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Published: Wednesday, November 29, 2017 @ 5:26 PM
Among the central issues of retirement planning is whether you should pay off your mortgage before you stop working. While it’s a straightforward question, the answer is less clear. Financial planners fall on both sides of the fence when it comes to advising their clients on how to handle their house payment.
The truth is, Americans have a love/hate relationship with mortgages, and with good reason. While these long-term loans have allowed folks across the socio-economic strata an avenue to home-ownership, the mortgage is also perhaps the most dreaded bill we pay every month. Why? Because it is by far our biggest monthly expense.
While doing research for my book, You Can Retire Sooner Than You Think, I gathered data on how retirees handle their mortgages, and how their particular situation impacted their happiness. I learned that the happiest retirees go into retirement either mortgage-free or within five years of paying it off completely.
But today, more people than ever are moving into retirement still carrying a mortgage. According to the Consumer Financial Protection Bureau, from 2001 to 2011, the percentage of homeowners ages 65 and older with mortgage debt increased from 22% to 30%. For homeowners 75 and older, the rate jumped from 8.4% to 21.2%.
And just how much do these folks still owe on their mortgages? The median debt climbed over the same period from approximately $43,500 to almost $80,000. Do the math and you see that this is an 82% increase. So, if your mortgage loan burning party is still some ways off, you’re not alone.
As you contemplate retirement, what should your strategy be? Should you set your financial focus on making your mortgage disappear?
Some financial professionals would answer with a resounding “No.” They look at it in terms of net returns. Think about a scenario where you have $100,000 socked away. You could use that money to pay off your mortgage or keep it invested in the stock market. Say your mortgage interest rate is 4%. These pros will tell you to hang on to the mortgage, because you may net 8% of gains from the stock market, putting you ahead 4% overall.
This strategy makes theoretical sense, but we have to ask if it passes the real-world test. The answer is no. In everyday life, we could go a decade with a flat market, just like we did in the 2000’s, something I recently discussed with Barron’s Magazine. Or the market could take a tumble right before you decide it’s time to cash out. In either of these scenarios, you will have paid 4% on your mortgage with little or no gain from your market investments. In my opinion, paying off a mortgage before retirement (or soon thereafter) is more of a financial sure thing.
But back to our question and how it applies to you. Should you pay off your home?
My answer is a qualified yes. Each decision is highly individual and requires careful calculation. Consider these three factors as you weigh your situation, and whether to wipe that house payment off your monthly budget:
If you don’t have tens of thousands of dollars to drop on your mortgage, that’s perfectly okay. And you’re not alone – very few people can throw a wad of money at their house payment all at once. Most happy retirees who own their homes outright paid off their mortgage early little by little, making more than the minimum monthly payment over several years. In my experience, probably 70% of retirees who are mortgage-free used this method to reach that goal.
Think about this scenario. You have just signed a 30-year mortgage of $250,000 at 5% interest, and your scheduled payment is $1,342 per month. If you just add an additional $300 to each payment, you’ll trim nine years and four months off the life of the loan – and save $79,684 in interest. That’s no small change.
Other ideas include saving up to make an extra mortgage payment each year, or structuring your payment plan so that you pay 50% of your monthly obligation every two weeks (which leads to an extra month’s payment every 12 months).
I want you to hear me loud and clear on this one: Never, ever use retirement account (IRA, 401k) money to pay off a mortgage. Never. Why? Because paying off your mortgage by tapping your nest egg won’t create that coveted peace of mind. Instead, it could create more stress.
For starters, withdrawing money from retirement accounts will likely incur a significant tax bill, on par with the taxes you’d pay on earned wages. Second, reducing your hard-earned retirement reserves undercuts your future security two-fold: It takes actual cash away and it reduces future interest earnings on the accounts.
Where does this leave you? With your non-retirement accounts, a.k.a. the ones that have already been taxed. But use caution here, too. These funds are important in your on-going security. They provide liquidity that can be tapped in case of emergency or opportunity, and tapping them out won’t help your peace of mind.
Anyone who’s familiar with my financial planning strategy knows that I’m a believer in the one-third rule. The rule is simple and powerful: If you can pay off your mortgage with no more than one-third of your non-retirement savings, you should consider doing so.
For real numbers, say you owe $50,000 and have $160,000 in savings. You should go ahead and wipe out that mortgage. In this case, you’ll still have $110,000 in liquid assets as you cruise down the retirement road.
Let’s talk more about peace of mind, as it’s paramount to a fulfilling retirement. My research on the happiest retirees has taught me that owning a home free and clear creates a real sense of calm and peace. Plain and simple, it just feels good to say goodbye to that monthly mortgage payment as you enter a new and different phase of life.
The feel-good factor makes sense. With no mortgage payment, you have dramatically lowered your monthly retirement living expenses and taken stress off your nest egg and other sources of monthly income. And with this extra cash on hand, you have more financial freedom to pursue your retirement passions and dreams – think added vacations, hobbies, or charitable giving. Isn’t that what a happy retirement is all about?
Published: Thursday, April 05, 2018 @ 11:46 PM
Updated: Thursday, April 05, 2018 @ 11:46 PM
— We get it. Doing your taxes is no fun, especially if you know you’re going to owe money. But as with any project on which you procrastinate, leaving everything to the last minute can lead to errors, both large and small, and some of those errors could cost you serious money.
If you’ve gone and done it, though, and are still looking at that pile of tax forms over there in the corner, we’ve compiled a list of six quick-and-dirty tips that could keep you from making some obvious, and not-so-obvious, mistakes when you finally sit down and tackle the task. They could also help you maximize your tax refund.
You might wonder how anyone could forget to sign their tax form, but this simple process is one of the most common tax mistakes, according to the IRS. Just like forgetting to sign a check or a contract, it means your return isn’t valid. Usually, there isn’t a penalty or interest associated with this error (since you’ve already included a check or electronic payment if you owed), so the IRS will just send a notice asking for a valid signature, but it will delay the processing of your return. If you’re getting a refund, that too will be delayed.
So check, double-check — heck, triple-check — that you signed or completed the e-signature process before filing your return. Also, check out these last-minute filing tips from the IRS.
Math errors are also a very common mistake made by folks in a hurry. Fortunately for most people, the IRS corrects any miscalculations, so there’s no need for filing an amended return. But these mistakes can mean the difference between you thinking you’re getting a refund and the reality that you actually owe taxes, so be sure to check your calculations carefully.
One way to help you avoid math errors is to file electronically so the calculations are done for you. Bye-bye, No. 2 pencil! So long, calculator!
Did you have a side hustle early last year? A freelance design gig for a friend’s business? If so, you’re going to need to account for it, regardless of whether you received a W-2 or 1099 from whomever paid you. That’s because, while there’s an IRS threshold for filing these documents by employers, there’s no similar threshold for claiming the income. Income is income is income. If you made money and don’t report it — and the IRS catches it — it’s going to cost you penalties and interest at best, and open you to a possible audit at worst.
It’s easy to forget these things when you’re in a hurry, but they can end up saving you some serious money and are well worth the extra time to figure out if you qualify. So if you’re just claiming the standard deductions because you’re under the gun, you might want to take a deep breath and check out TurboTax’s list of 10 commonly overlooked tax deductions that can keep you from overpaying the tax man.
Filing for an extension is a great idea if you’re down to the wire and don’t really understand your tax situation. But remember that an extension gives you an extra six months to file your paperwork, but not an extra six months to pay any taxes due. So, if you’re confused, tax pros recommend doing a quick calculation of your taxes, filing for your extension and making any required payment of taxes you think you owe. This will help you avoid penalties and interest once you get your final calculations together.
You gave up. You shoved, slammed and jammed your return through and now it’s full of mistakes that are going to cost you money by way of penalties or because you’ve left money on the table. It’s a much better idea to file the extension, then get the help you need from a tax professional to ensure you’re not overpaying your taxes.
Published: Thursday, April 05, 2018 @ 11:55 PM
Updated: Thursday, April 05, 2018 @ 11:55 PM
— If you claimed the right number of dependents and standard deductions on your 2017 federal income tax return and you still ended up owing the IRS, you’re probably looking to avoid a repeat performance next year. Luckily, there are several ways to increase your chance for a refund (or at least reduce the amount you’ll owe) and you don’t have to be a tax whiz or accountant to take advantage.
Here are 11 ways you can pay less in federal taxes for your income return next year.
Contributing to a retirement fund is an important way to ensure financial independence in your golden years, but it can also convey short-term tax benefits. In most cases, the contributions you make to your 401K and IRA plans are tax-deductible and are not included in your taxable income at the end of the year. (Note: If you didn’t contribute to an IRA in 2017, you still have time. You have until April 17 to contribute up to the maximum amount and shave off a good chunk of your tax bill. Filed your taxes already? That’s OK. You can file an amended return to reflect the contribution.)
There’s a distinct tax benefit to home ownership. The interest you pay on your mortgage is tax-deductible, and the interest is front-loaded. For the first several years, most of your mortgage payment goes toward interest, which will drastically reduce your adjusted gross income at tax time. Want an extra boost for your taxes next year? Consider paying January 2019’s mortgage payment in December to get a tax benefit before the end of the year.
You probably know charitable donations can be itemized and deducted from your income, so you’ll want to save receipts anytime you donate cash or items to charity. You can even deduct miles you travel for volunteering or other charity work.
“Miles you travel on behalf of a charity are deductible at 14 cents per mile for 2018,” said Gail Rosen, CPA.
Starting a home business can provide you with a new source of income and allow you to take deductions off any income the business generates.
These deductions include business costs you incur throughout the year, a portion of your mortgage and utilities if you use a home office and the cost of goods needed to keep your business running. You can even deduct startup costs.
“Any expenses that are incurred before the first sale are ‘start-up costs,’” Rosen said. “These costs cannot be deducted until the first sale. Then they are deducted over 15 years and you can deduct the first $5,000 in the first year.”
If you hunt for a new job in your field this year, you can write off some qualifying expenses as you search. There are exceptions, but potential write-offs include things like clothes or travel.
“If you looked for a new job in 2018, you should be aware of the income tax deduction that may be available with respect to job-search costs,” Rosen said. “Qualifying expenses are deductible even if they do not result in a new job being offered or accepted.”
Many employers offer flexible spending plans that let you contribute toward yearly medical expenses pre-tax. These contributions typically don’t count toward your taxable income.
Many medical and dental expenses are tax-deductible. According to Rosen, the cost of getting to and from medical treatment is deductible at 17 cents per mile, plus the cost of tolls and parking, and dependent expenses are also deductible.
“If you cover the medical cost of dependents, these can be deducted. Additionally, if you are covering the costs of an individual who would qualify as your dependent except that they have too much gross income — for example, an elderly parent — you may be able to deduct these costs as well,” said Rosen.
Current and former students have many eligible deductions and credits related to their education expenses. Paid student loan interest and tuition and fees can be claimed as deductions. Eligible current students can also access the American Opportunity Credit, which can cover up to $2,500 annually for four years, and the Lifetime Learning Credit, which can cover up to $2,000 per tax return.
Homeowners who install solar energy systems in their home can get back tax credits at up to 30% of the cost of installation. This credit will begin to decrease after 2019 so you may want to act soon if you’re planning on installing solar panels.
As an added bonus, solar energy can significantly reduce your energy bills.
We’ve named several tax credits above, but there are more, including credits for adopting children, the cost of child care and low-income households. Tax credits are more valuable than deductions, as they reduce your taxable income on a dollar-for-dollar basis, so make sure you’re taking advantage of every option.
Published: Monday, October 23, 2017 @ 11:27 AM
— Retirement can seem like a difficult goal to reach, so the thought of achieving it early may seem downright impossible.
But getting to retirement quicker doesn't require genius-level investing knowledge or extreme deprivation. With a plan, hard work and discipline, you may be able to get there sooner rather than later.
The following are five surefire ways to get to retirement quicker:
Set clear goals for yourself
Consumer adviser Clark Howard recently shared advice from Chris Reining, who decided in his late 20s that he wanted to retire early. By the time he turned 37, he was able to reach this goal.
Howard said he thought setting clear goals was one of the most important things that Reining did. He labeled his investment account "Retire early" so he could see the words every day. In addition, Reining tracked his progress by using a spreadsheet you can get on his website. He wanted to save up 25 times his annual expenses before retiring.
The Forbes Finance Council recommends working hard and being disciplined as the most reliable ways to retire early.
This can be achieved through a high-paying job combined with saving as much of your income as possible. Another path is starting your own business.
Forbes quotes a blogger who retired early and says that streamlining your spending is an important step toward achieving this goal. It's not glamorous or complicated, but it works.
He suggests scaling back on luxuries and investing your savings in a low-cost index fund. When you accumulate 25 to 30 times your annual spending in this type of account, you can quit working for the rest of your life.
Cut your housing expenses
If you're like most people, your home is your biggest expense, so it's also your biggest opportunity to save, according to Money.
Housing costs take up about a third of the average budget, so Money recommends not taking out the biggest mortgage you can get. Live in a more modest-sized home when possible, and in some cases, homeowners can purchase a two-family home, living in one side and renting out the other.
Put your money to work - wisely
CNBC talked to Scott Alan Turner, who had more than $70,000 in debt at age 25, yet managed to turn things around and retire by age 44.
Published: Thursday, February 22, 2018 @ 6:13 PM
— ‘Tis the season for taxpayers to get a nice chunk of change back from the IRS.
It’s tempting to spend it all, but financial experts say there are steps you should take to shore up your financial future.
Some who usually pay off debt will splurge this year.
“I’m going to Japan in April so I’m actually going to add that to my travel fund, so I’m really excited about it,” said Olivia Morris from Centerville.
Those who used to spend their return?
“I just plan to save it. We are about to start a family, so I plan on saving it for the baby,” said Toska Ivory of Dayton.
It’s important to have a plan for tax return funds or any financial windfall, said Lisa Roberts, Graceworks certified housing and credit counselor.
Pay urgent bills first then save.
“If it’s something that is urgent -- a bill that’s going to be a roof over your head, utilities, pay them,” said Roberts, “after that you definitely want to put it into savings.”
WalletHub has these additional tax refund spending recommendations:
As for splurging?