Retirement….Start Saving Now!!!

on January 28, 2016 Comments Off on Retirement….Start Saving Now!!!

It is easy to find things that are more interesting and exciting than saving for retirement.  I mean retirement is years or even decades away.  The unfortunate reality is that retirement creeps up on us and without putting forth the effort to plan for it early in our careers, we run the risk of not being prepared when we are ready to retire.

Why start early?  Well the biggest asset most of us have is time…time for our investments to grow, time for our contributions to become a meaningful amount of money.  The long road of saving for retirement requires patience and persistence.  In the beginning, the biggest questions are always how can this small amount of money saved each pay period even begin to create the nest egg I need in the future?  As a result, we never seem to get started early enough.  It may be because it is intimidating, or we feel that “until I have a larger amount to put away, it is not worth it.”  Regardless of the reason, the day to start seems to never arrive.  We all have things that seem to take precedence.  Our families, trips, and things we want today versus the thought of saving for years down the road.  When it is all weighed, it is easy to rationalize that saving is something, “I’ll get to later.”

The best approach is to make setting aside a portion of your check into a retirement account a habit.  At first, I know you will feel the effect of having a little less cash to spend, but after a short period, you adjust to the new amount available for spending.

So, why start as soon as possible…….TIME!!!!  As I mentioned above, time is the biggest asset we all have in saving for retirement.  The power of compounding on investments over long periods of time is tremendous, but growth from the markets is simply not enough.  The other benefit of time is the process of accumulation from the contributions made to the retirement account.  Take a look at the following chart that shows the meaningful the impact of contributions on savings.  In fact, for the first 20 years at a 7% compound rate of return, the balance from contributions is the majority of the value!!

Long Term Savings_Contribuions vs Gains

As can be seen, building a nest egg is a long term process that requires patience.  The markets alone won’t be able to get you to retirement.  The accumulation of such a significant balance is absolutely dependent on those contributions made to your retirement portfolio.  So stop waiting for a better time to do it.  Take advantage of the time you have between now and retirement and start saving today!

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Jeffrey MillerRetirement….Start Saving Now!!!

Is now the time to sell your investments?

on January 22, 2016 Comments Off on Is now the time to sell your investments?

Nooo!!!  It is inevitable that the market volatility causes people to question the investments they hold and whether or not to sell them to “protect” their capital.  I thought it would be helpful to step back and review what the “market” really is and what it is not.  I believe the conclusion provides a clearer picture of what to do during significant market volatility.

Whenever volatility increases and we see markets decline, the emotional side of investing takes control.  Our inherent fear of the unknown outcome can drive us to irrational decisions that have a far greater impact on our long term portfolio growth.

It is never easy to see your portfolio balance fall.  We are driven to protect it in any way possible, because we seem to expect the worst which may be driven by the media and their attention on the worst case scenarios.  It is important to look past the noise and think about what the underlying companies in your portfolio mean.  The reality is that the stock market is nothing more than an auction trying to place a value on companies that are traded between investors.  Well, for most of us, trading is not our goal of investing.  The goal of investing in equities is to purchase companies that over the long term are going to grow and become more valuable as well as potentially pay us dividends as an owner of the company.   When we look at the list of companies owned in a portfolio invested through mutual funds or ETFs, it is hard to imagine that the majority of the companies will not survive and thrive after the volatility fades.  There may be some near term impacts in revenues or profits as a result of near term economic impacts, but once things stabilize, the revenues and profits will return and valuations will rebound giving growth to company values.

The typical process in markets is to be overvalued or undervalued.  Nothing ever seems to hold course at a steady value because the value is derived from near term shifts in revenue and earnings.  It is also impacted by the emotion of investors and their current sentiment.  When sentiment is extremely negative, it has historically been a strong indicator that markets are bottoming and a turnaround will unfold.  With the current market volatility, do not make the irrational decision to sell your investments due to the short term fears.  The best approach is to maintain a diversified portfolio and stay the course in these turbulent times.  In addition to being rewarded in the future for your steadfastness, you will continue to receive dividends from your investments which are extremely meaningful to the growth of you investments over time.  If you are investing in a retirement plan, continue to make your contributions and take advantage of the lower prices to purchase into the investments.

Here is an interview with Jack Bogle the founder of the Vanguard Group on CNBC sharing his perspective to ‘Stay the course’ during market volatility.

Also, take a look at this slide from JP Morgan’s Guide to the Market that shows over the past 6 years we have seen other corrections with subsequent recoveries.

JP Morgan Market Volatility - Investments recover after market corrections

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Jeffrey MillerIs now the time to sell your investments?

5 things to consider about investing your IRA in Real Estate

on January 7, 2016 Comments Off on 5 things to consider about investing your IRA in Real Estate

For so many, retirement account assets comprise the bulk of their savings. As a result, there is always interest in understanding options for investments using those retirement funds. There are many traditional investment options such as real estate investment trusts, mutual funds, ETFs, bonds and stock for publicly traded companies. Recently though there has been an increased interest in real properties such as rental properties as an investment option within an IRA. As a result, I wanted to provide some information on items that should be considered when thinking about purchasing real estate in an IRA:

Prohibited Transactions – The IRS maintains strict guidelines on what is considered a prohibited transaction within an IRA.

  1.  You may not borrow money from your IRA – Some have heard that you can borrow money from your retirement. This is partially true. While you are able to borrow money from a 401K plan if the plan allows it, you are not able to borrow from an IRA. In a 401K plan, you can borrow up to 50% of the balance of the account or $50,000 whichever is less.
  2. Sell property to the IRA – you and any member of your family are not allowed to engage in a transaction to sell property to the IRA.
  3. Secure a loan with it – you cannot use an IRA as a form of collateral for a loan.
  4. Purchase property for personal use – while purchasing real estate and other forms of property is allowed, the property cannot be intended for personal use. For example, you cannot purchase a vacation home with an IRA, as the purpose of the property would be for your family to use on vacation. You could however purchase an investment property.

Leveraged Purchase – The best option is to have a large enough balance for a cash purchase. I say this because while lending options are available the prevailing rates and fees are going to be higher than traditional mortgages. Why? Lending to an IRA is a very specialized loan. These loans are riskier for the banks because there is no recourse other than the property used for collateral. The loan is made directly to the IRA, and the beneficiary of the IRA is not at risk personally. As a result of the increased risk, these loans have higher down payment requirements. In some instances, the lender may require as much as 50% of the value of the property. The lenders might also require a reserve in the IRA to cover the mortgage payment if the property is vacant for a period of time.

Custody – In a traditional purchase, the property is deeded to you or a business as the owner. Because the purchase of the real estate is made within an IRA, the formal deeded owner of the property is the IRA. As a result a custodian must be willing to hold the real estate property as an asset within the IRA for your benefit. Because IRAs have specific IRS rules as a retirement plan, a custodian is required to track all the activities of the IRA. The custodian has a responsibility to report or track activities such as contributions and distributions. The problem with a real estate purchase in an IRA is that traditional institutions such as Charles Schwab or Fidelity will not take responsibility for the tracking and providing the services necessary to facilitate the transaction. The good news is that there are custodians that will hold these assets, but you will want to research them carefully before choosing one to use. In my research, I found both Equity Trust and Millennium Trust will provide the services for real estate purchases.

Taxes – In a traditional real estate investment, depreciation on the property’s structure is a great benefit. The depreciation offers a deduction on your taxes to reduce your tax burden given the income stream generated by the investment property. Because the IRA is tax sheltered and is the owner of the asset, there is no tax benefit for depreciating the asset. Fortunately, this also works in your favor. Any cash flow generated from the property is paid directly to the IRA and not taxed as income. Taxes will be paid in the future when distributions are done from the IRA.
Another tax consideration is unrelated business income. According to the IRS, an activity is identified as Unrelated Business Income if it meets three requirements.

  1. It is a trade or business,
  2. It is regularly carried on, and
  3. It is not substantially related to furthering the exempt purpose of the organization.

The IRS does identify certain activities that are exceptions to this rule. Specifically, rental income and gains or losses from the disposition of property are listed as excluded activities.

Maintenance and Improvements – Since the property is formally owned by the IRA, all maintenance and improvements need to be made with capital available in the IRA. It is important to maintain a cash reserve to insure that immediate maintenance needs can be addressed. Since there is an annual contribution limit imposed for IRAs, you are not able to quickly add capital for use to maintain the property. Planning for unseen events is critical.
While real property is a potential option for investing in your IRA, you should carefully consider all the implications. The goal of these considerations is to begin the process of thinking through what should be addressed, but it does encompass all aspects that must be reviewed. I highly recommend seeking guidance from a professional for your personal situation before making an investment that potentially risks the tax exempt status of the entire IRA.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Courage Miller Partners, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Any links to outside organizations or information is not an endorsement of their products or services. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.

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Jeffrey Miller5 things to consider about investing your IRA in Real Estate