If you’re going to get rid of your mortgage within a 5 – 7 year time frame; I say it makes sense to make the extra mortgage payments to get rid of your mortgage.

However, if it’s going to take you longer than five to seven years to get rid of your mortgage, I would advocate NOT making extra principal payments because you’re building what I call dead equity.

Your required mortgage payment is still the same. It doesn’t go down. So when you make extra payments, you’re actually reducing your tax deductions — but you still have to make the same minimum mortgage payment so you haven’t affected your current cash flow in a positive manner.

I’d rather see you just save and accumulate that extra money in an outside fund. And if you look at the payment differential, and take that differential and apply it to, say, an S&P 500 index fund, then the odds are in your favor significantly that at the end of, say, 15 years you would have enough money in your index mutual fund to not only pay off your mortgage, but also have money left over.

So you end up with the same net result. You own your home free and clear in the same amount of time as if you had been making extra mortgage payments, but in the meantime you’ve increased your liquidity, maximized your tax deductions and had money left over. Or, put another way, you end up paying your mortgage off quicker.

So, yeah, if it’s going to take longer than, let’s say seven years, don’t make extra principal payments on your mortgage. Don’t do that bi-weekly mortgage payment program a lot of lenders try to encourage folks to do. Just take that extra cash flow and save it and invest it. You’ll come out a lot better – and worry free – in the end.

The topic was “Dirty Little Secrets Annuity Companies Hope You Never Find Out About.” During the Q and A session at the end of the call, this guy called me out for “inciting fear” about annuities.

Actually, to be specific, he said, “you made some pretty critical mistakes in your analysis of the way that fixed index annuities work as far as how the insurance companies are compensated. You didn’t disclose that the Wharton School of Business has evaluated fixed index annuities vs. just about every other possible investment strategy out there for the last 15 years and the fixed index annuity, although it was the safest, actually had the best performance. You were off by probably by as much as 10% on your assessment of commissions. I’m just wondering if the point of this discussion was to educate or incite fear.”

At that point, I asked him if he sold fixed index annuities. Guess what his answer was?

Now, I’m open to being proven wrong. The problem is, when I’m challenged like that, the person doing the challenging usually has a vested interest in (that they sell or represent) the type of product I’m not recommending! So I just want to make it clear that I have no axe to grind, product-wise.

We are a fee-only investment advisory and wealth management firm, meaning we don’t accept or collect commissions from any product of any nature. So if it’s a good investment we want to know about it and make everybody aware of it.

You’ve probably heard the term ‘real estate millionaire’, ‘stock market millionaire’ or ‘business owner millionaire’. But I’ve never heard the term ‘annuity millionaire’…have you?

I also get very leery of anyone who uses ‘research’ from a supposedly credible source as part of their ‘sales pitch’. Usually that source has either been misquoted or was paid for their research by the people using it to support/defend their sales pitch.

There are a lot of junk investments out there that aren’t talked about nearly often enough — and we’re going to start exposing them.

No matter who might be on the other end of the line!

I think the whole world is concerned about the financial solvency of the European countries. Our accounts have no exposure to Greece and none of any real significance to Europe, while at the same time profiting nicely from exposure to Asia, including China. So I’d say that’s the good news.

Beyond that, it really boils down to an issue of confidence. Pardon me for getting a little bit political here, but if you want to see what the US might look like in 5-10 years if we keep heading down the path we’re headed, I think you just need to look at (the public rioting) Greece – with the new austerity measures and the government being forced to cut back on services. To be honest, that scares me more than looking at Greece and these other countries from an investment perspective.

But again, the bottom line is our investment system has proven itself – and this holds true with the oil spill as well. Money doesn’t disappear; it just goes to where it’s in highest demand. So if world events change and dictate different investment classes are now favored, that’s where the money goes.

Our system has been able to pick up on changes and trends, and we rotate money to the areas that are in highest demand, while trying to avoid the areas that are in weak or falling demand. That is the beauty of our investment system. It takes everybody’s emotion out of the equation, because everybody will have an opinion. Some people will be right and some people will be wrong. And at the end of the day for us, it doesn’t matter. We just want to know where the money seems to be headed to.

Economics 101: if demand is increasing prices will tend to hold, if not increase. We just want to follow that trend. That’s how we’re able to give our clients the stability they’re looking for in volatile times. And yes, we’ll even go to all cash if our un-emotional supply and demand indicators show that’s where the money is going!

http://www.foxbusiness.com/personal-finance/2010/06/21/retirement-just-corner/

What are your thoughts on the article? Leave us a comment below!

Several months ago, we got a phone call from someone who had been focused on generating income from her investments. She had put almost all of her money in real estate investment trusts (REITs) at a time when, compared to other investments, real estate investment trusts paid higher dividends than other investments.

So she chose (or was talked into) putting over 70% of her money into these real estate investment trusts. Most of them were not publicly traded and most of them, if not all of them, were probably bought at the high point of the real estate market, certainly before the real estate melt-down occurred.

And you can imagine what has transpired since then. Virtually all of these REITs have cut their dividends in half, if they are paying dividends at all. And this poor woman can’t sell these things even if she wanted to! She can’t find somebody willing to pay her 10 cents on the dollar to reinvest her money or to pull money out to get her income back to what it was in some other form.

Maybe this is an exaggerated example. But people shoot themselves in the foot when they look for nothing but high yielding, high income producing investments. If not all at once, over time they end up allocating most of their money into one or two particular investment sectors or areas. And while it may look good when they first invest, no investment is a top-performing investment all the time.

Much more important is the growth and the increasing value of your account. If your account, over time, increases in value, you can sell off a piece of it and use that money to generate income.

So if you’re concerned about generating income from your investments, the biggest mistake you can make is to limit your search or your selection to only those investments that pay a high yield or a high dividend. The key to success is to have as low-risk as possible investment account or strategy that will give you the growth that you need. That way, you can prune your money tree (or your money bush) and take some of those clippings to create the cash flow that you need.

This was not simply their money to spend as they saw fit. Part of the requirement was they had to give 10% back to church. They had to save at least 10% for long-term savings. Then, with what was left over, they could decide whether they were going to spend it that week or set it aside in short-term savings to build money up for a bigger purchase.

That worked reasonably well while they were young. But as they got older, they kept coming to us saying, “I need new tennis shoes,” or, “Here’s a really cool video game”, or “I’ve got this birthday party to go to.” So over time, we upped their allowance, but made them responsible for buying their own clothes, gifts for all their friends’ birthday parties and going to the movies or out to eat with some friends. We still paid for some clothes for school, but if they wanted to get any wild and crazy must-have style clothing for kids, that was their nickel.

And here’s the beautiful lesson that came out of it. Soon after we instituted this new rule, Adam and his mom were shopping for a birthday gift for one of his friends. He had picked out, I think, a video game for about $25, or maybe $35. So he gets to the checkout stand with Annette, my wife, and she turns to him and says, “ I sure hope you remembered to bring your wallet, get it out and get ready to pay.“

And he was just shocked. He was mortified. So he thought about it for a moment and went and put the video game away. Instead, he purchased a $10.00 gift card from the video store. He decided that would be just fine for his friend.

That was his first lesson on the value of money. For some things, I think life really is the best teacher.

Ask yourself now, “What system do you have in place should the uninvolved spouse be the surviving spouse?” “What system and people do you have in place to take care of that surviving spouse so they don’t have to make decisions in an uncomfortable environment that they are not used to making without having you around?”

In my opinion, turning the reins over to a grown adult child is not the best of all systems. Your kids probably aren’t always going to see eye to eye with you, so it’s going to be very difficult for them to put themselves in Mom or Dad’s shoes and give them un-biased, independent, and most importantly, unemotional input. They’re just too closely connected to the family and the situation.

If you are the spouse who handles the finances, it’s time to find and start a working relationship with a trusted financial advisor. It’s important to establish a high trust relationship before anything happens. Don’t wait until after somebody passes away. The time to get that relationship in place is now!

I’m here to suggest that the best approach is to get that trust and confidence level established while you are both still here so you can talk about the relationship with your financial advisor and make sure the spouse that doesn’t deal with financial issues is comfortable relying on that advisor. This makes the transition a heck of a lot easier. There is less emotional stress and strain when your spouse has time to develop a higher level of trust and confidence.

Again, I believe the best approach is that, if you’re working with a professional now, let your spouse get to know them and how you work together. And if you don’t work with a professional, it’s time to find one you both have trust and confidence in.

An attorney I know was out of work for over a week (ironically the stock market was up that week) after injuring himself, and when I got the chance to talk to him I asked what had happened. He explained he was in the process of remodeling an upstairs bathroom and on the wall was a huge mirror. Knowing he was going to probably break the mirror when he took it off the wall, he took the time to tape it up to prevent the glass shards from going everywhere. But what he didn’t think about – that a professional likely would have – was where the plumbing pipes were sticking out of the wall.

When he removed the mirror, he lost control of it and accidentally sheared off the ends of the pipes. So he now has water spewing all over the floor. He ran out of the bathroom – which was on the second floor – and headed for the stairs, which were made out of ceramic tiles. Which were now wet. You know what happened next! He wound up falling down the stairs, and while he somehow managed to avoid the mirror, he ended up with two cracked ribs and a bruised kidney.

All this so he could save a little money on a remodeling job!

This story kind of reminds me of the folks who had to go through the 2008 market meltdown on their own. It was the equivalent of them sliding down the stairs, cracking ribs and bruising kidneys.

As we survey and speak with clients and talk with other financial advisors across the country, in general terms, it seems like we ended up doing better than most in the down turn. Losses weren’t as severe and we definitely recovered more quickly compared to what our clients are telling us about their friends and from me speaking to other advisors.

Sometimes, doing it yourself can lead to disaster! Don’t be afraid to bring in the experts when necessary.

Really?

About 3 years ago, a client brought some paperwork to us from the same company, after they had sold a mutual fund. I’m looking at the paperwork and I see this note at the bottom that says, “Refer to our mutual fund disclosure document” in really small print like this.

So I flip the page and here’s what the fine print said. “XYZ Company receives payments, known as revenue sharing, from preferred fund families which currently include American Funds, Franklin Templeton, Goldman Sachs, Hartford, Lord Abbot, Oppenheimer, Putnam, and Federated. Such revenue sharing involves a payment from a mutual fund company. XYZ, its investment representatives, investment companies and shareholders benefit financially from the receiving of revenue sharing payments from mutual fund families like these. As a result this creates a potential conflict of interest in the form of additional payments to the firm. These payments are in addition to the standard sales commissions and management fees.

And while we may offer many mutual fund families, revenue sharing creates incentive for the selection and sales of preferred funds.”

And here’s the clincher, “Virtually all of our sales of mutual funds are in these fund families.”

So here we’ve got a brokerage firm advertising on TV, telling you they don’t create their own mutual fund products – meaning their representatives are supposedly free to pick and choose the best fund for their client. But when you read the fine print, you find maybe 8 mutual fund companies that are paying extra for this brokerage firm to use them!

Have they ‘technically’ broken any law? No. But is this really the kind of company you want to be getting your financial advice from?

And doesn’t it make you wonder where they got all that money to pay for the air time of TV commercial???

A friendly reminder – always read the fine print, even if you need a magnifying glass to see it.

They usually argue that, “Well, you know, mortgage money today’s cheap. So keep your money invested at higher returns (or interest rates) and when the market goes up the difference if yours to keep.”

The investment argument has some merit, but not in an apples to apples comparison. If you’re going to keep a mortgage and have money invested in the market, the mortgage is guaranteed, so you’ve guaranteed to pay the interest back to the bank. The investment in the market is, as we all know, not guaranteed. So sometimes you might come out ahead, but sometimes you don’t come out ahead.

Some people complain that their taxes will go up, but usually forget that their monthly cash flow will also improve since they won’t be making mortgage payments every month. So in almost every case I find, on a net-after-tax cash flow basis, that you’re better off not having a mortgage. The argument that the home is a tax deduction just doesn’t hold water. Where does it make sense to give a mortgage company $1.00 of interest just so you can save $0.25 on your income tax?

When it comes to a Worry-Free Retirement and we look back, especially to the 2008 market meltdown, and we put our clients into two groups — people with mortgages and people without mortgages, I don’t need to tell you which group was sleeping better at night.

Bottom line, people with no mortgages sleep better at night! So if you want a Worry-Free Retirement, a big step in the right direction is paying off your mortgage!