Don't Miss the Match

Don’t Miss the Match

Are you taking full advantage of your company’s 401(k)?

Provided by Jared Daniel of Wealth Guardian Group

The 401(k) plan is one of the most widely-utilized wealth creation tools offered Americans. These retirement savings plans have several advantages, including dollar cost averaging, tax savings and tax deferral.  However, one of the most powerful advantages is the company match. If your company offers a match, are you making the most of it?

Not taking advantage of the company match is like passing up “free money”.  Most rational people don’t walk past a $5 bill on the ground without picking it up, but that’s what people do every day when they don’t contribute enough to their 401(k) to get the full company match. A full one-third of employees don’t take advantage of this feature, and it may make their retirement less comfortable.¹

In a typical plan an employer will match 50% of an employee’s contributions - up to 6% of their salary.¹  Let’s say an employee with that type of plan decides he can’t afford to contribute 6%, but instead chooses to put away 2% of his salary into his 401(k) account.  If he’s earning $75,000 a year, his account balance (assuming no growth) will be $2,250 by year’s end.  That’s $1,500 of his own money as well as $750 of his employer’s money.  If the same person had contributed 6% he would end the year with $6,750 - including $4,500 of his contributions and $2,250 of his employer’s. 

By investing just $3,000 more dollars each year ($4,500-$1,500), the employee can make an immediate $1,500 ($2,250-$750).  It’s hard to make that type of return in any other environment.

This isn’t a 401(k) plan’s only benefit. The higher account balances from making the most of a company match is magnified further by three other advantages of a 401(k) plan.

Regular investments into your 401(k) may help to reduce risk.  Putting a pre-determined amount of money into an investment at regular intervals – as with your 401(k) - is called dollar cost averaging.  This is believed, by many experts, to aid in reducing the overall risk of investing by helping an investor avoid buying at market highs.  A dollar cost averaging program allows investors to buy more shares when market prices dip.  This lowers the average cost of each share purchased.  If the share prices go up, the lower cost provides greater return.²

Investing in your 401(k) plan is an immediate tax savings.  The reason? Every dollar put into the plan avoids being taxed as income. 

For example, let’s assume you decide to put $100 per paycheck into your 401(k) plan and you pay 25% of your income in taxes.  On payday, $100 will go into your 401(k) plan.  However, if you decided against investing in your 401(k), then you’ll only get an additional $75 in your paycheck after taxes.  That additional $25 is, essentially, a reward from the IRS for saving for retirement.³

Finally, contributing to your 401(k) allows those investments to growth tax-deferred.  With most investments, you’ll pay tax on any interest, dividends, capital gains, or proceeds from selling an investment each year.  A 401(k) is a shelter from those taxes.  As long as you keep the funds in your 401(k), your dollars can grow without having to give a share to the IRS.  Over time, this can be a tremendous benefit. 

For example, a $10,000 account balance in a traditional investment for 30 years, with a tax rate of 30%, would only grow to $27,970. If those same dollars grew at 6% in a 401(k), they could grow to $33,043 over 25 years.⁴  That’s an additional $5,073 to enjoy during retirement.

Maximizing the company match with the inherent tax benefits of a 401(k) can go a long way toward helping achieve the goal of so many Americans … a comfortable retirement.

Jared Daniel may be reached at www.wgmoney.com or jared.daniel@wealthguardiangroup.com.

These are the views of Peter Montoya, Inc., not the named Representative or Broker/Dealer, and should not be construed as investment advice. Neither the named Representative or Broker/Dealer give tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

1.  http://www.usnews.com/money/personal-finance/retirement/articles/2008/05/13/3-mistakes-to-avoid-with-your-401k.html

2.  http://beginnersinvest.about.com/cs/newinvestors/a/041901a.htm

3. http://money.cnn.com/magazines/moneymag/money101/lesson23/index2.htm

4  http://www.newyorklife.com/nyl/v/index.jsp?vgnextoid=3e07a2b3019d2210a2b3019d221024301cacRCRD

Implications of Rising Mortgage Rates

Implications of Rising Mortgage Rates

Are they threatening the recovery? Or is their effect overstated?

Provided by Jared Daniel of Wealth Guardian Group

                                               

Between early May and mid-July, the average interest rate on the 30-year fixed-rate mortgage rose about 1%. Rates on 30-year FRMs have basically held steady since hitting a peak of 4.51% in Freddie Mac’s July 11 Primary Mortgage Market Survey – in the August 15 edition, they averaged 4.40% – but they could rise dramatically again.^1,2

 

When mortgages become a bit costlier, things can get a bit tougher for home buyers, home sellers, home builders, real estate brokers, the construction industry, the labor market, the service industry and the broad economy. As housing’s comeback is a key factor in this current economic recovery, how worried should we be that home loans are growing more expensive?

  

Analysts are divided about the impact. A July Wall Street Journal poll of economists drew rather mixed opinions: 40.0% of respondents felt that more expensive mortgages “won’t have a noticeable effect” on the housing recovery, 35.6% thought that they “will slow sales” and 24.4% believed that they “will slow home-price gains.”¹

 

So far, the lure of increasing home values appears to outweigh disappointment over pricier home loans. In the latest S&P/Case-Shiller Home Price Index (released at the end of July and covering the month of May), both the 10-city and 20-city composites showed the biggest year-over-year gain since 2006. Rising home prices (and rising stock prices) contribute greatly to the “wealth effect” felt by consumers. So there is a chance that a 100-basis-point rise in the 10-year Treasury yield (it hit 2.82% on August 15) and conventional mortgage rates may not do as much damage as feared. After all, both consumer confidence and consumer spending have improved even with a 2% hike in payroll taxes and this spring’s federal budget cuts.^3,4,5

    

Maybe we haven’t seen it yet. The fundamental housing market indicators in our economy are lagging indicators, presenting statistics a month or more old. The Case-Shiller composite home price figures are based on three-month averages ending in the latest month of the index – in other words, the May survey reflected data from March, April and May, and May is when mortgage rates began their ascent.³

 

New home sales figures compiled by the Census Bureau must also be taken with a grain of salt. The pace of new home sales reached a five-year peak in May, but here is the asterisk: the Census Bureau actually measures new home sales in terms of signed sales contracts rather than closings. So a sizable percentage of those homes were not yet constructed, and the actual closing could have been months away. As it turns out, 36% of the signed sales contracts in May were for homes yet to be built – meaning they were in all probability three to nine months from completion, with most of the involved buyers unable to lock in mortgage rates in early May as they would have preferred.⁶

 

Which of two outcomes will occur? Summer home sales statistics may reflect more impact from higher mortgage rates. Perhaps they will communicate that the housing market is no longer red-hot, but reasonably healthy. The real estate industry, Wall Street and Main Street can all live with that.  

 

The bigger question is whether consumer spending and GDP will keep improving as mortgage rates presumably keep rising. If the economy gathers or at least maintains momentum and the “wealth effect” continues to boost consumer morale, then the housing market should see sustained demand – a desirable outcome. If mortgage rates rise due to inflation (or some other factor unrelated to growth), then consumers may decide that costlier mortgages are simply too much of a stumbling block to home buying, gains in home values nonwithstanding.³

 

Two things can’t be denied. One, consumers have grown more optimistic recently (and wealthier, at least on paper). Two, home loans are still really cheap these days, at least by historical standards. Those two factors may maintain demand in the real estate market in the face of rising interest rates.

   

Jared Daniel may be reached at www.wgmoney.com or jared.daniel@wealthguardiangroup.com.

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

    

Citations.

1 - blogs.wsj.com/economics/2013/07/19/will-rising-mortgage-rates-halt-the-housing-rebound/ [7/19/13]

2 - freddiemac.com/pmms [8/15/13]

3 - forbes.com/sites/moneybuilder/2013/08/14/with-mortgage-rates-in-a-holding-pattern-what-will-housing-prices-do/ [8/14/13]

4 - nasdaq.com/article/how-we-know-the-federal-reserve-is-in-control-cm265615 [8/7/13]

5 - usatoday.com/story/money/markets/2013/08/15/stocks-thursday/2658439/ [8/15/13]

6 - realestate.aol.com/blog/2013/06/27/rising-mortgage-rates-impact-homebuilders/ [6/27/13]

What if Fannie and Freddie Went Away?

What if Fannie & Freddie Went Away?

How might things change for mortgage lenders & borrowers?

Provided by Jared Daniel of Wealth Guardian Group

                                                                                               

Is a new home financing system ahead? In the text of a speech delivered August 6, President Obama said: “I believe that while our housing system must have a limited government role, private lending should be the backbone of the housing market.” This statement came as part of call for winding down Fannie Mae and Freddie Mac and revamping home financing in America.^1,3

 

How might the playing field change? Right now, Fannie and Freddie backstop almost 90% of U.S. home loans. They are also $187.5 billion in debt to taxpayers, a result of the 2008 bailout that rescued them from the edge of insolvency. Two measures are already underway in Congress to replace both government-sponsored enterprises within the next few years.^2,3

 

If a bipartisan bill introduced this spring by Sen. Bob Corker (R-TN) and Mark Warner (D-VA) becomes law, it would transfer lending risk over to private capital. The proposed legislation would require private lenders to assume the first 10% of losses on individual home loans, and stay sufficiently capitalized to counter major losses. A new federal agency – the Federal Mortgage Insurance Corporation, or FMIC – would regulate the mortgage industry and act to insure banks in a crisis. Just how would it be funded? A fee would be assessed on each mortgage issued. In the vision of the bill, the FMIC would pay for itself thanks to those fees and have enough left over to fund the construction of affordable multifamily properties and provide assistance to low-income homebuyers.^2,3,4

 

Another bill written by House Financial Services Committee chairman Rep. Jeb Hensarling (R-TX) would terminate Fannie Mae and Freddie Mac without a replacement – the FHA would be the last remaining U.S. mortgage backstop. As Bloomberg notes, no House Democrats have emerged to support that bill – and as the Baltimore Sun notes, the bill drafted by Sens. Corker and Warner stands little chance of getting past the House. So it seems the playing field might be reshaped only after considerable compromise, and not in the short term.^2,3

 

Aren’t Freddie & Fannie turning a profit now? Yes, but none of it is paying for their bailout. The GSEs have now returned more than $131 billion in dividends to the Treasury, but that money represents ROI for Uncle Sam. It doesn’t whittle away the $187.5 billion owed to taxpayers.^3,5   

 

What would happen to mortgage rates without Fannie & Freddie? They would almost certainly rise. Private lenders have little motivation to finance home loans the way the rules are now, and it would take significant incentives to bring them back into the market. As Moody’s Analytics chief economist Mark Zandi told CNBC, “[That] will mean higher mortgage rates. The question is how much higher.” In particular, first-time or lower-income homebuyers might find it tougher to qualify for a loan. (In one key respect, it has grown tougher: the average credit score for a Fannie and Freddie loan in 2012 was 756, compared to 720 in 2006.)^4,6

 

Would the 30-year FRM become an endangered species? That is another concern. Without Fannie and Freddie around to guarantee home loans against defaults, the worry is that the standard American mortgage would become scarce. In many other nations, 30-year home loans are unconventional. The fear is that banks would address the default risks of 30-year mortgages by asking for larger down payments and demanding higher interest rates.^2,4

 

True change will likely take a few years. It is hard to imagine Fannie and Freddie liquidating their portfolios and going out of business soon. Reform will probably proceed gradually – very gradually. President Obama’s call to unwind both GSEs and the recent proposals to replace them certainly amount to interesting food for thought.²

 

Jared Daniel may be reached at www.wgmoney.com or jared.daniel@wealthguardiangroup.com .

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

    

Citations.

1 - cbsnews.com/8301-250_162-57597284/wind-down-fannie-mae-freddie-mac-obama-says/ [8/6/13]

2 - baltimoresun.com/news/opinion/editorial/bs-ed-obama-housing-reform-20130808,0,5392371.story [8/8/13]

3 - sfgate.com/business/bloomberg/article/Obama-Says-Housing-Market-Still-Needs-Limited-4710318.php [8/6/13]

4 - csmonitor.com/Business/new-economy/2013/0808/If-Obama-eliminates-Fannie-Mae-Freddie-Mac-will-mortgage-rates-go-up [8/8/13]

5 - reuters.com/article/2013/08/08/us-usa-fanniemae-results-idUSBRE9770JL20130808 [8/8/13]

6 - tinyurl.com/mg2xxs4 [8/7/13]

Can You Raise Your SSI By Reapplying for Benefits?

CAN YOU RAISE YOUR SSI BY REAPPLYING FOR BENEFITS?

Social Security has closed a popular loophole, but all is not lost.

Presented by Jared Daniel of Wealth Guardian Group

 

The “reset button” has been removed. A few years back, the distinguished economist Laurence Kotlikoff alerted people to a loophole in the Social Security framework: retirees could dramatically increase their Social Security benefits by reapplying for them years after they first applied.

 

It worked like this: upon paying back the equivalent of the Social Security benefits they had received to the federal government, retirees could fill out some simple paperwork to reapply for federal retirement benefits at a later age, thereby increasing the size of their Social Security checks. Figuratively speaking, they could boost their SSI after repaying an interest-free loan from Uncle Sam.  

 

You can’t do this any longer.

 

In late 2010, the Social Security Administration closed the loophole. Too many retirees were using the repayment tactic, and the SSA’s tolerance had worn thin. (The Center for Retirement Research at Boston College figured that the strategy had cost the Social Security system between $5.5-8.7 billion.)^1,2

 

Today, accumulated Social Security benefits can no longer be repaid with the goal of having the SSA recalculate benefits based on the retiree’s current age. You can only withdraw your request for Social Security benefits once, and you are only allowed to reapply for benefits within 12 months of the first month of entitlement.^1,3

 

Couples can still potentially increase their SSI. This involves using the “file and suspend” strategy once one spouse has reached full retirement age (FRA).

 

An example: Eric applies for Social Security at age 66 (his FRA). Immediately after filing for Social Security benefits, he elects to have his benefit checks stopped or postponed. As he has technically filed for benefits at full retirement age, his wife Fiona can begin receiving spousal benefits – a combination of her own benefits plus the extra benefits coming to her as a spouse, both reduced by a small percentage for each month that she is short of her FRA. (If she is younger than her FRA, she cannot apply to only receive a spousal benefit.)⁴

 

Meanwhile, Eric’s Social Security benefits are poised to increase as long as his checks are halted or deferred. As Eric has hit FRA, he now has the chance to accrue delayed retirement credits (DRCs) and have his benefits enhanced by COLAs between today and the month in which he turns 70.⁴

 

Before you claim Social Security benefits, run the numbers. Knowing when to apply for Social Security is crucial. As it may be one of the most important financial decisions you make for retirement, it cannot be made casually. Be sure to consult the financial professional you know and trust before you apply.

Jared Daniel may be reached at www.wgmoney.com or jared.daniel@wealthguardiangroup.com

   

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – www.socialsecurity.gov/pressoffice/pr/withdrawal-policy-pr.html [12/8/10]

2 – www.cbsnews.com/8301-505123_162-37841858/the-end-of-social-securitys-interest-free-loan/ [12/9/10]

3 – www.financial-planning.com/fp_issues/2011_3/under-the-radar-2671684-1.html [3/1/11]

4 - www.foxbusiness.com/personal-finance/2012/01/30/social-security-qa-how-to-maximize-benefits/ [1/30/12]