How to Keep Your Kids Close Forever

Dec 21, 2020 David Kennon

I’ve harped on beneficiary arrangements in the past, but recently I’ve seen two more messes, and I want to re-emphasize what you need to watch out for.   It is incredible to me.  Someone will spend their entire life working to build up some savings.  They care for it, nurture it, and watch it grow.  But when it comes to deciding who will get the money – the decision lasts about five seconds.   For example:   Mary opens are IRA containing $500,000 of hard-fought savings.  She agonizes about how to invest it correctly.  She interviews several financial planners.  She works hard on a plan that will allow her to live a secure retirement.   When it comes to naming a beneficiary it looks something like this:   Advisor:  “So who do you want this money to go to when you pass away?”   Mary:  “I don’t know, I guess my husband first and then split it between the three kids.”   That’s it.  Thousands of hours creating her life savings.  Five seconds determining who gets the financial efforts of her entire life.   Let’s look at some real stories (obviously names and details are changed).   Story #1   Bill owns a turnip farm in Wisconsin.  He worked the farm his entire life.  Through acquiring adjacent acreage he was able to buy up nearly a thousand acres of land in order to increase his turnip empire.  While the property was worth nearly a million dollars, Bill would never dream of selling- he made a $50,000 turnip profit each year.   What would happen to the farm if he were to pass?  His will dictated that his wife would get the property, and next up were the two sons who would share 50/50.   Bill passes away.  Mom gets the farm.  She wasn’t really sure what to do- as her husband handled the demanding and complex turnip industry.   Suddenly there is some strife in the family.  Son #1 is a responsible parent of two and son #2 loves to spend money.  Son #1 wants to keep the farm in the family and collect the profits.  Son #2 want it sold immediately for a big payday.   So who is caught in the middle?  Their mother.  The stress it causes in the family creates rifts that might never be healed.  And their mother gets stuck being the judge and jury.   Story #2   A widow dies suddenly from a heart attack.  In her later years, she became very close to two specific nieces.  With no kids of her own, she began to think that maybe it would be best if they received the bulk of the money.  They were almost like the daughters to her.  It made her feel warm inside to know that all of her hard work could help make her beloved nieces’ lives easier.   Nobody even plans on dying suddenly.  At her death, her IRA beneficiary arrangements were examined.  The instructions hadn’t been changed in fifteen years.   Half the money went to a local political party and the other half was split among ten extended family members.  Most of whom she hadn’t spoken to in years.   Story #3   Mr. and Mrs. Smith named each other as the primary beneficiaries on their retirement accounts.  Several years later Mrs. Smith passed away.  After a few years, Mr. Smith began dating again and eventually married.  Mr. Smith just defaulted to his new wife as beneficiary on his accounts.  He just didn’t think about it at the time.  He was too in love.   Mr. Smith passed away ten years later.  The new wife got all of Mrs. Smith’s money even with several kids and grandkids in the picture.   Story #4   The parents of two daughters pass away.  On their beneficiary documents, 100% of the money was to go to daughter #1.  Why?  Daughter #2 was terrible with money and according to Mom, “She would spend it in less than a year.”   Her parent’s idea was that daughter #1 could give daughter #2 money slowly, over time.  This way daughter #2 wouldn’t blow the money.   This is a terrible idea.  The reasons are obvious.  At Thanksgiving, one daughter threw a turkey leg at the other.   Would you like it if your sibling could decide when you can get your inheritance?  As an aside, a trust could easily fix this situation.   ——————————————————-   Lastly, I wanted to share an email I received recently from a client.  She gave me permission to share and I hope it reinforces my entire retirement philosophy.   Hi Dave,    I hope you are doing well in the middle of these crazy times.     I’m writing you with a question but first I wanted to thank you for the wonderful advice you gave me to spend and enjoy the money that I have. You’ll be happy to know, I took your advice to heart. After Bob passed away in March of 2019, I decided I would travel somewhere each month. Between April 2019 and April 2020 I traveled to Paris, Copenhagen, Amsterdam, the Maldives, Dubai, California, Texas, New Mexico, Illinois, Michigan, and various places in Florida.   Then things came to a halt with the pandemic. Then for me everything changed drastically when I suffered a compression fracture in my back this summer followed by a diagnosis of multiple myeloma, a cancer of the plasma cells. Needless to say, my life has been turned upside down.   I’m going through treatment now and the doctors at Moffitt say the prognosis is good and people can now live decades with this cancer. I’m so thankful that I followed your advice and enjoyed my money because you never know when life will throw you a curveball.    So, thank you!     Be Blessed,   Dave

 

Why Do Dentists Love Retirees?

Dec 14, 2020 David Kennon

Unexpected Retirement Expenses   Joey and Jane Jenkins, ages 65, decided to retire after over 40 years of work and toil.  While their social security and investment income would more than cover their monthly expenses, they still felt financial anxiety.   “What happens if there is a big one-time expense we weren’t considering?” Jane lamented.  “You never know what might happen. Who knows? I read a frightening article on the internet explaining how many seniors are hit with unexpected expenses.”   Joey agreed.  “Well, I guess we should try to live on a strict budget.  That way we can save as much as possible… just in case. I guess we won’t get to live out some of our dreams in retirement.  We will probably have to watch our friends travel, dine, and spoil their grandkids. But for us? It’s spaghettios and spam for us.”   Joey and Jane fears came true, in a sense.  They ran into nearly every big “unexpected” expense a retiree could face.   Dental care.  Joey never listened to his Mom as a kid and didn’t brush and floss everyday.  At age 74, he needed a root canal and crown, and again at age 82. While Medicare doesn’t cover dental care, there are several options to reduce the cost.   If you have an iffy dental history, you should seriously consider supplemental insurance or a discount dental plan.  I would say teeth are the largest and most common unexpected expense retirees face.   Hearing Aids.  Joey also required a hearing aid at age 74.  While Medicare usually covers a basic pair, the more advanced versions can get up in the $6000 range.   Major Health Event.  At age 83, Jane needed complex surgery to remove some melanomas from her back.  The bill they received in the mail totalled nearly $80,000.   Luckily, as long as you receive Medicare and have purchased a supplement, the maximum out of pocket expense in any given year is $6500.  “That was a close one,” sighed Jane. “I didn’t realize how much Medicare actually covers.” (source)   Prescriptions.  Jane developed rheumatoid arthritis at age 68.  The injections she received each month were extremely expensive.  But, considering Jane was enrolled in both Medicare and an appropriate Medicare supplement, she was only liable for a maximum of $5100 a year out-of-pocket (source).   There are also a myriad of options lower-income retirees can utilize to receive deeply discounted medications. Surprisingly, in my experience, prescription costs are lower in retirement than most expect.   Car Repairs.  Joey and Jane, like most retirees, purchased cars far less often, and put on less miles (after a couple road trips around this beautiful country).  Considering the warranties only lasted five years, Joey was upset when his transmission blew at age 78. While the $3000+ bill wasn’t welcomed, it did not upset their financial lives.   Home Repair.  The Florida weather took a toll on Joey and Jane’s home.  During their retired years they needed to replace the air conditioner twice and get a new roof. The air conditioners cost them $4,000 a piece, and the roof set them back almost $15,000. This is one of the most common one-time expenses I see.   Helping Kids and Grandkids.  Joey and Jane’s third child, Jessica, had a messy divorce, leaving her and their two cherished grandkids in a tough spot.  “Joey,” pleaded Jane, “We need to help them. Maybe we can set aside $1000 a month to keep them on their feet. Maybe they can even move in for a while until things settle.”   While not common, in my professional experience, this can be the most expense “problem” once retired.  But it’s no reason to skimp and live small now. If it happens, it happens, and you adjust.   Some of you may disagree with my prices, as you may have a bigger roof or really bad teeth.  But I’m trying to make a point here. Hopefully as I lay out all the normal “unexpected” expenses, you might start to realize that there are fewer unknowns than you thought.   Beyond this list there isn’t much else to worry about. I’ve consulted with many retirees, and this is a pretty comprehensive list of surprise expenses.   The solution?  I always recommend my clients keep $20,000 to $30,000 in an emergency fund.  Keep the money in the bank and maybe utilize a short term CD or a money market.  This will allow you to absorb these kinds of expenses. So in addition to your portfolio of stocks and bonds, it makes sense to have a bit of a cushion.   You can always take out a little extra from your retirement accounts too.  Generally it doesn’t upset your long-term retirement income plan.   The other option is to finance these expenses as they come, and simply add the payments into your monthly budget.  While not ideal, as long as your monthly spending plan has room, you’re still in the clear.   Be Blessed,   Dave

 

Using Artificial Intelligence to Maximize Investment Returns

Dec 7, 2020 David Kennon

I was in my car the other day when I heard a commercial on the radio that got my attention:   “Most investors took a huge hit with the Coronavirus crash. That pain suffering and financial loss didn’t have to happen, and we’ll show you how with a free demo of VantagePoint. Text the word FREE to 411411 to learn how we’ve applied artificial intelligence to protect your capital so you can navigate and thrive in volatile markets.”   You will hear my extremely emotional response in a moment, but before that I need to point out:  This is a criminal act. They are selling snake oil. They are scamming unsuspecting people.   I heard this on a reputable national station reaching untold numbers of listeners. I’ve heard it several times since.   I don’t know exactly where to begin.   1. If I were to make these kinds of claims I would be stripped of my license. If you are registered with the SEC as a registered investment advisor you can NEVER—never, ever, ever—make claims like this. These yahoos get away with it because of a loophole in the system.  They are not selling “investment advice;” they are selling software.   2. When was the huge crash with the Coronavirus exactly? The market was down a month and a half.   3. “The pain and suffering of financing loss.”  I see this tactic used quite often. These con men feed off of fear. It doesn’t matter if their “medicine” makes it much worse. They don’t care.   4. The part that completely floors me is where they say “We’ve applied artificial intelligence.”  What does that even mean?  It certainly sounds exciting and cutting-edge.  Maybe they do have some sort of algorithm they could use to help smooth out my portfolio, right?   No, they don’t.   Let’s think about this logically. If VantagePoint has this fancy software that will help you make all this money, why are they not using it for themselves? If their “artificial intelligence” can predict the movements of the market, wouldn’t the developers of this software be unfathomably rich?  Why would they offer it to the public? They would be making so much money by “navigating and thriving in volatile markets.”   Next, I went to their website. Front and center was:   “Created by world-renowned trading software pioneer Louis B. Mendelsohn, VantagePoint forecasts Stocks, Futures, Forex, and ETFs with a remarkable proven accuracy of up to 87.4%. Using artificial intelligence, VantagePoint’s patented Neural Network processes predicts changes in market trend direction 1-3 days in advance. With this information, traders can confidently get in and out of trades at the optimal time. With nearly four decades and more than $10 million dollars of research and development invested, VantagePoint helps traders preserve their hard-earned capital and create real wealth.”   This. Makes. Me. FURIOUS.   Making the claim of 87.4% accuracy is ridiculous. Again, I would probably go to jail if I ran around touting these claims. But these guys don’t go to jail. They are only selling software.   They use a “patented Neural Network process!” What could that possibly mean?  I mean, seriously.  It is just a bunch of fancy sounding words strung together.   What is especially sad about these scams are all the unsuspecting investors out there losing all kinds of money day trading using this worthless software. Remember, day trading doesn’t work over the long term.   Testimonials from the site:   Jeff S.   “In 2 months I was able to recoup my investment. I have since paid off my mortgage and car.”    Sam A.   “I started using VantagePoint 6 months ago and my account has tripled!”    By now you clearly understand that this is a scam. I don’t understand how it can be advertised on national radio. I don’t even understand how this is legal.   What is the total cost for the VantagePoint Software system?   A mere $4,900.   Be Blessed,   Dave

 

Baby Boomers Face the Reality They Might Never Retire

Nov 30, 2020 David Kennon

I was messing around on Google the other day and typed in: “Baby Boomer Retirement.”   These are the search results, in order:   1. Are We in a Baby Boomer Retirement Crisis?   2. One-third of baby boomers had nothing saved for retirement at age 58   3. Tough retirement realities for baby boomers   4. Lack of retirement savings haunts Baby Boomers   5. Baby Boomers Face Reality They Might Never Retire   I’m not even kidding.  Those are the first five search results.  How could you not worry about retirement when you keep hearing this dismal news?   But are Baby Boomer’s prospects really that dire?   Today, poverty rates among people 65+ is around 10%. Fifty years ago, in 1969, it was 20%. Nearly twice as much.(source)   Forbes recently published an article titled The Graying of Wealth.  In it, author Neil Howe writes, “The relative affluence of today’s elderly is historically unprecedented. Never before have the 75+ had the highest median household net worth of any age bracket. Today, the typical 80-year-old household has twice the net worth of the typical 50-year-old household.”   Below is the data by which he reached his conclusion. According to the 2016 Federal Reserve Survey of Consumer Finances….   Here is the median net worth by age in the U.S.: Ages 55-64: $191,836 Ages 65-74: $229,425 Ages 75 and older: $271,162 (source)   Do you know what this means?  The average American sees their financial status improve as they get older. This data is so counter-cultural it is almost hard to believe. The doom and gloom surrounding Baby Boomers and retirement is profoundly over-hyped.   This kind of one-sided information dramatically skews the perception of most Americans nearing the end of their careers.  For at least 50% of the population, these articles are completely irrelevant.   Even more compelling data:   Only 12% of retirees die with no assets (source)   48% of retirees are able to maintain their standard of living once retired (source)   1/3 of retirees have more money 20 years into retirement than on the day they retired (source)   I had to dig to find this information.  It required me to read government studies and surveys which are rarely cited.  But the data is there. It is available for all to see.   Let’s create our own fictitious Google search results.  If it were up to me, these would be the first five results when searching the term “baby boomer retirement.”   1. The Majority of Baby Boomers Will Thrive Once Retired   2. The Bottom 25% of Americans Will Struggle Financially in Retirement, But What About the Other 75%?   3. The Elderly Are More Wealthy Than Any Other Time in American History   4. The Average Retiree Sees Their Net Worth Increase As They Age   5. Nearly Half of Boomers Will Not Have to Adjust Their Lifestyle Once Retired   Now that is refreshing.   Be Blessed,   Dave

 

How to Only Work Three Hours a Day

Nov 23, 2020 David Kennon

It’s 2020. A year for the history books. I figured we all needed some good news to fight the unrelenting negativity of the media. The following good news contains an important financial lesson. The human capacity to grow, change, and innovate is absolutely incredible.  If you’re worried about the stock market stopping its 200-year positive run, try this on for size:   In 1981, 42% of human beings lived in poverty. By 2018, that number had dropped to 8.6%.   The incidence of armed conflict has decreased substantially in the past few decades.   The chance of a person dying from a natural catastrophe (earthquake, flood, drought, storm, wildfire, or landslide) has declined 99% since the 1920s and ’30s.   90% of the world’s population was illiterate in 1820. Today the world literacy rate is over 90%.   In 1870, the average time globally that a human being in the world spent in school was six months.  That number is now eight and a half years.   The IQ’s of people of the world are growing at an incredible pace. IQ over the past hundred years has increased 30 points. How is that possible? No one knows for sure, but it probably has something to do with better nutrition, mentally challenging media, more schooling, and a reduction in childhood diseases.   Mothers died 1% of the time during childbirth in the 18th century. Now it is 500 times less.   Smallpox, in the 20th century, accounted for between 300 and 500 million deaths. That is almost unimaginable.  Prior to 1980, 30% of people who became infected died. Now the disease has been completely eradicated by vaccines.   Since 1990, the number of people dying from cancer has dropped by 17% due to advances in medical treatments.   In the past thirty years, homicide rates have been reduced by 17%.   Military spending is going down. In the past fifty years, 6% of the world’s GDP (gross domestic product) was spent on the military. That number is now 2.2%.   For thousands of years the Earth was inhabited by hunter-gatherer societies. They worked between three and eight hours a day. Once they found their food, they stopped.   Once we became more of an agrarian society, the average person worked between eight and twelve hours a day (depending on the time of year), six days a week.   By 1830, the country was industrialized and the average American urban worker worked ten to twelve hours a day, six days a week.   Today we stand at eight hours a day, five days a week. Even that has been reduced by 20% since 1950.   The number of countries with legalized slavery has dropped from sixty in the year 1800 to zero today.   One hundred years ago almost no land on Earth was deemed as “protected and regulated.” Yosemite Park was one of the few. Today fifteen percent of the Earth is protected under these laws, which is twice the size of the United States.   Since 1910 economists have warned that the Earth is running out of oil. However, the world has pumped nearly one trillion barrels of oil since 1980. Oil reserves now stand at 1.7 trillion barrels. At the current rate of consumption, oil will run out in fifty years. Alternative energy is predicted to overcome the use of fossil fuels in the next 20 to 30 years. It appears we will be left with a significant surplus of oil before it runs out. It appears energy may soon be renewable and infinite.   In the past fifty years, the prevalence of malnourishment in the world has dropped from 37% to 10%.   In the past thirty years, world access to electricity rose from 71% to 87%.   In the past thirty years, access to clean water in the world rose from 76% to 91%.   Seventy-three percent of Sub-Saharan Africa owns a smartphone. A Nigerian coal miner can send money to his mother in Lagos. A fisherman in the Congo can warn his friends about bad weather.   In the U.S., emissions of carbon monoxide fell 73% in the past thirty years.   Wow, that was a lot to take in. No matter what doom and gloom the media likes to heap upon you, never forget that we live in the wealthiest and safest world in human history.   Be Blessed,   Dave   Source:  Ten Global Trends Every Smart Person Should Know by Ronald Bailey and Marian Tupy.

 

This Time Is Different

Nov 16, 2020 David Kennon

Recently I’ve had an inordinate amount of people say to me, “I am going to cash in all my investments.  Everything is crazy.  I don’t care if I miss out on the gains.  I just want to make sure I don’t lose any money.”   This might be a comforting move for you, but it is absolutely devastating to your long term financial wellbeing.  Things always seem crazy.  There is always a reason to sit on the sidelines.   To quote Sir John Templeton, “The four most dangerous words in investing are: this time it’s different.”   Robert    The year was 1930.  Robert had $10,000 invested in the stock market.  He thought to himself, “We are in the middle of the worst economic Depression this country has ever seen.  This time is different. The markets are dangerous.” Robert took the money in cash and buried it in his backyard.  Ten years later in 1940, his $10,000, had he had kept in in the stock market, was worth $11,925.   Joan   The year was 1940.  Joan had $10,000 invested in the stock market.  She thought to herself, “We are in the middle of World War II.  I better start learning German. The economy is still a mess from the Great Depression.  This time is different. The markets are dangerous.”  Joan took the money in cash and buried it in her backyard. Ten years later in 1950, her $10,000, had she had kept it in the stock market, was worth $35,035.   Earl   The year was 1950.  Earl had $10,000 invested in the stock market.  He thought to himself, “The Communists have infiltrated our government.  I’m pretty sure my neighbor Bob is a Commie.  Nuclear war is inevitable.  More and more countries are developing bombs.  This time is different. The markets are dangerous.”  Earl took the money in cash and buried in it his back yard. Ten years later in 1960, his $10,000, had he had kept it in the stock market, was worth $44,694.   Paul   The year was 1960.  Paul had $10,000 invested in the stock market.  He thought to himself, “The stock market has been going up for nearly 20 years.  We are due for a crash. The Russians beat us to space.  We are dealing with the aftermath of the Korean War.  The new dictator Fidel Castro is a maniac and he’s a few hundred miles from our shores. This time is different. The markets are dangerous.” Paul took the money in cash and buried it in his backyard.  Ten years later in 1970, his $10,000, had he had kept it in the stock market, was worth $21,959.   David   The year was 1970.  David had $10,000 invested in the stock market.  He thought to himself, “This country is falling apart. Vietnam is a nightmare.  John F. Kennedy, Robert Kennedy, and Martin Luther King all were assassinated. The politics of this country are so polarized.  The Berlin Wall is going up. This time is different. The markets are dangerous.”  David took the money in cash and buried it in his backyard. Ten years later in 1980, his $10,000, had he had kept it in the stock market, was worth $22,555.   Tom   The year was 1980.  Tom had $10,000 invested in the stock market.  He thought to himself, “The Cold War menace is looming. Nuclear tensions are at an all-time high.   Russian paratroopers could descend from the skies at any time. Iran took American hostages and all those people were murdered at the Munich Olympics.  This time is different. The markets are dangerous.”  Tom took the money in cash and buried it in his backyard. Ten years later in 1990, his $10,000, had he had kept it in the stock market, was worth $36,813.   Wolfgang   The year was 1990.  Wolfgang had $10,000 invested in the stock market.  He thought to himself, “Saddam Hussein has us on the brink of war.  The AIDS epidemic is spreading everywhere. That nuclear power plant in Russia, Chernobyl, melted down. The Exxon Valdez spill destroyed our environment. We haven’t had a significant recession since the early 1970s.  This time is different. The markets are dangerous.” Wolfgang took the money in cash and buried it in his backyard.  Ten years later in 2000, his $10,000, had he had kept it in the stock market, was worth $49,907.   Bobby   The year was 2000.  Bobby had $10,000 invested in the stock market.  He thought to himself, “The tech bubble is bursting.  This time is different. The markets are dangerous.” Bobby took the money in cash and buried it in his backyard.  Ten years later in 2010, his $10,000, had he had kept it in the stock market, was worth $11,500.   Derek   The year was 2010.  Derek had $10,000 invested in the stock market.  He thought to himself, “We just experienced a decade with two historically awful recessions.  The economy is in ruins.  Terrorism dominates the headlines.  We are still recovering from 9/11.  It seems like there is a new attack each week.  This time is different. The markets are dangerous.” Derek took the money in cash and buried it in his backyard.  Ten years later in 2020, his $10,000, had he had kept it in the stock market, was worth $35,016.   Maybe this time isn’t different.  Maybe it’s time to embrace a financial vehicle that has an almost uninterrupted string of success for decades.   Be Blessed,   Dave

 

Why is the Market Skyrocketing During a Contested Election and Pandemic?

Nov 9, 2020 David Kennon

Why is the Stock Market Skyrocketing During a Contested Election and Pandemic?   Answer: I have absolutely no idea.  Never ever forget:  The stock market is illogical.  Trying to time the market is impossible.   Let’s take this moment to look at history and remind ourselves how the stock market can weather any storm.   Even the Spanish American War.   Let’s go waaaay back in history.   Warning: What I am about to share with you is not my opinion. What I am about to share with you is simply data. Facts.   I often talk about how, in the past 100 years, the stock and bond markets have shown remarkable consistency. The patterns they exhibit are so clear that it’s impossible to ignore.   But let’s dig deeper. Maybe this past century was an anomaly. What about the 1800’s?   That’s right, we are going back to the days of the Louisiana Purchase and the Civil war.   In past articles I have spoken at great length about how stocks had returned an average of 10% during the 20th century, but what about the 19th century?   Now remember, the lightbulb wasn’t invented until 1879, and the leading cause of death in 1900 was tuberculosis.   So, how did the stock market hold up? We have good data from Dr. Jeremy Siegel who wrote the fantastic book, Stocks for the Long Run.   His data shows that from 1801-1900 the stock market returned an average of 6.51%.   At first glance that appears to be a little disappointing, especially considering that from 1901-2000 the stock market returned an average of 9.89%.   But all is not as straight-forward as it seems. You see, in the 1800’s the country saw very little inflation. In fact, something that cost $1 in the year 1800, cost a little less than a dollar one-hundred years later in 1900.   That means that after inflation, stocks from 1800-1900 returned 6.76%. And from 1900-2000, after inflation, the stock market returned a real return of 6.45%. You need to subtract out inflation from stock returns to get the real return- the amount of purchasing power your money has grown after inflation.   Takeaways:   1. The stock market, after inflation, has had a similar average return for over 200 YEARS.   2. Going forward, while no one can guarantee what will happen, don’t you want to base your financial decisions on an incredibly consistent pattern that has persisted for centuries?   3. If you invest in a diversified portfolio of stocks and bonds you are giving yourself the best chance, statistically, to succeed. Don’t make this more complicated than it is!   Let’s take a look at some more data.   When I ask people, “What do you think about the stock market?” The most common answer is: “Oh, man, I lost a fortune in 2001 and it was even worse in 2008. The stock market is dangerous.”   It’s funny how human beings perceive the world. We naturally remember the bad stuff and edit out the good stuff. I guess we are hard-wired that way.   Yes. The S & P 500 was down 12% in 2001 and 22% in 2002. And yes, the S & P was down 36% in 2008. I don’t want to minimize that.   BUT, what about the other years since 2001? Let’s take out 2001, 2002, and 2008 and look at the other years.   2003 UP 28% 2004 UP 10% 2005 UP 5% 2006 UP 15% 2007 UP 5% 2009 UP 26% 2010 UP 15% 2011 UP 15% 2012 UP 16% 2013 UP 32% 2014 UP 13% 2015 UP 1% 2016  UP  12% 2017 UP 21% 2019 UP  32% 2020 UP 6%  (how is that possible is this crazy world?!)   Why doesn’t anyone talk about 2003? Or 2009? Or 2013?  Or 2019?   Why do our minds automatically gravitate toward the down years? I don’t know. I’m not a behavioral psychologist.   So next time someone asks you, “What do you think about the stock market?” you need to say, “Man, I made a ton of money in 2003, 2004, 2006, 2009, 2010, 2011, 2012, 2013 and 2014, 2016, 2017, 2018, and 2019.”   People will probably look at you funny.   Be Blessed,   Dave

 

The Fastest Way to Lose Your Home

Nov 3, 2020 David Kennon

Reverse Mortgages   When I say “reverse mortgages” to people in my office I office get very emotional reactions.  They sit across the desk from me, cross their arms and proclaim, “There is no way I would ever do that.  It is a scam and I could lose my house!”   Now, to be clear, I am not a reverse mortgage expert.  But I have had this article reviewed by a local reverse mortgage broker to ensure the accuracy of the contents.   I will start with the “pro’s” and end with the “con’s.”   In its purest form, what is a reverse mortgage?   Answer: You take out a loan against the equity of your home which you are not required to pay back until you sell your home.   This could make sense if you consider the other options:   You have to make payments on a home equity line of credit.   You have to make payments on a second mortgage.   If you refinance your home you would have to make payments.   Who likes making payments anyway?   I’m going to rattle off some common objections people have to reverse mortgages.   “The bank is going to steal my house away and I’ll have to move in with my kids.”   This really isn’t true.  If you get a reverse mortgage, the only stipulations are:   You pay your property taxes. You pay your homeowner’s insurance. You pay your HOA fees. You keep your house in decent shape.   As long as you do all that, you have nothing to worry about.  The bank cannot come in and steal your house away.   “I have to pay high-interest rates on the loan.”   While reverse mortgages have slightly higher rates, they are still competitive. Right now rates are in the mid 2% range for ARM’s and in the mid 4% range for the fixed rate reverse mortgage product.   Let’s say your house is worth $100,000.  You get a reverse mortgage and the bank gives you $40,000 at a 5% interest rate.  Like I mentioned before, you do not need to make payments on the $40,000 loan.  (payments are defined as principal and interest)   You live in the house another 20 years, at which point the loan (which has been compounding at 5%) is now around $200,000.  Oh no!  What happens now!   Nothing.  You can continue to live in the house and when you sell it (or your kids sell it after your passing), you have to pay back the loan.   “But what if the outstanding loan is more than the value of my house?!  What if my house is worth $150,000 and I owe $200,000 to the bank!” I’ll be underwater and owe the bank money.   No, you wouldn’t.  FHA insurance (government insurance) covers any money between the home’s value and the value of the loan.   That’s right!  If you sell the home for $150,000 and you own $200,000 on the reverse mortgage, the bank (and government) covers the $50,000.  You never have to pay it back.  This is a HUGE benefit.   “What happens if my house is worth $200,000 and I owe $100,000 to the bank for the reverse mortgage, and then I sell the house?”   You get the $100,000 of equity.  All you need to do is pay off the reverse mortgage loan with the bank, and keep the rest, after normal closing costs.   “Is the money I get from the reverse mortgage taxed?”  No.   “Can the bank cancel the loan and ask for all the money back?”  No.   “What kind of homes qualify?”   Basically anything but a condo.  Single-family homes, townhouses and villas are fine.   “Can I get a reverse mortgage if I still have a mortgage on my home?”   Yes, depending on how much equity you have.  Let’s say you own a $100,000 home and owe $30,000.  A reverse mortgage could pay off the loan so you don’t need to make any more payments.   “How much will the bank give me?  How do they determine the payout?”   It mostly depends on your age.  One spouse must be at least 62 years old.   “What choices do I have for a payout?”   You can get monthly payments.   You can use it as a line of credit and take money from it when you need to.   You can get a lump sum.   Or a combination of these if you have enough equity.   The “Con’s”   1. There is a good chance your kids won’t get the home.   2. If your health declines and you need to go to a nursing home for twelve consecutive months or more, you must pay back the loan because your house no longer qualifies as a “primary residence.”  If you can’t pay back the loan it could go into foreclosure.   You can always pay back the loan by selling the house, foreclosure is not the only option here.   3. There are quite a few upfront costs.  Much like closing on a new mortgage.   “Dave, do you recommend reverse mortgages?”   It is not my place to recommend this strategy, and I do not utilize it in the financial planning I do for my clients.  But I do believe it works in some situations.  It truly depends on your comfort level and living situation. If you are interested in exploring this option let me know so I can point you in the right direction.   Be Blessed,   Dave