BRED Slices Mortgages Into Affordable Pieces

Baby boomers have long been the movers and shakers of the real estate market, but millennials are expected to be the biggest buyers in 2019. Millennials are projected to account for 45 percent of mortgages, compared to 37 percent for Generation X and 17 percent for boomers in the new year. This trend is expected to continue well into the future, as millennials climb the income ladder and trade up to homes in mid- to upper-tier prices.1

One big problem is people shopping for homes today tend to have more income than savings to contribute to a down payment. To help younger buyers qualify for a home loan, the mortgage market has rolled out a new type of mixed-rate mortgage, called the blended rate equity driver (BRED).

This type of loan pairs both fixed and variable mortgage structures into a single first‐lien mortgage using a combination of the 30‐year fixed rate mortgage (FRM), the 15‐year FRM and the 5/1 adjustable rate mortgage (ARM).2

The specific mix can be tailored to the buyer, but in each case, the goal is to have equity grow faster through principal payments. Typically, a homeowner garners home equity via three paths: down payment, price appreciation and principal payments over time. However, the real estate market moves fast and is unpredictable. Homebuyers are more transient these days and want the option to relocate, if necessary, so they don’t get stuck with an unaffordable mortgage.

While it’s important to match a home and mortgage to meet your specific needs, it’s also critical to do so with a long-term perspective toward your eventual retirement and financial goals. It’s normally advisable to live within one’s means, but when it comes to buying a home, better advice may be to live below your means. Be sure to consult with a professional mortgage lender or broker to help decide what’s best for your unique situation.

Purchasing a more affordable home frees up more discretionary income that can help create a better financial future. Please contact us if you’re looking for ways to add more confidence to your retirement income plans through the use of insurance products.

Content prepared by Kara Stefan Communications.

Aly J. Yale. Forbes. Dec. 6, 2018. “2019 Real Estate Forecast: What Home Buyers, Sellers And Investors Can Expect.” https://www.forbes.com/sites/alyyale/2018/12/06/2019-real-estate-forecast-what-home-buyers-sellers-and-investors-can-expect/. Accessed Dec. 9, 2018.

2 National Association of Realtors. 2018. “BRED Mortgage: More Money in Your Pocket.” https://www.nar.realtor/sites/default/files/migration_files/bred-mortgage-introduction-10-19-2015.pdf. Accessed Dec. 9, 2018.

We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

Stock Buybacks Explained

When the 2017 Tax Cuts and Jobs Act reduced the corporate tax rate from 35 percent to 21 percent, the hope was companies would spend their influx of money on expansion and increased jobs and wages. Instead, public companies’ most popular way to spend the excess capital has been to buy back their own stock.1

Stock buybacks can be beneficial to both the corporation and its stockholders. Those selling their stock generally do so at a premium, so they’re happy. Shareholders who retain their stock are also pleased because the same amount of earnings is spread between fewer shares, creating higher earnings per share (EPS). Also, company executives generally buy back stock when they feel the current price, which may well be at a record high, is still below its intrinsic value. They benefit because, in many cases, their bonus is linked to EPS growth.2

Even the best-known investor in the world, Warren Buffett, has said, at Berkshire Hathaway’s 2004 annual meeting, “When stock can be bought below a business’s value, it is probably the best use of cash.”3 Buying back stocks is a simple move that can artificially inflate the value of shares without all those complicated expansion plans. However, critics decry the move as masking the true value of a publicly traded business.

Stock buybacks were illegal before the Reagan administration. Legislators believed companies diverting money from employee compensation, research and development would create an income and wealth discrepancy leading to stagnation of the working-class economy.4

The reality is common stockholders don’t have much control over the value of shares. If the price is high, they may want to sell. However, if the company is engaged in a buyback, that could be a clue they expect share prices to go higher, so it may make sense to hang on to shares.

It may be wise to consider why you’d want to sell anyway. Are the proceeds earmarked to pay for a particular financial goal, such as a wedding or college tuition? It’s important to keep your own financial objectives in mind, rather than selling based solely on a company’s dealings. If you find yourself in this situation, we’d be happy to review your portfolio and offer advice within the context of your goals, risk tolerance and investment timeline.

According to Goldman Sachs, U.S. companies were on track to reach $1 trillion in buybacks in 2018 – a pace nearly double that of 2017.5 Federal Reserve data shows buybacks are now equivalent to 4 percent of annual economic output.6

Some of the lowest-paying industries have been the most prolific participants in stock buybacks. From 2015 to 2017, the restaurant industry spent 140 percent of its profits on buybacks (borrowing or dipping into cash allowances to purchase the shares), the retail industry spent nearly 80 percent of its profits on buybacks, and food-manufacturing firms nearly 60 percent.7

Despite concerns that buybacks would reduce long-term investment, some companies have been spending capital at the fastest pace in 25 years. Unfortunately, this is not universally true. Goldman Sachs reports 79 percent of growth in S&P 500 capital spending came from a mere 10 companies.8

Furthermore, S&P 500 firms account for less than 50 percent of business profits and less than 20 percent of employment in the United States. A silver lining of buybacks is what shareholders do with the proceeds after selling. A common route is investing in smaller public and private firms, which does more to support innovation and job growth throughout the economy.9

Content prepared by Kara Stefan Communications.

Larry Light. Forbes. Aug. 31, 2018. “Stock Buybacks Outstrip Capital Spending For 2018’s 1st Half: Is That Bad?”  https://www.forbes.com/sites/lawrencelight/2018/08/31/stock-buybacks-outstrip-capital-spending-for-2018s-1st-half-is-that-bad/#6a16ea066615. Accessed Dec. 9, 2018.

2 Ibid.

3 Eric Rosenbaum. CNBC. Sept. 1, 2018. “Warren Buffett explains the enduring power of stock buybacks for long-term investors.” https://www.cnbc.com/2018/08/31/warren-buffett-explains-the-enduring-power-of-stock-buybacks.html. Accessed Dec. 9, 2018.

Annie Lowrey. The Atlantic. July 31, 2018. “Are Stock Buybacks Starving the Economy?” https://www.theatlantic.com/ideas/archive/2018/07/are-stock-buybacks-starving-the-economy/566387/. Accessed Dec. 9, 2018.

5 Eric Rosenbaum. CNBC. Sept. 1, 2018. “Warren Buffett explains the enduring power of stock buybacks for long-term investors.” https://www.cnbc.com/2018/08/31/warren-buffett-explains-the-enduring-power-of-stock-buybacks.html. Accessed Dec. 9, 2018.

Annie Lowrey. The Atlantic. July 31, 2018. “Are Stock Buybacks Starving the Economy?” https://www.theatlantic.com/ideas/archive/2018/07/are-stock-buybacks-starving-the-economy/566387/. Accessed Dec. 9, 2018.

Ibid.

Matt Egan. CNN. Sept. 17, 2018. “Corporate America is spending more on buybacks than anything else.” https://money.cnn.com/2018/09/17/investing/stock-buybacks-tax-cuts/index.html. Accessed Dec. 9, 2018.

Jesse M. Fried and Charles C.Y. Wang. Harvard Business Review. March-April 2018. “Are Buybacks Really Shortchanging Investment?” https://hbr.org/2018/03/are-buybacks-really-shortchanging-investment. Accessed Dec. 9, 2018.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

Divorce During Retirement

A funny thing happens when you get busy with trying to achieve all the things you want out of life: You lose a few along the way. Unfortunately, some people lose their marriage.1 However, for those who are truly unhappy and can’t see a way back to blissful partnership, a “gray divorce” isn’t necessarily all negative. Even in retirement, leaving a spouse can open up new avenues to be explored, the chance to pursue activities perhaps not supported before and new opportunities to reinvent yourself.

With that said, you also must deal with a myriad of details when it comes to dividing assets to help ensure each ex-spouse has enough income to live comfortably during retirement. Just as it takes a village to raise children, it can take a team of experienced and qualified professionals to help you do this, from attorneys to financial advisors to tax planners and perhaps even a therapist. The goal is to emerge confident about your financial future, and we’re here to help both spouses on this journey should you need it.

When it comes to Social Security, there are certain rules that apply to benefits for a divorced spouse based on the ex’s earning history. For example, the marriage must have lasted for at least 10 years, the couple must be divorced for at least two years and the claiming ex must be currently unmarried – if the claimer gets remarried, the ex’s spousal benefits will stop. Furthermore, the ex-spouses must both be at least age 62 to begin drawing spousal benefits, and the spouse/divorcee must be full retirement age to be eligible for the full spousal benefit.2

Another important component to address is life insurance. If there are alimony payments involved, life insurance can help cover the loss of that income should the payer die first. Depending on their circumstances, divorcing couples may want to update their named beneficiaries on their respective policies. If a policy has a cash value, that money belongs to the owner. While the policy is active, the owner may forgo the death benefit and instead take the cash value, a process known as cashing out your life insurance policy.3

Research has found that divorce may be a reason why many people are working long past traditional retirement age.4 Because of this, it’s important to set aside animosity and work on an equitable agreement for both spouses’ retirement. Divorcing spouses should be cognizant that if one ends up struggling financially, their adult children may have to pick up the slack.5

 Content prepared by Kara Stefan Communications

1 Linda Melone. Next Avenue. July 11, 2016. “Why Couples Divorce After Decades of Marriage.” http://www.nextavenue.org/slideshow/why-couples-divorce-after-decades-of-marriage/. Accessed June 6, 2017.

2 Social Security Administration. “Retirement Planner: If You Are Divorced.” https://www.ssa.gov/planners/retire/divspouse.html. Accessed June 6, 2017.

3 Greg DePersio. Investopedia. Nov. 25, 2015. “How Life Insurance Works in a Divorce.” http://www.investopedia.com/articles/personal-finance/112515/how-life-insurance-works-divorce.asp. Accessed June 6, 2017.

4 Ben Steverman. Bloomberg. Oct. 17, 2016. “Divorce Is Destroying Retirement.” https://www.bloomberg.com/news/articles/2016-10-17/divorce-is-destroying-retirement. Accessed June 6, 2017.

5 Charlotte Cowles. The Cut. May 12, 2017. “My Mom Is Broke. How Can I Help Her?” https://www.thecut.com/2017/05/my-mom-is-bad-with-money-how-do-i-help-her.html. Accessed June 6, 2017.

Our firm is not affiliated with or endorsed by the Social Security Administration or any governmental agency and does not provide tax or legal advice.

Life insurance policies are contracts between you and an insurance company. Life insurance product guarantees rely on the financial strength and claims-paying ability of the issuing insurer.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Taxes and Retirement Planning

The White House recently introduced what it billed the “biggest tax cut” in U.S. history. While a presidential tax proposal is not likely to get passed without significant changes, the fact that Republicans dominate both chambers of Congress suggests 2017 may well be a year in which significant tax reform is engineered.1

One thing should be perfectly clear: The U.S. tax code is highly complicated.2 There may not be anyone who understands it all off the top of their head. CPAs and tax professionals must conduct thorough due diligence to tailor strategies and complete returns for taxpayers with complex situations.

Because of this, we recommend our clients who require tax advice work directly with an experienced and qualified tax professional. However, we also believe financial and tax professionals should not work in a vacuum, and therefore are more than happy to work in concert with our clients’ tax advisors to help align their financial strategy with their tax situation.

This is particularly important when it comes to retirement planning, because you want to save as much as possible before you retire, which may include tax-deferred financial vehicles such as a 401(k) or IRA, but you don’t want to get hit with a big tax bill on untaxed earnings once you’re in retirement.3 This is a delicate balance that requires experience and collaboration from both a financial professional and a tax professional.

One tax issue each of us deals with is the federal income tax rate. Our annual earnings determine which federal tax bracket we land in, but that tax bracket isn’t the tax rate applied to our entire income. Instead, we pay every tax rate on income blocks up to our individual bracket. Like many things about filing taxes, this can be highly confusing for many people.

It may be easier to understand this through a hypothetical example. Let’s say Joe, who is single, had $92,000 of taxable income in 2016, which landed him in the 28 percent tax bracket. This is how his total tax is calculated:4

  • He pays 10% on the first $9,275 (tax of $927.50)
  • He pays 15% on the next $28,375 (tax of $4,256.25)
  • He pays 25% on the next $53,500 (tax of $13,375)
  • He pays 28% on the final $850 (tax of $238)
  • Total tax bill of $18,796.75

As you can see, Joe doesn’t pay 28 percent on the full amount of his taxable income; his taxable amount progresses through each income bracket and their respective tax rates until it reaches his total taxable income for the year. Therefore, a person who falls in the highest tax bracket is only paying that higher tax rate on a portion of his or her income.

This is an important distinction to remember as the U.S. works toward tax reform. On one hand, reducing the number of tax rates from seven to three (Trump’s proposal: 10 percent, 25 percent, 35 percent)5 looks to simplify tax filings, but for many people, this could mean paying a higher tax rate on larger blocks of income. Let’s take the hypothetical example of Joe again, using the same income brackets (to date, no tax rate income brackets have been proposed). Here’s how Joe’s scenario might break down:

  • He pays 10% on the first $9,275 (tax of $927.50)
  • He pays 25% on the next $81,875 (tax of $20,468.75)
  • He pays 35% on the final $850 (tax of $297.50)
  • Total tax bill of $21,693.75

This example simply illustrates how a progressive income tax works. Obviously, it doesn’t take into consideration credits and deductions, which vary substantially among taxpayers. Nor does it include payroll taxes.6

Federal income brackets and their respective tax rates are the most fundamental issues Americans are subject to when filing taxes. But as you can see, there’s nothing straightforward about them. This is worth remembering as tax reforms continue to be proposed and debated moving forward: Nothing concerning taxes is simple, and there are usually layers that impact us that the average layperson isn’t likely to see.

Content prepared by Kara Stefan Communications

1 Fox News. April 26, 2017. “Mnuchin vows ‘biggest tax cut’ in US history, confirms plan to slash business rate.” http://www.foxnews.com/politics/2017/04/26/mnuchin-vows-biggest-tax-cut-in-us-history-confirms-plan-to-slash-corporate-rate.html. Accessed May 5, 2017.

2 Vanessa Williamson. The Atlantic. April 18, 2017. “How the Tax-Filing Process Confuses Americans about Tax Policy.” https://www.theatlantic.com/business/archive/2017/04/paying-taxes-confusion-policy-1040/523287/. Accessed May 5, 2017.

3 Fidelity. March 1, 2017. “How to invest tax efficiently.” https://www.fidelity.com/viewpoints/investing-ideas/tax-strategy. Accessed May 5, 2017.

4 Tina Orem. Nerd Wallet. Sept. 8, 2016. “2016 Federal Income Tax Brackets.” https://www.nerdwallet.com/blog/taxes/federal-income-tax-brackets/. Accessed May 5, 2017.

5 Martha C. White. NBC News. May 2, 2017. “Even Families Making $100K Won’t Be Better Off Under New Tax Plan.” http://www.nbcnews.com/business/taxes/even-families-making-100k-won-t-be-better-under-new-n753941. Accessed May 5, 2017.

6 NPR. 2017. “On Tax Day, an Economist Outlines How the Payroll Tax Works.” http://nhpr.org/post/tax-day-economist-outlines-how-payroll-tax-works#stream/0. Accessed May 5, 2017.

These hypothetical examples are for illustrative purposes only. This information is not intended to provide tax advice. Be sure to speak with qualified professionals about your unique situation.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Savings and Investment Updates

The American College of Financial Services recently posted some surprising results from its Retirement Income Literacy Quiz. Nearly three-quarters of respondents ages 60 to 75 failed the test with a score of 60 percent or less.1

The quiz included topics such as which expenses are covered by Medicare and long-term care insurance and what age people should start drawing benefits from Social Security. If you’re not familiar with the answers to questions such as these, we invite you to schedule a consultation so we can help you delve into retirement planning. There are many factors to consider beyond where to invest and how much you’ve saved. Retirement is about preserving and distributing assets, as well as understanding the impact of longevity.

Let’s take a look at some other retirement-oriented questions that are important to answer. For example, do you know how long you have to work for your company before you can keep matched contributions to your 401(k) plan? Some companies that sponsor a 401(k) require employees to work around two to three years before employer-matching contributions are vested. If you leave the company before then, those matches won’t be added to your account balance — even if you maintain the plan with that employer after you go to work for another one.2

It’s worth noting that 401(k) and other employer-sponsored retirement plans may be considered for tax reform. Recent discussions have included eliminating the tax-deferred status of retirement plan contributions, which represent a four-year tab of $583.6 billion that Congress could spend elsewhere. The discussions are in the very early stages, but things can happen quickly in Washington these days, so it’s an issue worth watching.3

For those in the military, on Jan. 1, 2018, the military’s new Blended Retirement System goes into effect. Starting that day, all military personnel whose length of service spans one to 12 years will have one year to make an irrevocable choice between the old and new retirement plans. Service members who started before 2006 will automatically remain in the old plan, which offers a generous pension complete with inflation adjustments. However, anyone joining the military starting next year gets enrolled automatically in the new program, which combines reduced pension benefits with up to a 5 percent match of personal contributions to the government’s Thrift Savings Plan (TSP).4

If you haven’t saved enough money to retire yet, you may be thinking you’ll just keep working until you have enough. However, according to a recent survey of 1,002 retirees, 60 percent said the timing of their retirement was unexpected, citing reasons such as health issues, job loss or the need to care for a loved one.5 While working longer is a worthy goal, it’s good to develop a financial plan that helps provide for possible contingencies just in case you have to pivot to “Plan B.”

Content prepared by Kara Stefan Communications.

1 Walter Updegrave. Money. May 12, 2017. “Most Seniors Flunked a New Retirement Quiz. Could You Do Better?” http://time.com/money/4771461/retirement-quiz-pass-or-flunk/. Accessed May 12, 2017.

2 Emily Brandon. US News & World Report. May 8, 2017. “How Long Does It Take to Vest in a 401(k) Plan?” http://money.usnews.com/money/retirement/401ks/articles/2017-05-08/how-long-does-it-take-to-vest-in-a-401-k-plan. Accessed May 12, 2017.

3 Suzanne Woolley. Bloomberg. May 3, 2017. “What Is Washington Doing to My 401(k) Tax Break?” https://www.bloomberg.com/news/articles/2017-05-03/what-is-washington-doing-to-my-401-k-tax-break. Accessed May 12, 2017.

4 Dan Kadlec. Money. May 10, 2017. “What U.S. Military Need to Know About Their New Retirement Plan.”  http://time.com/money/4767777/military-blended-retirement-system-tips-new-calculator/. Accessed May 12, 2017.

5 Charisse Jones. USA Today. June 2, 2015. “60% of Americans Have to Retire Sooner Than They’d Planned.” https://www.usatoday.com/story/money/2015/06/02/majority-of-americans-have-to-retire-sooner-than-theyd-planned/28371099/. Accessed June 2, 2017.

Our firm is not affiliated with the U.S. government or any governmental agency and does not provide federal benefits advice.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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