September 29, 2010
All-Star Advice 2010
Just because the economic recovery is moving like molasses doesn’t mean your personal rebound has to be sluggish. Black Enterprise talked to some of the wisest financial planners, investment advisers, real estate professionals, tax accountants, and insurance agents we know to gain their best advice for the months ahead. What follows is a collection of top tips from experts passionate about providing such guidance to clients, friends, and family. Read on to benefit from their timely recommendations.
Blend your 401(k) with a Roth IRA to achieve â€‹â€‹maximum savings and minimal taxes.
Max out your 401(k). Put as much as you can into it before using any other type of investment and retirement savings vehicle. It’s a good idea to hold both a 401(k) and Roth IRA based on your tax bracket, but consult with an adviser. When you’re planning for retirement you want to maximize the amount you can pull out tax free. The Roth is great but isn’t deductible, so if you’re in a higher bracket try to put in $16,500 or $22,000 (over 50 years old) to reduce your tax burden. The first thing I do with clients is talk to their CPAs. We look at their modified adjusted growth income and designate their tax bracket. When it comes to a 401(k), if you’re in the 28% tax bracket and you put away an additional $4,000, it may put you in the 35% tax bracket. But let’s say you put that $4,000 in a Roth–it keeps you in a lower tax bracket.
Handle your family’s finances like a Âbusiness–with formal bi-weekly meetings.
I advise clients to stay on track with their financial and professional goals by holding regular, structured meetings. If you’re single, meet with yourself. I’ve been helping clients to schedule and host a formal meeting with themselves no less than twice a month for at least 30 minutes. This meeting should not just be an opportunity to sit, relax, and think. It should be a formally scheduled meeting, written into whatever calendar tool you use, and with a formal agenda and note taking. The agenda should include a vigorous discussion and assessment of how well you’re progressing toward your goals and you should leave the meeting with action items to complete within the next two weeks. The discussion should include a review and approval of notes from the last meeting, and an appraisal of any new ideas you’ve gathered. During tough times, it’s important to not let the moment distract you from your desired end result. Surviving and thriving can occur at the same time.
Forget about a short sale and buying a foreclosed home.
So-called ‘regular’ sales are likely to present better bargains.
Contrary to popular belief, individual home sellers have more leeway and, often, more motivation to accept a lower offer than banks that are negotiating short sales or selling foreclosures. (In a short sale, the bank is the ultimate arbiter of how low the seller can go.) Banks must often adhere to guidelines and in many cases they can’t accept an offer that is below a certain percentage of the home’s fair market value. So rather than accepting a lowball offer, many banks have a policy of slightly reducing the list price and simply re-marketing the home. By contrast, individual sellers have no such limitations, and will often accept bargain-priced offers. They are also motivated. Sellers have the ability to bargain on other transaction points as well. You might pay the fair market value to an individual seller but get them to agree to paint the place, complete repairs, or fix the furnace. What are the chances you’ll get a bank to do that for you? Somewhere between slim and none.
Keep abreast of credit card news and Âdevelopments–and work to pay down your debt.
Banks and credit card issuers are losing money [because of recent credit card reform legislation] so they want to offset that some way. Everyone should stay on top of any news related to credit cards. Card holders have to watch their statements–every piece of mail they get at home–because banks are going to find a way to supplement all this money they’re about to lose, and they are working diligently to figure it out. If your card issuer has an e-mail list, sign up. Read those e-mails. The federal government does a great job of educating consumers. The websites of the Federal Trade Commission, www.ftc.gov, and the Federal Reserve, www.federalreserve.gov, both have consumer protection sections and provide a wealth of information about the credit card law and rights consumers have.Â My best advice is to pay down credit card debt. List your credit cards from smallest to largest and get them paid down.
Get in the habit of projecting your taxes well before tax time.
Taxes are a certainty, but you can have more control over the amount you pay on April 15 if you project your taxes early in the year while there is still time to do something about the bill. October is a good time to project your taxes; another is immediately after you file your taxes, while the pain of missed opportunities is still fresh in your mind.
Start the process by reviewing your last tax return, and then consider any changes that have occurred since you filed it: changes in your income, your filing status, the number of dependents, if you purchased or sold a home, and any changes in the tax laws that might affect you such as the new federal energy tax credits. If you work with an accountant, he or she can assist you with the projection. Or, you can use one of the tax software programs such as Intuit’s TurboTax or H&R Block’s TaxCut to calculate your tax bill. Once you have a projection of how much you will owe, you can make changes to lower it such as adjusting your withholding, contributing more to your retirement plans, or making purchases that take advantage of tax credits.
Even if you’re an “underwaterâ€ Âhomeowner, you may be able to refinance.
With many communities experiencing significant declines in property values, some borrowers who qualify financially and are creditworthy may find that the appraised value of their home presents some challenges in getting approved for refinancing. Recognizing this, the federal government has established the Home Affordable Refinance Program, or HARP, to provide some relief to those who have a mortgage currently owned by Fannie Mae or Freddie Mac and who may owe more than their home is worth. The bottom line: refinancing options are very much available [for specific, applicable programs], but homeowners should talk to a trusted lender about what options may be best for their situation. Ultimately, homeowners need to determine what their overall goal is in refinancing. Is it to lower monthly payments and increase monthly cash flow? Is it to reduce the term or length of the loan and pay off the home sooner?
Exercise your right to negotiate unfair terms with banks and credit card companies.
Credit card issuers have set up lots of loopholes in response to the recent credit and debit card reform. Even responsible customers have had their accounts closed and limits decreased. But consumers can get around these loopholes. If your account has been closed or your limit reduced, and you’ve been making your payments on time and in full, call the company and ask to have the decision reversed. You can usually negotiate. Always stay in contact with your creditors. If you’re having a tough time paying your bills or you don’t agree with any new terms, call and let them know.
Look into an annuity.
A lot of people are losing their jobs and receiving severance packages. If you’re one of these people, look to roll over your 401(k)s and 403(b)s into annuities, insurance vehicles that offer customers a stream of income as well as protection of assets in retirement. Annuities generally come in two types: fixed or variable. In the past, annuities didn’t have a good reputation, but some annuities guarantee to double the amount you add within a designated period, usually 20 years. These products also have a “step-upâ€ feature, which allows you to preserve your principal and increase your initial investment and protect any gains. For example, if you add $100,000 to an annuity, you can lock it so that if your portfolio goes down to $50,000, you still get paid $100,000. Also, annuities usually have holding periods from five to seven or nine years during which you are penalized for early withdrawal, but once that holding period is up you can withdraw from it with no penalties usually up to 10%.
Invest in undervalued stocks.
It is a good time to invest because stock prices are down right now. Because of the economic times, we are finding stocks that are very undervalued. A new or seasoned investor can buy stocks from companies that were out of their reach before, price-wise. It is a good opportunity to buy companies that will be around for the long haul such as Coca-Cola, Pepsi, and Microsoft. These companies usually have a very high stock price [compared with their industry peers], and people would normally stay away from them, but now that stocks are undervalued it is a good time to jump on them, because at some point they are going to rebound and catch up to where they were before the recession. It comes down to researching the individual companies and not the industry, because every industry is down.
Go for the gold.
I recommend gold because it is the only incorruptible form of wealth. The federal government’s debt is unsustainable and gold should serve as a hedge. In five years, if the government didn’t spend a dime on anything besides Social Security, Medicare, and Medicaid, we would still have a budget deficit. In 15 years, 31 states will have exhausted their state pension funds. The Federal Reserve’s response to these fiscal imbalances is to print money and dilute the currency. As the value of the dollar declines, gold should increase. Every year the pundits say gold is a bubble, yet it has outperformed the S&P 500 by close to 200% over the last five years.
A home is a good place to live, not a fast-money investment.
People need to back away from thinking of their home primarily as an investment. When you really take a look at the cost of owning a home versus renting, especially when you’re not going to stay in that home for a long period of time, it is not the investment you think it is. When you factor in the cost of property taxes, insurance, maintenance, and other expenses, you are really only getting paid back all the money that you put into it. You can take any extra money saved while renting and invest it in the stock market. It’s easier to divest out of stocks than to sell your home when market conditions change very quickly. Plus, most people have a large percentage of their net worth tied up in real estate. You never want to have a majority of your net worth tied up in any one asset.
Consider a whole life insurance policy.
People need to start taking advantage of permanent whole life insurance. You’ll get a guaranteed interest rate anywhere between 3% and 4%. You don’t have to pay taxes on that, as opposed to a savings account where you have gains from interest you have to pay taxes on. A lot of people put money into CDs, and each year they have to pay taxes on that as well. Whole life insurance accrues cash value that you have access to as well, but without having to pay penalties for early withdrawals. The tough times we’re in now mean a greater need for life insurance. A lot of people have depleted their IRAs and 401(k)s. If something happens to them, their children won’t be able to collect their unemployment benefits. They will get some Social Security but it probably won’t be enough for them to maintain the style of living that they’ve been accustomed to. A policy of $50,000 for a 25-year-old in relatively good health costs $180 and at age 35 would have a cash value of $21,400.