October
2005
A Monthly Newsletter Source of Financial Sources
Don't miss this month's timely story ideas, direct dial phone
numbers, and E-mail addresses of these accessible experts!
REAL ESTATE STRATEGIES
• You are Not Finished With Refinancing your Mortgage Until You Know the Answers to the Follow Up Letters You Will Receive.
• Start Planning Your Retirement Real Estate Transactions:
The best strategies take time and can save or defer significant capital gains taxes.
• New Interest-only ARM Mortgage Products with Fixed Rates for 7 or 10 Years May be a Good Alternative for Homeowners Concerned About How Rising Interest Rates will Impact Their Current ARM.
INVESTMENT MANAGEMENT & RETIREMENT
• PMFM Successfully Taps 401(k) Market and Profitability.
PERSONAL FINANCE
• It Takes Planning to Establish Sustainable Withdrawal Rates from Retirement Assets.
• How Unmarried Couples Keep Track of their Finances
Has Important Ramifications for Taxes.
NEW BOOK "MONEY WITHOUT MATRIMONY: The
Unmarried Couple's Guide to Financial Security."
Co-authored by Debra Neiman, CFP. Media copies available.
E-COMMERCE
• Production Line versus Custom Web Design:
Decide what you want and make sure you get what you asked for.
PLEASE VISIT THE NEW INK&AIR WEBSITE AT:
http://www.inkair.com.
REAL ESTATE STRATEGIES
You are Not Finished Refinancing your Mortgage Until You Know the Answers to the Follow Up Letters You Will Receive.
If you have just refinanced or taken out a new mortgage, there are several things to be aware of (or wary of) that can impact the actual cost of your mortgage.
1) You will get letters asking you to buy mortgage insurance. Don't do it! Mortgage insurance can be 3-4 times more expensive than life insurance. A term life policy that covers the cost of the mortgage is an inexpensive way to assure that your family will not have to leave the home you have just purchased, should something happen to you.
2) It is no longer true that your family will want the mortgage paid off should you die. There are benefits to the mortgage deduction on your taxes. Mortgage insurance automatically pays off the mortgage.
3) Don't sign on for a bi-weekly (twice monthly) payment plan, offered by your new mortgage company. You can accomplish the same thing yourself by making an extra payment each month. You avoid the signup fee for this “privilege” of $200-$300, plus a monthly fee. You also retain complete flexibility to make an extra payment each month or not, should an emergency arise that requires money.
4) You should delay making you monthly mortgage payment until near the end of the typical 15-day grace period. SO if your monthly mortgage payment is due on the 1st of each month, and you have until the 15th to pay without incurring a penalty, you might want to delay payment until around the 12th. You'll save the bank interest you earn on your monthly mortgage payment for 12-13 days each month, and you won't be reported as "late" on your payments. To make this work, call your mortgage bank several months in a row to see how many days it takes, precisely, for your check to be at the mortgage company.
5) Don't use an escrow account unless required by law. Try to close such an account if one has been set up. Escrow accounts collect payments early from you to make insurance and property tax payments, but you don't earn any interest on these payments. Plus, you can't control the timing of when you will make property tax payments. Property tax payments come into play if you are going to be hit with the Alternative Minimum Tax some tax years. Property taxes are not deductible in your AMT years, but the escrow account will ignore that.
William R. Urban is a principal of Bingham, Osborn & Scarborough LLC (BOS) 650-462-8666, a San Francisco and Menlo Park, California-based registered investment advisor with $1.3 billion in assets under management. BOS has provided investment management and comprehensive financial planning for individuals and endowments since 1985. All revenues are fee only. BOS has eight principals and seven portfolio managers working directly with clients, plus an administration, finance and systems staff with direct client contact and responsibilities related to client accounts.
Start Planning Your Retirement Real Estate Transactions:
The best strategies take time and can save or defer significant capital gains taxes.
This month, the Bush administration is floating a proposal for reducing the deductibility of mortgage interest as a way of reducing the current national deficit. The current talk is about reducing the deductible mortgage interest from a mortgage of $1 million to $300,000. In cases before, when Congress has made a change of this magnitude, there were grandfather provisions. In this case there is a chance that the existing deductibility might be kept, but all new mortgage holders would face dealing with a lower amount of interest deductibility on their taxes.
This possible legislative change regarding mortgage interest deductibility brings up the importance of planning all of your retirement real estate transactions as much in advance as possible. Advance preparation allows you to take advantage of existing strategies as well as preparing for unforeseen changes in the law.
The key to real estate transactions in retirement is to reduce or defer capital gains taxes that are incurred at the time of sale of real estate. With the growing value of appreciated property, paying the capital gains tax and “getting it over with,” is not only bad advice, but can make a significant dent in your retirement assets.
Pre-retirees have an endless set of scenarios that may be relevant to their planning, such as:
o Downsizing to create an income stream
o Using undeveloped property to create an income stream
o Selling investment real estate and creating a charitable foundation
o Selling highly appreciated real estate and solving very different needs of sellers
o Selling investment property and buying a retirement home that must be rented for at least two years to quality for a 1031 exchange.
o Selling a business property and purchasing resort rental property that will become a vacation home.
Each of these retirement real estate scenarios have time frames and legal nuances that require the attention of an advisor who understands how to manage highly appreciated real estate in retirement. If you plan to leave your current primary residence or sell business or investment real estate, start planning now so that multiple options will be available to you. In each case, the goal is to reduce or defer capital gains taxes so your retirement nest egg increases rather than decreases at the time of your real estate transaction.
Pearson Financial Services, Dennis, MA, is the author of "The Million Dollar Gift: Dynasty Trusts. Why Leave Your Assets Any Other Way", written for his clients, their families, and his own family. He offers a fully integrated wealth management process, incorporating investment, retirement, financial and estate planning specialists under one roof, serving clients as their family's office, designing and implementing strategies to protect and distribute their wealth and highly appreciated property. Seth Pearson, CFP, 800-385-7925
New ARM Mortgage Products with Fixed Rates for 7 or 10 Years May be a Good Alternative for Homeowners Concerned About How Rising Interest Rates will Impact Their Current ARM Mortgages.
Mortgages, like any financial asset, need to be managed. If you have assets, you periodically meet with a financial planner to devise the best strategy for managing those mortgages. If you had treated your mortgage as deserving of a mortgage consultant, you would be in a more attractive position today than those who shopped for the lowest fixed-rate on the Internet. Most people think mortgages are about interest rates, but they are really about cash flow. Homeowners who have annual or monthly adjustable mortgages have saved thousands of dollars over the past few years. Even if they refinance and incur some closing costs, they are net ahead.
At this point, they are reexamining their options as interest rates increase. It is still true that a 30-year mortgage may not be the only solution. In the past, when adjustable rates went up, people flocked to 30-year fixed mortgages. Today, the other options include a 7-10-year ARM mortgage where interest rates are locked for that time frame, meaning they are fixed for that time frame. The monthly payments are still interest only, allowing greater cash flow flexibility. Home owners then have the option of investing the difference. If a mortgage is at 6% and you are at a 25% tax bracket, the federal government gives you a discount on your taxes for all of the interest payments that you pay annually.
These intermediate duration fixed mortgages have been developed to meet the payment flexibility required by consumers who don't want to take interest rate risks. Seven to ten years is a long time in terms of personal life changes. You may want to sell your home and your career situation might change within the seven year time frame, requiring selling the house or taking equity out of the home.
At this time, there is a consideration of cutting the amount of mortgage interest that can be deducted on income tax forms. However, most Americans do not have mortgages that are near the million dollar mark. therefore they are not likely to be affected by whatever action the Congress takes on mortgage deductibility.
Contrary to conventional wisdom, the purchase of an ARM over the last several years worked well for homeowners and can continue to work well with new ARM products with fixed rates.
Gibran Nicholas is the CEO and founder of Nicholas & Co. Mortgage Planners, a private mortgage brokerage and mortgage planning firm based in Ann Arbor, MI. Nicholas & Co. specializes in helping affluent families manage the equity in their home, vacation homes and investment properties to enhance wealth. Gibran serves on the board of directors of the Financial Planning Association (FPA) of Michigan, and he is Chairman and founder of the CMPS Institute, a national training and certifying organization that helps mortgage professionals integrate financial planning concepts into the mortgage process. Gibran has also authored Wealth Equity, a 5 1/2 hour educational DVD course designed to help consumers transform real estate equity into true wealth through various real estate investment strategies and mortgage planning techniques. Gibran has been featured in various national publications including AARP Magazine, the Wall Street Journal, Investor’s Business Daily, Investment News, Financial Advisor Magazine, National Underwriter Magazine, Builder Magazine, Mortgage Originator and Broker Magazine. Phone: 888-608-9800; Email: Gibran@WealthEquity.com.
INVESTMENT MANAGEMENT & RETIREMENT
PMFM Successfully Taps 401(k) Market and Profitability.
PMFM, Inc., once a small investment management firm, has tapped into the 401(k) market and turned itself into a competitive and profitable national-class information and advice provider for 401(k) participants. The company currently has $680 million in assets under management.
"We started as investment managers with one-on-one experience working with individual clients. We bootstrapped our way into the 401(k) market with very little outside capital. We are a family-owned type of business and have stayed selective about clients," says Tim Chapman, one of the managing partners in the firm.
PMFM's 401k Toolbox advice programs still focus on individuals, most of whom want someone to manage their asset for them, according to Chapman. He believes that investment education is important and necessary, but that 401(k) participants need very basic information and almost immediately decide they want someone else to make their investing decisions. "We have always known this and developed our strategies to meet this need," says Chapman,
In June of 2003, Atlanta-based Catalyst magazine featured PMFM as a company in Georgia to watch. Since the feature article two years ago, PMFM has had a 97% increase in assets under management, and a 180% increase in annual revenue. The number of clients is up 185% and the firm now employs 30 people.
PMFM is a company with a long history of preserving client assets. Because of its beginnings as an investment management firm, it was never stuck in an education/advice/guidance model that did not provide one-on-one services to individuals. Now, 401k Toolbox offers two levels of service to employees.
1. An advice module for participants who want to manage their own money, and
2. A "Manage it for me" option, where the assets are actively managed by PMFM.
401k Toolbox is marketed in three ways:
o Through an alliance of third party administrators and brokers using Lincoln Financial Service's Group Annuity 401(k) product, and through Guardian Life Insurance Company. Through these alliances, PMFM, Inc. serves as the independent investment manager for participants who check the "Manage it for me" option. In the Lincoln program, more than 13,000 participants in 3000 plans have opened accounts to receive PMFM's discretionary investment services.
o Direct to participants through a proprietary newsletter giving portfolio change advice readers can implement on their own, or choose to become clients of the firm;
o Direct to plan sponsors whose employees can choose to have their portfolios managed for them.
401k Toolbox was developed as a service to employers who want to assist their employees, but who cannot function as investment managers, says Chapman. 401k Toolbox allows employees to determine what level of assistance they need with their investment management goals. The advice component began as a successful newsletter offering investment advice to Delta Airlines pilots and employees on managing their corporate 401(k) accounts. After successfully offering their services directly to participants for eight years, 401k Toolbox began offering services directly to plan sponsors who are beginning to recognize that such a service may decrease their fiduciary liability, rather than increase it.
PMFM, Inc. manages $680 million as of June 30, 2005. The firm has increased its assets under management by nearly 40% in each of the last three years. Principals Tim Chapman and Don Beasley, experienced investment advisors with offices just outside Athens, Georgia, have worked with thousands of clients and now offer their services to plan sponsors through 401k Toolbox. Jud Doherty, CFA, is the chief financial officer for the firm, and Tim McCabe is national marketing director. 800-222-7636.
PERSONAL FINANCE
It Takes Planning to Establish Sustainable Withdrawal Rates from Retirement Assets.
Retirees know how much they need to cover expenses when they retire, but they need help to figure out how much they can take out of their accounts to fund their retirement expenses.
Financial advisers have generally relied on a 4 to 4.5% withdrawal rate as a safe number. That number should be a starting point for the discussion and not the end of the discussion. The number could be higher or lower. It is important, however, for retirees to focus on how much they can withdraw from their portfolio without jeopardizing their long term financial security.
An ideal withdrawal rate will allow for regular increases to account for inflation and to ensure that the withdrawal rate will be sustainable for 30 to 40 years. Important decisions must be made, that include prioritizing retirement goals, asset allocation that will help achieve a targeted rate of return above inflation, and ground rules covering increases in withdrawal depending on different scenarios that are likely to crop up.
The withdrawal rate is not set in stone. Following years with investment losses, the client can forego any increases in the withdrawal rate. The client can decide to cap any increase in the withdrawal rate in years with high inflation.
It is important to remember that creating an income stream is not a "once and done" concept. Plan to use the services of a financial adviser to help you stay aware of the relationship between the withdrawal rate your expenses, the rate of return of the portfolio, and the impact of inflation on the value of the withdrawal amount.
Donald L. McCoy, J.D., CMFC -- Planners Financial Services, Inc., 952-835-9000. Minneapolis, Minnesota. Registered investment adviser and subsidiary company Montgomery Investment Management, specialize in the management of no-load mutual fund portfolios for individuals and retirement plans designed to protect capital by reducing risk. pfshim@usinternet.com.
How Unmarried Couples Keep Track of their Finances
Has Important Ramifications for Taxes.
With the right kind of financial planning, taxes are one area in which unmarried couples actually can come out ahead of their married counterparts – and not because of any legal protections. In fact, the tax laws are stacked against unmarried couples, but you can learn to make the system work for you. Making the most of legitimate tax advantages is simply good common sense. Most unmarried couples are not aware of how to leverage their tax advantages.
Income tax season is particularly important. If, as an unmarried couple, you have commingled or merged any part of your finances. it is time to go back and unmerge those finances. Each partner of an unmarried couple must file an individual federal and state tax returns and each partner can only take deductions for expenses they actually paid.
Savings strategies start with each partner determining his or her effective tax rate – that is, the rate levied by the U.S. government on earned income. It varies depending on the amount of income each partner makes. If an individual has a 20 percent effective tax rate, then for every $1 he or she earns, 20 cents goes to the federal government for taxes. (Don’t forget to add your effective state tax to your effective federal tax to calculate your total tax rate.) Most states have income tax rates generally ranging from 4 to 10 percent.
One effective strategy is to lump tax deductions on the higher-income taxpayer's return, because he or she has a higher tax rate. Lumping taxable earnings on the lower-bracket partner's return works best because of his or her lower tax rate. This can effectively lower the total taxes paid by the unmarried couple. However, be careful about how you handle mortgage interest and real estate tax deductions, because there may be other issues that could arise down the road.
Before you embark on any tax strategy, you should talk to your tax advisor and make sure he/she is familiar with you and your partner's situation.
Debra Neiman, CFP®, Neiman & Associates Financial Services, LLC, Watertown, Mass., helps traditional and non-traditional couples and families make smarter financial decisions so that they can achieve peace of mind and pursue their life dreams. SHE IS THE CO-AUTHOR OF “MONEY WITHOUT MATRIMONY: THE UNMARRIED COUPLE'S GUIDE TO FINANCIAL SECURITY.” Neiman provides fee-only financial planning, tax preparation and investment advisory services. deb@neimanonline.com 617-744-1816.
NEW BOOK "MONEY WITHOUT MATRIMONY: The
Unmarried Couple's Guide to Financial Security" co-authored
by Debra Neiman, CFP. Media copies available.
E-COMMERCE
Production Line versus Custom Web Design:
Decide what you want and make sure you get what you asked for.
A custom graphic experience is very different than picking something from a production line– and the attempt to get such services from a production line is always a problem. The difference between custom and production a in web design is like picking a tattoo from the wall of the tattoo shop rather than bringing in a design you have had created exclusively for you. If you go to your local print shop looking for wedding invitations, they have a display book from which to pick. Sign makers usually have samples and photos of signs they have done in the past. Lands End has 18 fonts to choose from and dozens of colors in their catalog for corporate items. If you need to “get it done,” this type of Tattoo shop design process works very well. Simply select what you want from the samples and the item is produced.
This is completely different than having a logo designed by a graphic artist. The actual final logo usually takes about 15 minutes to produce. The real cost is in the execution of many versions, ideas, and the time the graphic designer spends on understanding you and creating concepts.
If you’ve ever tried to get custom work like this done across the counter at your sign maker or print shop, a smart clerk might eventually tell you that you need a graphic artist to design the invites and to please come back when that is done.
Logo design is often where web development projects go wrong. The web itself is the biggest display of design elements ever created – and more than once web designers have been asked to use something like the "round blue buttons" from one site, the "logo in the upper right" like another site, and "Please use the color scheme" the client admires.
This is picking off the wall, and for many people this is what they would do making a business card or letterhead for their business. The product is excellent, and many sites “designed” in this manner are wildly successful. Most of the time a good designer will work with a client to establish a “brand standard” - the preexisting logo, fonts, and color scheme. We'll they can match the existing corporate look and feel to achieve a uniform brand standard across all media.
A web development project goes wrong when the client gets confused about what they have purchased. It's the young woman getting upset in Staples when they can't make the silver bell on invitation #784 more curved. It's the sales guy being upset with his new “branded” T-Shirt when he simply selected font #12 and color #7.
A decent custom branding package will cost between three and fifteen thousand dollars. When building your site, be sure to understand the difference – yes, a web designer certainly can make “something” from production elements available that will work well and be effective for you, but it won't be a branding package.
The job of a branding package is to clearly distinguish you from your competitors. The final branding product should be clearly evident in every image you publish, whether electronic, print, brochures or newsletters. It should clearly identify your unique qualities. Opting for custom design will help you stand out. Production line design can be serviceable, but will not set you apart. Decide what you want before you visit with a web designer and make sure you get what you asked for.
KISS Computing is full-service web strategy firm, providing design, implementation, long term evaluation, and action steps for change that keep web site profitability above $5000 a month for small and mid-size companies. Ross Lasley, KISS Computing, Eastham, Mass., 508-255-9550 x401, ross@kisscomputing.com.
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