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Investing

Retirement Risks

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Retirement, or Financial Independence, is a relatively new concept here in the U.S. Retirement used to be pretty simple: you step away from the company where you spent your entire career and they rewarded you with a pension check in the mail every month. That was really all there was to it from a financial standpoint. With people now living longer and a shift from employer sponsored pension plans to defined contribution plans (401(k)s, 403(b)s, etc.), people are now responsible for the success of their own retirement more than ever before. Listed below are risks that are unique to retirees, with explanations on ways that these risks can be mitigated.

Longevity Risk

Put simply, longevity risk is the risk of outliving your assets. According to the Social Security Administration, life expectancy for someone born in 1930 was only 58 for men and 62 for women. Now 1 in 4 people who reach age 65 will live past age 90, and 1 in 10 will live past age 95. One of the primary ways to combat this risk is to plan for longevity. When we create financial plans for clients, it is our standard to run the plan until the youngest client reaches age 95 at the minimum. Planning for a longer time horizon forces a retiree to be more conservative when pulling from their investment portfolio throughout retirement.

Inflation Risk

Inflation reduces the purchasing power of a dollar as goods and services increase in price over time. In your working years, inflation may not be as critical of an issue as many workers see cost of living adjustments to their salary. When you’re retired and not earning a salary anymore, it’s important that whatever sources of income you have, keep up with inflation. Social Security has a built-in cost of living adjustment that has historically been around 2% per year. Some government or employer-sponsored pension plans have living adjustments associated with them as well, but they are fairly uncommon and the adjustments are usually less than inflation. One way to help your investment portfolio keep up with inflation is by having a portion of your portfolio invested in stocks. Stocks have historically helped hedge inflation risk.

Long-Term Care Risk

Long-term care risk goes hand-in-hand with longevity risk. As our society continually makes medical advancements, we are able to live longer, but for some this may come at a cost. Many elderly people no longer have the ability to care for themselves, and they have to rely on either family members or professional caretakers to watch over them. According to a study by AARP, 66% of people aged 65 in 2005 will need some type of long-term care during their lifetime. Long-term care insurance policies are the primary way to mitigate this risk, but they are expensive and many people don’t like the “use it or lose it” terms of these policies. Therefore, life and long-term care insurance hybrid policies have recently become more popular. These policies allow you to access the death benefit for long-term care needs while you are still living, yet still provide a death benefit to your beneficiary after you pass away if you do not end up requiring long-term care.

Financial Elder Abuse Risk

A growing risk that retirees face is financial elder abuse. Financial elder abuse occurs when someone tries to take advantage of an elderly person for their own financial gain. What many people don’t know is that elder abuse most often comes from family members! One way to help prevent elder abuse is to simplify your finances as you get older. The less accounts a retiree has, the less accounts they have to monitor. Another way is to work with a trusted financial advisor, who can act as a safeguard if bad actors are trying to swindle money away from those who are no longer able to track their finances as easily as they have in the past.

Sequence of Returns Risk

As we all know, investment returns are unpredictable. We often have very little warning when an event like the 2008 Financial Crisis will occur and send global stock markets tumbling. Negative returns in the first few years of retirement can be detrimental to the success of a retirement plan. It is important to make sure you have a well-diversified portfolio heading into retirement with a mixture of stocks, bonds, and cash. If the stock market were to decline while you’re pulling money from the portfolio, you need conservative investments to draw from so you can allow the stocks to recover.

Loss of Spouse Risk

Losing a spouse can be a turbulent point in anyone’s life. It can be very hard to make sure you have your financial house in order after enduring such a tragic event, especially if the recently deceased spouse handled all of the finances. One of the best ways to ensure the surviving spouse maintains their level of lifestyle is to have a comprehensive financial and estate plan. Hiring a financial advisor in retirement gives the surviving spouse an advocate in such a trying time. The advisor should help create a plan to ensure the surviving spouse has enough assets and income streams to not alter their lifestyle.

If you or anyone you know is nearing retirement, contact Sharkey, Howes & Javer to meet with a CERTIFIED FINANCIAL PLANNER™ and develop a financial plan that helps mitigate these and other retirement risks.

Avoiding the 5 Most Common Mortgage Mistakes

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For most people, a house is one of the biggest, most expensive investments that you’ll ever make. The journey to homeownership is often an exciting milestone, but you must be careful in order to ensure that it’s a positive experience.  Whether you are a first time homebuyer or you’ve purchased several homes, avoiding these common mortgage mistakes will help prevent financial problems following the purchase.  

Mistake #1: Making Yourself House Rich, Cash Poor

Home ownership can be more expensive than renting–especially when you add up all the taxes, insurance, and home maintenance costs over several years.  In fact, many people fall into the trap of making themselves “house rich, cash poor”–that is, tying up all of their available income in the house. Suddenly, despite having a reasonable monthly income stream, you have no extra money, and you find yourself living in a tight paycheck to paycheck struggle.

How to avoid the trap: Find out how much house you can actually afford! The fact that a mortgage broker has offered you a mortgage loan in a particular amount doesn’t automatically mean you can afford to spend that much on your house each month. In fact, many mortgage brokers will offer you a mortgage that exceeds the amount you really should spend on a house. This is because mortgage brokers don’t know your regular expenses since they don’t appear on your credit report.  Nor do they take into account the additional monthly savings necessary for you to reach your other short and long-term goals. Review all your expenses and required savings before committing to your mortgage.

Mistake #2: Ignoring the True Cost of Home Ownership

Home ownership expenses don’t just stop at your mortgage. You’ll also have to take into consideration homeowners insurance, property taxes, Home Owner’s Association (HOA) dues, and maintenance on your home. Once a home belongs to you, you no longer have the luxury of calling your landlord to fix something that breaks. You’ll need extra income or an emergency fund to cover those expenses instead! If you’re used to renting, you’re likely used to a fixed monthly housing expense in your budget. The cost of homeownership, on the other hand, fluctuates and can be difficult to predict month to month.

How to avoid the trap: Create a budget estimate that includes all of the costs associated with home ownership, not just your mortgage. Don’t forget to set aside an estimate for maintenance! This more detailed budget may give you a better idea of what you can afford when you’re setting up mortgage payments. One rule of thumb is to put away 1% of the home value in a separate home maintenance account. For example, if the value of your home is $600,000, save $6,000 per year (or $500 per month) toward future maintenance costs.

Mistake #3: Not Shopping Around for the Best Loan

All loans are not created equal! Some mortgage brokers will give you better terms on your loan than others. If you aren’t shopping around–looking for better interest rates or more favorable closing costs–you may end up paying more than you have to for your home.

How to avoid the trap: Take the time to get mortgage information from several lenders–and make sure you know what they’re really saying! Compare interest rates, down payments, fees associated with the mortgage, and private mortgage insurance requirements in order to be sure that you’re getting the best deal for your mortgage.

Mistake #4: Putting Little to Nothing Down

Although there are loan programs where you may not be required to make a 20% down payment, which seems appealing if you don’t already have a lot of money saved, there are some drawbacks to this option.  Unfortunately, lower down payments don’t just lead to more money paid over the lifetime of the loan. It can also lead to higher interest rates, higher monthly payments that are more likely to put you in a financial pinch, and the need for mortgage insurance.

How to avoid the trap: Save for a little while longer before jumping into the home buying process.  Putting down an additional 5-10% can make a big difference over the lifetime of your loan. Be willing to be patient and wait for it!

Mistake #5: Not Checking and Fixing Your Credit Reports

Your credit report has a significant impact on your mortgage: your monthly payment, your interest rate, and how much you have to put down on the loan, not to mention the need (or lack thereof) for mortgage insurance. If there’s something wrong with your credit report–and unfortunately, sometimes, there can be problems on your credit report that aren’t a result of your spending–it may send up red flags for potential lenders.

How to avoid the trap: Take the time to check your credit report before you start looking at mortgage rates. Make sure you don’t have any common red flags. If there are issues, take the time to fix them before you’re ready to buy a house.

Having a mortgage doesn’t have to be terrifying. By avoiding these common mistakes, however, you can save yourself and your family some money and ensure that you’re better prepared for the road to home ownership.

Are you thinking of buying a house? Give us a call or schedule a complimentary consultation to discuss how to avoid these mistakes with a CFP®.

Build a New Home or Renovate a Fixer Upper?

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Planning a move can be an exciting time for your family. While you are shopping around to see what’s on the market, it feels like the possibilities are limitless. Before you get your heart set on a plan, however, consider the implications of buying a new construction home, or buying a fixer upper to renovate. Now is the time to take a critical look at your financial situation and goals to determine how much house you can afford.  Additionally, take the time to decide upon and make a list of non-negotiable items you want when considering your next home.

The thought of purchasing a brand new house, complete with home automation and an in-ground pool, sounds appealing to just about anyone. Determine exactly what you need in a new home before you start browsing real estate catalogs, and then search for homes that specifically fit those parameters.

New construction homes can provide a sense of security that you won’t get from purchasing a fixer upper. Some of the benefits of new builds include:

  • Low maintenance costs. Everything, from the sinks and counters down to the plumbing and electrical wiring, is brand-spanking new. You shouldn’t have to pay for many repairs for some time.
  • Energy efficiency. While most new build homes aren’t necessarily built to the greenest of standards, they are made to meet more exacting standards than the homes of years past, so they will likely be easier on your utility bills.  
  • Modern conveniences. It isn’t just the house itself that will be new; appliances, alarm systems, entertainment systems, and even lighting options will support a modern, tech-infused lifestyle.  
  • Customization. When you purchase a home before construction is complete, you may have the option to customize it the way you want. Depending on the stage of construction, you might not be able to move the bathroom or add a fourth bedroom, but you may have your pick of countertops, faucets, light fixtures, and paint colors.  
  • Open floor plans. Most older homes you see do not feature the open floor plans, large bedrooms, walk-in closets, and spacious bathrooms that you will find in a new build.  
  • Warranties. Most new homes come with at least a ten-year warranty, and even longer warranties on many aspects of the building.  

If low maintenance, energy efficiency, and modern design elements are a must, you might prefer to buy new. However, if you are more concerned about factors such as the neighborhood, having more land, the price point, or your home’s ability to accommodate some serious personalization, take a look at the benefits of buying a fixer upper:

  • Lower or no HOA dues. Fixer uppers are often found in neighborhoods that have very low or no Homeowners Association (HOA) dues.  In new builds, these dues can greatly increase the cost of owning a home and are often overlooked when considering a purchase.  Buying in an area with low HOA dues can help reduce the annual costs of owning a home.
  • Lower mortgage. When you buy a fixer upper, you will almost certainly get more house for the money, and end up with a lower mortgage payment to boot. Having a lower mortgage can free up cash flow or allow a smaller secondary loan to cover the cost of renovations or remodeling.
  • Better neighborhood. New construction homes tend to be in new developments, where houses are often cookie cutter and wall to wall. Fixer uppers can be found in just about any type of neighborhood, and it’s quite possible to buy into a better neighborhood than you could normally afford by choosing a fixer upper.  
  • More land. Older homes are often situated on larger lots with mature landscaping that offers more privacy than you can usually get in the newer communities.
  • Customization. New construction customization is mostly about the cosmetic aspect of the home. Fixer uppers have much more potential for knocking out walls, adding bathrooms, or setting the kitchen up exactly the way you want it.  

There are financial risks to making any big purchase, especially when you take out a mortgage. There are advantages and disadvantages to both new builds and fixer uppers. The most important consideration is to know specifically what you are looking for in your next home. Before you buy anything, talk to an experienced real estate agent, weigh the advantages and disadvantages of a new build versus a fixer upper, and contact Sharkey, Howes, & Javer to help you determine just how much house you can afford given your circumstances and other goals.

The Aging Brain and Decision Making

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Regardless of age, we all have moments when we walk into a room and forget what we were looking for or start a sentence and forget what we were going to say. However, as we get older and these occurrences perhaps become more frequent, it is important to consider how our aging brain may be impacting other areas of our lives.

In 2015, the Center for Retirement Research at Boston College released a report on how a decline in cognitive skills affects financial decision making. The study conducted an annual review of a group of aging individuals’ financial literacy or knowledge, confidence in making financial decisions, and level of responsibility for managing their finances.

The study found that while a decline in cognition lead to a significant decline in financial literacy, it did not reduce individuals’ confidence in their ability to manage their finances. As a result, many individuals maintained primary responsibility over their finances despite a decline in their ability.

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Our Thoughts on the Dow and 20K

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You’ve likely heard noise in the media recently about the potential of the Dow hitting 20,000. We recently wrote about the history of the Dow and want to remind you that the media has a tendency to add hype where it is not warranted. In our reading over the weekend we found an article that illustrates our feelings about the Dow and the recent hype around it quite well.

In the article, Why Dow 20k doesn’t matter, published in the Chicago Tribune, author Jill Schlesinger said, “I think the Dow is perhaps the least meaningful U.S. stock index available. Sure, it’s got history on its side — it was created by Charles Dow in 1896 in order to provide investors with a snapshot of how the overall stock market was doing. But it includes only 30 large companies, and considering that Amazon, Google and Facebook are not part of the Dow, it is hard to make the case that it reflects the broader market.” (source)

The full article can be read here and we think it is a worthwhile read.

 

Dow 20,000 and the History of the Dow’s Milestones

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The Dow is within “striking distance” of reaching 20,000, a milestone that many investors may feel as though they have been waiting forever for (source). As we are potentially days away from the arrival of the Dow 20,000, and while this is merely just a number – a big, round number – we consider the history of the Dow Jones Industrial Average and the time it took to reach some of its past milestones.

Historically, the index has struggled reaching major milestones. The Dow first reached 100 in 1906, but after many fluctuations, it wasn’t until the mid-1920s before it convincingly traded higher than that level, and it permanently broke above it in 1942 (source).

This was the case for the Dow 1,000 as well. It initially hit the 1,000 mark intraday in 1966 but did not close above that mark until November 1972. It wasn’t until 1982, 16 years after initially reaching 1,000, that the Dow finally traded above that mark for good (source). It took roughly 15 years from first closing above 1,000 in 1972 for the Dow to progress another 1,000 points to the 2,000 milestone, yet only four years to go from 2,000 to 3,000 points.

The Dow first hit 10,000 in 1999, but the average fell below that level for 11 years, until 2010 when it took residence above that milestone. Now, seven short years later, the Dow is about to hit 20,000.

The chart below shows the important Dow milestones and additional key dates that defined what the Dow is today:

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8 Creative Ways to Win Your Dream Home Without Making a Poor Investment

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In a hot real estate market it’s easy to let your emotions get involved possibly resulting in making a poor real estate investment. It’s not uncommon in today’s market for buyers to waive inspections or pay an amount over the listed value in order to get the home of their dreams. Instead of risking your investment with emotional decisions, we’ve put together some more creative ideas to help your offer stand out.

Here are 8 tips for standing out in a bidding war:

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The Top 3 Advisors You Need for Optimum Financial Health

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Throughout the course of our lives we often find ourselves in need of the benefits various advisors provide. In the realm of finances, there are three types of advisors we see as invaluable to your long term financial health.

1. Estate Planning Attorney

A recent Gallup poll found only half of Americans have created a last will and testament (source). Furthermore, estate planning services seem to be a dime a dozen from cheap online solutions to attorneys who draft the same plan for every client.

Estate planning is often misunderstood. It involves much more than paying estate taxes. Estate planning done well allows you to provide guidance to and appoint person(s) of your choosing to make healthcare and financial decisions on your behalf in the event of your incapacitation and may help ensure that your assets are divided amongst heirs as you desire. Building a relationship with a reputable estate planning attorney who understands your unique situation not only makes sense for you, but it also can help offer your loved ones peace of mind that you have a plan in place.

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