UnThreaded | Threaded | Whole Thread (9) | Ignore Thread Prev Thread | Next Thread
Author: Kidmuse Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75625  
Subject: Financial Planning Advice Date: 9/14/2007 8:43 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Thanks to all who responded to my post last night. I knew you would want more data and so do I.

A couple of answers:

1. We have a home that is currently worth @$650K and our mortgage is $390K. It's an ARM (@7.25% and always climbing these days). The upside of our loan is that we can pay a lower amount in slow months (we're musicians), although we usually pay the full amount. We also have a home equity loan that we've unfortunately ran up to $80K. I'm wondering if we should consider refinancing and rolling the HELOC into the new mortgage. Any thoughts about this? One of my friends did this CONSTANTLY when the value of his property kept increasing so that he could take out more home equity loans and improve his lifestyle. This behavior can catch up with one, I'm sure. I might need to talk with a debt consolidation expert instead of a mortgage broker.

2. We haven't done a budget, yet, so I cannot adequately answer this portion of the life insurance puzzle. My wife and I are 45 and 43 years old. We love our job (we work together) and we would love to keep doing it until we're 70 or so. And I definitely don't want to work at WalMart as a greeter. To his credit, the planner did suggest that funding our retirement is more critical than funding our kids' college funds. One of the tricky things about our line of work is that in the event of one of our deaths, we would have to either hire a new musician to take the spouse's place or switch careers. Should we have a bigger life insurance plan because of this? Or a disability plan?

3. He did not give specifics about the Mutual Funds he's pushing, although they are loaded funds.

4. My kids' 529 plans are split into four equal funds from Vanguard. Value Growth, Small Cap, Index funds, etc. I'll have to get more information for my next post if it's still relevant, but it seems likely that I'll be concentrating more on retirement as opposed to college. The planner said, "the kids can always take out loans on college. You can't take out loans for retirement."

5. The individual stocks in our retirement plan are very aggressive small companies. I do have some balance in bond funds and International index funds and there's a mid cap fund, too. I've basically gone lockstep with Motley Fool's Hidden Gems program and done a 25-35% return since I invested the money last year. Not bad, but I might be playing this too risky. Should I keep some of the money here or invest it all into the safer 10.5% percent S&P Index types?

6.Also on the subject of IRAs. We have a traditional IRA. The planner is suggesting that he wants to discuss ROTH IRAs, SEPIRAs, IRAs for our business, etc. I guess these are tax related vehicles to save for our retirement. Any thoughts here or places I can look to get more information?

Thanks,
Scott
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: Hubris Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59190 of 75625
Subject: Re: Financial Planning Advice Date: 9/14/2007 11:04 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
We also have a home equity loan that we've unfortunately ran up to $80K. I'm wondering if we should consider refinancing and rolling the HELOC into the new mortgage.

Be extremely careful here, this is how people are losing their houses. There are two problems here, not one. The first, and more important, is understanding why you've run up debt and solving your budget problems. The Credit Card and Consumer Debt board here at the fool is excellent if you have a thick enough skin to handle people second-guessing all your decisions. The lesser problem is that of mortgage rate. While it will always be technically correct to reduce the cost of your loan, I call this the lesser problem because until you have the spending issue fixed, burying the evidence by rolling the loan into a refi won't really help you.

We haven't done a budget, yet, so I cannot adequately answer this portion of the life insurance puzzle.

Do it. Religiously track your income and expenses so you can make informed decisions. As other people have said you should have term life insurance to cover the financial damage that would be caused by your early death (as should your spouse). Disability plans can also be really important since you are more likely to be disabled than to die suddenly.

He did not give specifics about the Mutual Funds he's pushing, although they are loaded funds.

Fire him. Anyone pushing you into load funds at best doesn't know what he's doing, and more likely is just trying to make more money off of you. Also, a great credential to look for is CFP, it requires a good bit of effort to get and reflects a solid understanding of financial planning.

The individual stocks in our retirement plan are very aggressive small companies...I've basically gone lockstep with Motley Fool's Hidden Gems program and done a 25-35% return since I invested the money last year...Should I keep some of the money here or invest it all into the safer 10.5% percent S&P Index types?

With apologies to our hosts for saying this on their forums, I think that products/services like Hidden Gems do a real disservice to less experienced investors. A 25-35% return is phenomenal and in all likelihood unsustainable, be thankful at your good fortune so far, but it's very likely this won't continue forever. Even the "safe" 10.5% is not at all guaranteed (it's based on historical market returns, the market could well do worse or better going forward).

The key advantages of a broad market index are: 1) diversification means that you are not really vulnerable to single company risk, Enron may implode but if it's <<1% of your portfolio that's not a disaster; 2) less work, to analyze individual companies takes a ton of work (if you can't give a very detailed analysis of every company you own then imo you are gambling, not investing); and 3) very low transaction costs, people recommend Vanguard a lot not just because the name sounds cool but because that company is extremely efficient in using your money on the internal expenses of their funds.

The key disadvantages as I see it: 1) ego, you don't get to make cocktail party chatter about how your latest stock investment went through the roof, nobody cares that you own an index fund; and 2) giving up the dream of outrageous returns like 25-35%, the problem is that everyone thinks they can get these returns long term, but hardly anyone does.

Anyway, take anything any anonymous message board poster says with a grain of salt (and maybe a tequila and a lime). I'm sure you'll get a lot more opinions from the board regulars--I just happened to be passing by and your post caught my attention.

hope this helps,

Hubris

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: mrparrotfez Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59191 of 75625
Subject: Re: Financial Planning Advice Date: 9/14/2007 11:52 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Want to have some fun? Ask him why he's pushing load funds over no-load funds. Ask him to demonstrate why you can expect to make more money in loaded funds. "How is it more to my advantage to lose $575 of my $10000 the day I invest?" For extra amusement, ask him to tell you how much money the $575 would be worth in an S&P 500 index fund over that same time, because that would be the real amount you were losing.

Print the post Back To Top
Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59192 of 75625
Subject: Re: Financial Planning Advice Date: 9/14/2007 12:01 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
Scott
Hubris has covered your questions pretty well. Can't add too much except a bit or reinforcement from another stranger.

Except for bona-fied emergencies, dipping into your home equity to support your life style is a very bad idea. You are in effect spending money you don't have. And if home values in your area should gradually decline (due to any number of local or national reasons) and you wanted to sell, you may well have to 'take money to the table' to close, meaning you'd have to make up the difference between the selling price and the (closing costs + sales commissions + balance due on loan).

And as Hubris says, your investment return is due to good fortune, not your investing skills. This is a critical distinction to make. Las Vagas is highly profitable becuase most gamblers don't get it. When a typical gambler plugs a silver dollar into a slot machine and gets 4 sevens, the gambler assumes it has something to do with skill, or prowesss or lady luck being on his side...so he puts all of his winnings back into the machine plus more out of his pocket. If you can't recognize that what happened is fortune, you'll plug your money back into the high risk MF's and keep doing it as you watch it dissappear in a protracted down market...and there WILL be a protracted down market.

Disability (inability to do your regular work) is much more probable than untimely death. This is where an untouched HELOC would come in handy. Otherwise, a disability insurance policy that replaces a % of your income sufficient to meet fixed costs (usually 50-70%) over a sufficient time period until you would be able to recover or pick up another line of work.

How much you need to save for retirement depends on the savings you have so far, your current lifestyle ($$ consumed per month), how fast it has been growing, your projected retirement age, life expectancy and expected rate of investment return. Any competent financial planner should be able to sit down with you both, and with a financial calculator, figure this out. If he can't, he's not a financial planner. But once the monthly savings amount is known, you can split it up between your IRA's (Roths are typically preferred over traditional IRA's as there is no tax on qualified withdrawals and there are no minimum required distributions) and your self employment retirement plan, like a SEP or SIMPLE IRA. You can read more about these at the IRS web site at

http://www.irs.gov/retirement/article/0,,id=111406,00.html

Finally, I agree with the idea of sitting down with a financial planner who carries either the CFP or CPA/PFS designations, as these are tough to get and demonstrate at least a basic broad knowledge of personal finance. And it would be in your best interest to find one who charges you for their services by the hour. Ok, lets say it'll cost you $1,000. What would it cost you to have your car's transmission repaired, or to have to have a plummer go into your wall to find and fix a leaking water supply pipe? The real difference is that the advice received from a competent financial planner should effect you for the rest of your life.

BruceM

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59193 of 75625
Subject: Re: Financial Planning Advice Date: 9/14/2007 12:32 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
...We love our job (we work together) and we would love to keep doing it until we're 70 or so.....

That would be great, but I wouldn't plan it if financially. As you age your voice may suffer or you might get some arthritis's or repetitive stress injury that will limit your ability to perform.

It sounds like you might be able to benefit from a fee only(by the hour) financial advisor. Watch out fore the financial advisors that "only" charge 1 or 1.5% of you assets each year for their advice. The math gets funky, but over the next 30 years that is around a third to a half of your retirement funds.

Unless the HELOC was run up with something like major medical bills, it should be a red flag that you are living above your means, which is especially dangerous to you since you sometimes have slow months. Eventually just by random chance there will be a series of slow months that are back to back and last longer than you thought possible. You really don't want for financial problem to force you to make bad career choices just for some short-term gains.

...With apologies to our hosts for saying this on their forums, I think that products/services like Hidden Gems do a real disservice to less experienced investors. A 25-35% return is phenomenal and in all likelihood unsustainable, be thankful at your good fortune so far, but it's very likely this won't continue forever....

That performance can also be thought of a being to or three time the performance of the overall market. It is sometimes hard to differentiate between being able to pick better stocks, or just picking a basket of more volatile stocks. Unfortunately if the stocks are just more volatile then in the case in a bad market, and if the market has a 20% correction, you might be down 40-60%.

Greg

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: alaskack Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59197 of 75625
Subject: Re: Financial Planning Advice Date: 9/14/2007 4:46 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
1. We have a home that is currently worth @$650K and our mortgage is $390K. It's an ARM (@7.25% and always climbing these days). The upside of our loan is that we can pay a lower amount in slow months (we're musicians), although we usually pay the full amount. We also have a home equity loan that we've unfortunately ran up to $80K. I'm wondering if we should consider refinancing and rolling the HELOC into the new mortgage. Any thoughts about this?

Since both loans are already against your home, you can refinance them into one loan. The problems I see with doing this are you'll be extending a 10-15 year HELOC into a likely 30 year loan, meaning you'll be paying more interest. And the danger of you adding another HELOC if you decide you need the money. You then get right back into the same situation. If you can avoid this, then go for it, if ther is an advantage for you. You might consider a 15 or 20 year refinance option if you can afford the payments.

6.Also on the subject of IRAs. We have a traditional IRA. The planner is suggesting that he wants to discuss ROTH IRAs, SEPIRAs, IRAs for our business, etc. I guess these are tax related vehicles to save for our retirement. Any thoughts here or places I can look to get more information?

You can start here:

http://www.fool.com/ira/ira.htm

And also Google each type for more info.

Calvin

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59201 of 75625
Subject: Re: Financial Planning Advice Date: 9/14/2007 9:06 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
Since both loans are already against your home, you can refinance them into one loan. The problems I see with doing this are ....

The current mortgage market troubles have created a situation that isn't conducive to this. We just did a refi, and the VERY FIRST thing that all the mortgage agents asked me was, "Do you have a 2nd mortgage or HELOC?" These are now a red flag, just like a history of unsecured consumer loans---they take it as a sign that you don't know how to handle money.

Also, FNMA now considers that if the new 1st mortage is going to pay off a HELOC or 2nd, then that is a cash-out refi UNLESS it was used as part of the original house acquisition. They do not like to do cash-out refi's right now, and express their displeasure by bumping up the interest rate. Used to be that they'd only do this if you took a draw within the last 24 months. Not anymore.


You might consider a 15 or 20 year refinance option if you can afford the payments.
No no no. Get a 30. Keep your required payment low. You can always pay more, but you can't pay less.

Print the post Back To Top
Author: RetiredVermonter Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59204 of 75625
Subject: Re: Financial Planning Advice Date: 9/15/2007 7:45 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
Kidmuse:

Your first post generated a number of pretty good responses, so I've just read them and kept my mouth shut.

By way of background, we're both retired, both over 65, and raised three children through college, and they are all now married and on their own, with families, homes, etc.

We're both collecting Social Security. We have no pensions, as such, though I get a tiny amount each month from one former employer. My wife has a small IRA that we tend to leave alone, as we are satisfied with its reasonably stable growth. My IRA is larger, and I have actively managed it on my own for several years, since when it was a 401k, later rolled over into the current IRA.

I've managed to sustain it at or above where it was several years ago, even though we draw money from it occasionally for special needs (occasional trips, unusually large single payment things like our lump sum oil payment for this winter, etc.) We're not rich, but we're comfortable.

Now, for some comments.

...our mortgage is $390K. It's an ARM (@7.25% and always climbing these days).

I find that a bit uncomfortable. What might it end up costing you as rates move up? Any idea?

The upside of our loan is that we can pay a lower amount in slow months (we're musicians), although we usually pay the full amount.

Will that continue forever?

We also have a home equity loan that we've unfortunately ran up to $80K. I'm wondering if we should consider refinancing and rolling the HELOC into the new mortgage. Any thoughts about this?

Others may disagree, but I think I would try to combine all of that into ONE, new, fixed rate mortgage that you could pay without fear of it suddenly escalating. Just my opinion.

We haven't done a budget, yet, so I cannot adequately answer this portion of the life insurance puzzle.

You need a budget of some kind so you can see what you are really earning AND what you are spending. As for life insurance, a TERM policy on EACH of you would be prudent, if you each earn about the same amount. When you say you are musicians who "work together", does that mean you are interdependent, so if one suddenly were not there the other's livelihood would evaporate, too? Things to consider.

I echo others' observations to beware lest the advisor send you into investments that HE makes more money from.

Also, I'd not necessarily rush to pay off a huge mortgage if it meant drastically reducing all of my assets. When we bought our retirement home, we plowed SOME of the proceeds from our former home into paying cash for a large addition, and we also paid off HALF of the already small mortgage and refinanced the rest at a modest 5.65%. Had we paid it ALL off, it would have taken about HALF of my IRA, which I felt would have left us with too much tied up in this one asset.

Just a few thoughts.

Good luck!

Vermonter

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59215 of 75625
Subject: Re: Financial Planning Advice Date: 9/16/2007 5:29 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 20
1. We have a home that is currently worth @$650K and our mortgage is $390K. It's an ARM (@7.25% and always climbing these days). The upside of our loan is that we can pay a lower amount in slow months (we're musicians), although we usually pay the full amount.

DANGER! This sounds like an 'Option' ARM - usually you get 4 different payment options - a minimum payment, an interest only payment, a 30 year amortized payment and a 15 year amortized payment.

By paying the 'full amount', which payment are you making? If it's not at either the 30 year or 15 year amortized payment, you are not paying any principal at all on your home.

If, by making the 'lower amount', you are making the minimum payment, you are actually pulling equity out of your home to support your lifestyle.

We also have a home equity loan that we've unfortunately ran up to $80K.

This also sounds like you are using your home equity to support a lifestyle that you cannot sustain on your current income.

I'm wondering if we should consider refinancing and rolling the HELOC into the new mortgage. Any thoughts about this? One of my friends did this CONSTANTLY when the value of his property kept increasing so that he could take out more home equity loans and improve his lifestyle. This behavior can catch up with one, I'm sure. I might need to talk with a debt consolidation expert instead of a mortgage broker.

Yes, this is why people are losing their homes now - they continue to borrow the maximum amount that they can against their homes to support lifestyles that they cannot afford on their income. Then, when the value of the home either flattens out, or worse yet, drops, they cannot borrow any more money, and they cannot afford to meet the obligations they have already committed to, including their mortgage, and end up declaring bankruptcy and/or losing their homes to foreclosure.

I work for a mortgage servicing company, and I am seeing this more and more every day.

2. We haven't done a budget, yet

Until you do a budget and figure out what your actual income vs. expenses are, you should not even consider refinancing your mortgage in order to continue to upgrade your lifestyle (which is what you are doing by lowering your payments - getting more money to spend on other things). You need to understand if you can truly afford your house, or if you are living in a house of cards. Because if you are stealing home equity to support your lifestyle, you need to do some deep thinking on your income and your expenses.

It's great that you love your jobs, and it's great that you love your house and your lifestyle, but if your income cannot support the obligations of your lifestyle, one of them has to give, or there will be drastic financial consequences.

AJ

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
UnThreaded | Threaded | Whole Thread (9) | Ignore Thread Prev Thread | Next Thread
Advertisement