, under some circumstances, tax-free access to the cash value.  If you have a need for Life Insurance, consider one of these policies.

Now, go back & fill up your 401k.  Your contributions will be made before deduction of income taxes and your growth will be tax deferred until you begin taking money out. 

Annuities provide for tax-deferred growth of after-tax contributions.

Mutual funds, stocks, bonds, and real estate, can all be good investments and often have some tax advantages associated with them.  No investment decision is without a price.  This applies to tax-favored investment vehicles.  Some of the investment vehicles mentioned above may have a limited number of investment alternatives available.  That limitation may, but won’t necessarily, offset some of their tax advantages.  Consider what you may be giving up to obtain those tax advantages. 

The most significant single difference between those with a lot of money and those with a little, is the way they think, feel and act around money, wealth and their lives.  You may be able to benefit from some help in learning how the wealthy think.

Beta measures an investment’s volatility against the market as a whole.  A Beta of 1 means that if the market gains or loses 10% the investment is also expected to gain or lose 10%.  A beta of 1.5 would mean that a movement of 10% in the market would be expected to result in a movement of 15% in the investment.  A Beta of .8 would mean that for that same 10% in market movement you would expect an 8% movement in the investment. 

There are different kinds of Life Insurance policies because people have different needs.  The first priority is to purchase the amount of life insurance you need.  The longer the insurance need, the more permanent insurance makes sense.  If you anticipate keeping the insurance for the rest of your life, that is a clear indication for Permanent Life Insurance.  If your need for coverage will end within the next 10 years, the clear answer is Term Insurance.  The time period in between is a gray area and the answer will depend on your individual circumstances.

In terms of how to pay the least interest, the answer is 15 years.  Both because 15-year mortgages typically carry a lower interest rate than do 30-year mortgages, and because you are paying interest for ½ as long. 

In terms of the best use of your money, the answer may be 30 years.  Mortgage loans are usually the lowest interest rate loan you will ever have, and that interest is usually tax-deductible.  If you have higher interest loans, you may be better off applying to those loans the additional money a 15- year mortgage would have cost each month.  If you have no loans paying a higher interest rate, you can often earn more by investing the additional money a 15-year mortgage would cost than you are paying in interest.

There is also greater flexibility in a 30-year loan.  If your heart is set on making mortgage payments that will have your home paid for in 15 years, consider taking out a 30-year mortgage and paying on it as if it were a 15-year loan.  This will pay off your home in something between 15 ½ & 17 years and you are not obligated to the higher payment.  If you should have a financial setback, you can drop back to the scheduled 30-year payment.

Understand that each month you pay only one month’s worth of interest.  The reason there is so much interest paid on a mortgage is because you are paying on it for so many years.  If you have higher interest loans you are actually money ahead to make minimum payments on your mortgage and pay off your more costly loans.  You can also invest the extra money with the possibility of earning more than you are paying on your mortgage.  This would enable you to pay your mortgage off even faster than making extra payments on the mortgage. 

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