Planning Beyond College

Posted on April 8, 2011 by mikemills

Is it possible to plan for college without sacrificing your retirement?

The total cost of four years at both public and private colleges is estimated to double within the next twelve years. This means the estimated national average for an undergraduate degree $130,000 for a public school and $288,000 for a private one.  These figures come from the annual report published by The College Board and assume an annual average growth rate above five percent.

We all know that college is expensive and so we begin to ask questions like “How much will it cost?” and “How much should I save?”

These are great questions that can often be answered quite simply. However, it is our belief that the more important questions are “Where should I be saving?” and “How does my decision to save for college affect my overall financial plan?”

As with most issues in financial planning, there usually is not an easy answer to these questions.  Most education funding decisions must be somewhat customized for each individual’s goals, financial situation, and risk tolerance.  In our opinion parents are all too often willing to sacrifice their eventual financial freedom to gain a large 529 balance.  The reality is that maintaining flexibility and liquidity and creating income that you cannot outlive are far more critical objectives.  We always remind clients that it is unlikely that banks will loan money to the retiree that didn’t fully fund their retirement plan.

No matter what you might hear, we believe there is not a “one size fits all” plan to save for college.

An Invitation

I want to invite you to an education session that we are holding on May 3rd. In this one hour session, we will be looking at many of the ways you can save for higher education expenses.  Most importantly, we will look at tools to fund the cost of college that will help you avoid destroying your financial plan.

Reserve your seat via email:  info@mike-mills.com or phone: 817-416-7300

This is an open session, so please feel free to invite anyone you feel would benefit.

It is a great way to introduce the people you care about to us.

We look forward to seeing you on May 3rd!

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So a broker, an agent and a fiduciary walk into a bar…

Posted on March 24, 2011 by davidblaylock

Would you know the difference?

I believe that when it comes to the delivery of financial advice it is imperative that investors have a clear understanding between the two prominent standards that financial professionals operate under.  For many years financial professionals that operate as agents and/or brokers have used a standard that equates to “do no harm”.  The reality is that this standard falls short of putting their client’s interest ahead of their own.  Let’s look at the standards that financial professionals follow and examine my belief that the advice they give should be objective and unbiased.

Trust is the foundation of any professional relationship between a client and their advisor, and over the past decade Wall Street firms have let greed severely damage the trust of their clients.  Profits were placed in front of clients and as a result we have seen investment banking research scandals, Ponzi schemes, and of course the mortgage crisis that wiped out almost all of the major investment banks.  These events have definitely caused a lack of trust not only on Wall Street but through the entire financial services industry.

Below are the standards of care for the financial industry.  If you are working with a financial professional that is a broker and/or agent they are required to follow the suitability standard.  The fiduciary standard is required of Registered Investment Advisors and is most notably practiced by Certified Financial Planning™ Professionals.

For source and more information, click here.

It is my opinion that most investors would be better served under the fiduciary standard.  The reason is simple; clients should expect that their financial professional is recommending what is the best for them.  The fiduciary standard makes the financial professional accountable for the recommendations and advice they provide to their clients.

To understand the difference between these two standards consider buying a vehicle.  You want something that gets at least 25 mpg and costs no more than $25,000. Given these two requirements there are likely many models from many manufacturers to choose from, and as such are “suitable” for you. However, most consumers would want to drill down beyond those two attributes.  They might consider which model has the best safety record.  Which has the lowest repair costs?  Which holds its resale value? These questions go beyond whether something merely satisfies needs.  These additional questions will likely determine the “best” model for you to buy.  Now, it’s possible that there may not be a clear-cut winner. Maybe three models are all great choices and no one emerges as better than the others. Nonetheless, there is a difference between narrowing down the choices to among the “best” rather than what merely is “suitable.”

For the past 24 months congress and other regulators have been debating how to protect investors as they craft the most sweeping financial reform since the aftermath of the Great Depression.  These reforms hope to curb the abuses experienced in the past that has hurt investors and nearly collapsed our financial system.  But, so far it appears the lobbyists working for Wall Street are winning the fight, and as usual the average investor is losing. Evan Cooper writes a popular opinion column for Investment News. He says, “I’m probably being presumptuous and offensive, but the issue of fiduciary standards should be an ethical no-brainer for these people — if they really place the needs of individual investors ahead of the industry they regulate.  Lobbyists for Wall Street can sing the praises of a suitability standard, or a modified suitability standard, or a Swiss cheese fiduciary standard all they want. But if regulators don’t see that a plain-English fiduciary standard is better for investors than a suitability standard, they don’t deserve to hold their jobs.”

Politics aside, how should we fix the issue of suitability versus fiduciary standards? I agree with John Osbon, the head of Osbon Capital Management, John believes “firms that make financial products and distribute said products need only meet the lower suitability standard.  But the moment such products touch clients they need to meet the higher fiduciary standard.”  Review the quote.  After all when it comes to people and their money advisors must be held to the highest possible standard.

Choosing a financial professional could be one of the most important decisions you will make.   Finding an advisor that you trust and respect and who can provide leadership during the tough times is paramount.  I recommend that you interview a Certified Financial Planner™.  Of the hundreds of financial designations that are out there this designation is one of the most respected in the industry.  Additionally I would recommend that you find someone with 10 or more years of experience in working directly with clients.  Experience matters in our industry and I’ve found clients are more easily able to follow the advice of a seasoned financial professional.  As for the team, no one person can know it all, and there is strength in numbers. I suggest you work with a firm that uses an ensemble approach to helping you achieve financial success.  When the markets inevitably fall and emotions are running high having an advisor relationship based on trust, wisdom, and experience are qualities that often lead to success.

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The Perfect Investment

Posted on March 2, 2011 by mikemills

What’s the perfect investment?  Could it be a Section 79 Plan?

If you were describing the perfect Investment, what would it look like?  Would it be tax deductible, grow tax deferred, provide a tax free income stream, have limited market risk, produce a fair return, and offer immediately liquidity?  This is the description of how a Section 79 Plan funded with a cash accumulating life insurance policy works.

I’ve come to realize that most of us want the benefits of owning life insurance, but we don’t want to pay for it.  Permanent death benefit provides love, safety, flexibility, and options to a financial plan.  If you have a profitable business, setting up a Section 79 Plan (S79) for you and your select employees could be the least expensive way to acquire a permanent tax free death benefit.  Depending on design, these plans provide a 100% tax deduction to the company, yet the employee will only need to pay taxes on about 60-70% of the money saved within the plan, meaning that for every $100 dollars contributed to the plan the employee or owner will get about a $25-$40 up front tax deduction, but won’t pay any tax on the buildup of cash value within the policy or the tax free death benefit.  The insurance policies are owned personally, not by the company, so the funds stored inside a policy is liquid and can be used immediately to help fund a business need, or left to accumulate as a supplemental retirement plan.

We believe the S79 plan offers many benefits for the profitable business.  For instance, these plans are inexpensive and easy to administer.  There are no set up fees or ongoing administration cost outside of the cost of insurance.  Contributions to the plan can be flexible and adjusted from year to year, plus plans are not subject to the burdensome qualified plan limitations, top heavy rules or required minimum distributions.  S79 plans can be discriminatory by employee class which provides more benefits to the highly compensated than ERISA based qualified retirement plans due to restrictions on contributions. 

People flock to the 401ks and qualified plans because of they get a 100% tax deduction, however, investor performance inside these plans has been dismal.  Once funds are contributed the drawback is illiquidity, limited investments, legislation risk and penalties until 59 ½.  With a Section 79 plan in addition to or in place of a 401k, the business owner has creditor protected access to the funds along with the self completing protection benefit that comes with owning permanent life insurance.  The funds also have little market risk and are in a tax favored status.

Most of the time when a promoter is trying to get a tax deduction to buy life insurance it does not pass the smell test, it’s either too good to be true, or not in the spirit of the law. However, the legislation governing S79 Plans been around since the 1970s and was further substantiated via IRS safe harbor rulings in 2005.  Almost all large companies utilize section 79 plans, but the reason smaller companies have not used these plans is because in order for the business owner to benefit some of the business income needs to be structured as a C Corporation.  Should a business take the steps to split a portion of their revenue between both a C Corp and S Corp combination, multiple deductions become available under  the C Corp that are not available to S Corps/LLC.  This will usually more than offset any additional record keeping cost.   

Let’s look at an example of a 45 year old business owner with 10 employees and over $100,000 of profit that is currently being retained in the business each year.  For simplicity we are going to aggregate 5 years of 100,000 contributions which is $500,000.  At the worst case this plan will cost the Employer approximately $20,000 over 5 years in extra record keeping cost & employee term cost.  Given the additional tax benefits it is likely to be cost neutral or positive. Let’s examine the productivity of the S79 plan for 2.2 million of permanent death benefit designed to grow to 2.5 million by year 5 (age 50) at which point the policy is projected to be fully funded and no additional premiums should be required.

I believe that the tax benefits provided by a Section 79 Plan make it the least expensive and most flexible way for the high income employee and/or business owners to acquire permanent insurance. Profitable C Corps, S Corps & LLCs should evaluate the costs and benefits of adding a S79 plan.  Taxes for business owners are likely will increase in the future.  Strategies that seek to minimize tax rather than defer tax to the future will reduce tax risk and provide more security to the business owner and his family.

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It’s the End of Times…Again

Posted on February 15, 2011 by davidblaylock

Recently I have talked with clients who have asked me to give an opinion on the  newly self-published video by infamous financial journalist Porter Stansberry, Founder of Stansberry & Associates. The video entitled “Is this the end of America?” discusses in little detail events that may come to pass in the near future that could cause the collapse of the U.S. financial system. It ends with a suggestion that the only way to survive is to obtain advice that comes from Stansberry and his firm. As you might guess the advice is not free.

This type of prediction is nothing new. Throughout history people like Stansberry have made similar claims and as of this writing The United States of America still remains the dominate financial power in the world. If you’re going to view Stansberry’s video, you owe it to yourself to read the counter-point,  The Next 100 Years by George Freidman. Unlike Stansberry’s predictions of the future, Friedman’s see’s the financial dominance of the U.S. for the next 100 years.

So, what is it about this video that provided enough motivation for me to write to you about it?

Stansberry has chosen to partner with political organizations in order to maximize distribution to targeted audiences who are already fearful of the current presidential administration. After watching it, I must admit it is a well published look at some of the problems that face our nation. Many of these problems are no secret to the public and are worthy of consideration. I respect the author’s right to speak freely as guaranteed by our constitution, however, as with any financial advice I believe investors owe it to themselves and their families to understand the source of such information.

There is no shortage of online information about Stansberry or his organization but I was unable to locate any relevant credentials for Stansbury that would lead me to believe that he is an expert on our economy or has any expertise to substantiate the claims in his video. In fact, the video itself is void of any substantial information or expert opinions from anyone but Stansbury. The SEC does however have an opinion on his advice. Their opinion led them to file suit against Stansberry in 2003. You can read a copy of complaint at http://www.sec.gov/litigation/complaints/comp18090.htm . As a result of this complaint Stansberry was ordered by a US District Judge to pay $1.5 million in fines for his misleading advice to investors in 2009.

It is my belief that no one can predict the future. If anyone was doing it with even 80% accuracy, we’d all be lined up at their door, myself included. The economic future of this county is always somewhat of a mystery. We never know what might be around the corner. My experience and education have taught me that to prepare for uncertainty. The best investment advice is and will continue to be: own a well-diversified portfolio that includes, stocks, bonds, commodities, and real estate.
 
I am sure there are those that will read this post and elect to side with Stansberry. For this reason I have included a link to an article that highlights some of the investment opinions of Stansberry. See the article at http://seekingalpha.com/instablog/399928-the-gold-report/105953-porter-stansberry-strategies-for-survival. The first part of the article is his usual rhetoric of gloom and doom. The part I find interesting is at the end of the article. By his own admission you will see he is still a strong believer in the power and sustainability of U.S. companies. He mentions more than once that equities are a great inflation hedge and that companies have been able to weather the strongest of financial storms including the Great Depression. He also talks about diversification as a method to survive a financial meltdown. It seems as if even he has difficulty believing the U.S. economy will not survive. It is clear to me after reviewing his tactics and reading several of his publications that the only person who will truly benefit from the advice offered in his video will be Stansberry himself. His book is a marketing tactic. Fear sells and he is taking full advantage the financial position and state of mind of the American public. He will benefit by taking your hard earned dollars for his recommendations and then again benefit from selling the same securities he recommends you buy after investors have artificially driven the price of those securities higher.

It is rare when I am so vocal about something that is published in the media, but I believe that following this type of investment strategy can be extremely dangerous to investors. I urge you to always consider the risks of any investment recommendation and resolve to never make any investment decision out of fear or the promise of success but instead on tested investment principals and a strategy that is aligned with your goals and expectations. I remain confident that our country will continue to be prosperous because of our ability to respond to challenges, adapt to change and the ingenuity of our people.

If you feel like your investment portfolio is not properly diversified or would like advice on the strength of your diversification, please do not hesitate to contact or office and schedule an appointment.

e-mail Info@Mike-Mills.com

Securities and Advisory Services offered through the BFT Financial Group, LLC.
Member FINRA/SIPC/MSRB. 1121 S. Carroll Ave., Ste. 215, Southlake, TX 76092 817-416-7300

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The Top 8 Investment pitches to Avoid in 2011

Posted on February 1, 2011 by mikemills

1. Life Settlements.  There was a great article in the Wall Street Journal lately stating that profiting from others demise is not only creepy but more importantly risky.  Aside from the fact that profiting from someone’s death just doesn’t seem right, the big issue here is that these vehicles are unregistered. There are and will continue to be problems. Salesmen love to sell life settlements as the perfect investment, what most people don’t realize is that there are many risks inherent in these unregistered products. 

While we love diversification, I don’t feel that the expected returns are worth the lack of transparency.  My final reason in telling you to avoid this investment stems from the fact that most salesmen tout the industry return since the AIDs created the product in the 1980’s (a period of almost 30 years), knowing the rates of returns are likely to be significantly below those levels.  As the WSJ article referenced above indicates, underwriting is a problem and when underwriters have no vested interest in profit on the backside the only incentive is to get as many deals done as possible.  I think the underwriting is probably a joke just like it was in the mortgage market at its hay day.  I would avoid life settlements today, if you have them diversify by company and promoter, and I would be especially wary of the company listed in the wall street journal article above.  Read the WSJ article 

2. Equity Index Annuity.  Insurance agents love to sell fear.  While equity index annuities are probably better than CDs or money markets today, I think the key is to keep surrender charges to less than 5 years because of the possibility of higher interest rates. Surrender charges on Equity Index Annuity typically last 7-10 years.   Annuities are complex investments and oftentimes it is easier to get better returns using simpler investments like bonds.

3. Variable Annuity.  This is slightly better than index annuity (because the return is potentially higher) but benefit s have been reduced and cost increased to the point that the lack of transparency and flexibility won’t come close to comparing to that of a prudently diversified portfolio.  We recently ran the cost of a popular contract.  The transparent costs were just over 4% per year + the hidden charges that are not disclosed (like mutual fund trading cost which can often run another 1-2%).  With charges like this these, the guarantees will be realized only around 50% of the time, so make sure that you are comfortable with these terms before you step into one of these products.  Once again it is often possible to get the same guarantees and upside by combining two lower cost products (SPIA & index funds).  While we understand where a Variable Annuity can be useful; we feel they are often way oversold.  Often, the only person they pay rich fees to is the salespeople pushing them.

4. Muni Bond.  Stock brokers love to prospect with tax free muni bonds but rising rates are likely to make this a poor investment choice compared to other alternatives like dividend paying stocks or hedged options.  We think some municipal bonds are a must own, but this is an illiquid market that must be traversed carefully with diversification by issue and source.

5. Pay Off Your House Quicker.   You’ve heard the radio ad, “join my program to miraculously pay down debt faster”.  But do you really want to pay your house off quicker? Assuming interest rates are near 4.5%, if have the funds to pay off your home more quickly and you are willing to save the difference between what you owe and what you have, the interest you save and the opportunity cost of saving those funds are huge.  By my most conservative calculations paying off a house faster than scheduled often results in a loss of wealth equal to the size of the house. 

So if you have a $300,000 house it is likely that if you compare the options of using a pay it off in less than 15 years or stretch it out to 30 years often the difference will be around $300,000 in lost wealth over that time period (if you invest well it is even more).  The point is simple, if you borrow money borrow from the cheapest source with the best terms, and if you save or invest money only save it in places that produces higher returns than your debt’s interest rates.

6. Max Funding Tax Deductible Investments.  Have you heard? The tax rates are low for 2 more years.  Now is the time to use these low rates to get the money out of the company plans.  Imagine the productivity of paying the tax at 25% and then using that money to buy a foreclosure that is cash flowing at 20% per year.  I think that for most Americans minimizing taxes by doing some tax free investing (Roth IRA, Roth 401k, Insurance Death Benefit and 529 Plans) make lots of sense at today’s low tax rates (at least for the next 24 months through 2012).

7. Oil & gas deal – Working interest in an oil well.  Oil prices are high and may go higher, so pitchmen are working the phones daily trying to raise capital to fund oil & gas wells promising tax savings and high returns.  The pitch goes like this, “We have one spot left. We’ve already hit oil but we’d like to keep a spot for our new investors.”  Whatever.  If the well was going to be awesome they wouldn’t use your money they would use their own money or the banks money.  We have done oil & gas and some work and many don’t. 

It is imperative that you know who you are dealing with and what the costs are.  Limited Partnerships are not transparent by nature and because so many people have lost money in this space in the past, make sure you seek counsel and get independent verification by a geologist.  This is a treacherous place for most investors to wander.  Exxon Mobile is the biggest company in the world for a reason, as size matters and it might be smarter to let them explore on your behalf.  Just buy the public company. They get tax benefits too.

8. Buy Gold Now.  The world is falling apart and people have valued gold for thousands of years!  Gold is bought and marketed by many and holding gold bullion is both dangerous and expensive (easy to steal and must be insured).  Typically, additional costs are found in the mark ups of gold promoters.  I think that using ETFs that are backed up by the physical commodity are smarter to own because they are and less expensive to own and safer as it is recorded in share format.  I believe whole heartily that gold is going to decline by 75% in value as soon as fear goes away from the marketplace.  The only question is will it fall 75% from today’s prices or $3000 an ounce (tomorrow’s price).

Not sure what to think about investment opportunities that you’ve heard about?  We’d be happy to give you are take on the opportunities you’ve been presented.  Just give us a call 817-416-7300 or e-mail Info@Mike-Mills.com.

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Should you add Municipal Debt to your portfolio today?

Posted on January 26, 2011 by mikemills

Since the end of the 3rd Quarter we have watched yields jump nearly 130 basis points on a triple-A rated 30-year municipal bonds, most recently because Meredith Whitney, the banking analyst who gained fame during the financial crisis, predicted hundreds of billions of dollars in municipal defaults.  Duh!

See the attached article for more details:  http://www.bondbuyer.com/issues/120_14/-1022369-1.html

I think conservative investors should use the recent selloff to add municipal exposure, while some defaults may occur, I believe a skilled investor can find value in this market and reduce the risk of default by utilizing the principals of diversification, and buy adding shorter bond maturities.  I default rate on muni bonds has historically hovered around 1/10 of 1%.  Even if Meredith Whitney is right, and defaults increase it is important to remember that the market has already priced in this risk and it is offering much higher tax free yields in anticipation of the increased risk.  If your manager is skillful enough to pick non defaulting bonds (and there will be a lot of bonds that do not default) then you will be getting strong returns for the risk.  We like municipal debt for high income investors especially compared to CDs, money markets, and annuities.

 –Mike Mills, CFP® CFS

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A New Year’s Resolution That Will Stick

Posted on January 11, 2011 by mikemills

The results of the most popular resolutions for this year are in.  Like many other years losing weight and saving money are at the top.  These are certainly both great goals but seem to me to be large goals that can be difficult to attain.  As 2011 begins, like many others I am beginning to make my resolutions.  In an effort to make my resolutions stick beyond January 15th I am thinking that I am going to set some small but attainable resolutions that will hopefully lead to change by the end of the year.  If your resolution is to save money here are a few smaller attainable ideas you can use to make your resolution a reality.

Consider refinancing. This may be something you have heard a lot lately but there is truth to this advice for many people the low interest rate environment has created great opportunity to reduce payments or cash some equity out of there home.  Start by speaking to a trusted mortgage specialist and simply ask if refinancing your primary residence might make sense in your situation (Here’s a link to a recent article we wrote on this topic).

Reduce your expenses. We all have things we can live without.  Maybe it is time to review your outflows and see if there are ways you can reduce or redeploy assets.   Hopefully you will find some extra savings to pad your emergency fund or make a wise investment.  We think that subscribing to Mint.com (http://www.mint.com) and allowing a professional to review your expenses annually can: 1.) Help easily track where money is going 2.) Help find money that could be slipping through your fingers.

Get a Roth IRA or Roth 401k. If you meet the income restrictions to contribute to a Roth IRA or if you are an employer consider adding a Roth 401k to capitalize on today’s low income tax rates because I believe taxes will rise in 24 months).  You should, without doubt, take full advantage of this opportunity to minimize taxes not just defer them.  (See article: http://blog.mike-mills.com/?p=216 )   If you don’t meet the income requirements to qualify to contribute, then visit with your financial planner and/or your tax advisor to see if a conversion from a traditional IRA to a Roth might be an option that helps you keep more of your earnings protected from higher taxes in the future.  After all it’s not what you make it’s what you keep that counts.

While the finanancial markets have improved and 2010 was a strong year for profits for many companies, we as a firm are bullish on many markets for 2011 as profits are high, and the economy appears to be propped up temporarily by government spending. Eventually we will need to pay the piper for today’s deficit spending, but until that day arrives here is a list of mistakes to avoid as you review your finances and set your path for 2011.  Paul Merriman’s article how to avoid the worst mistakes investors make” should be included on everyone’s reading list. http://www.fundadvice.com/fehtml/investingbasics/0009.html

In closing remember that while 2010 was better than years past 1 in 10 Americans are out of work and it is still a very difficult time for many families facing the loss of their home, unemployment, or both.  So as you make your resolutions I certainly hope you include a resolution to serve the greater good in our community.  We wish you all a safe and prosperous new year!

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ROTH IRA’s: How Can I Fund a ROTH IRA If I Make Above $150,000 / Year?

Posted on January 11, 2011 by Admin

As you get ready to send the kids back to school, have you wondered what is the most versatile college savings / retirement savings vehicle?  There is no perfect product for every situation, but the ROTH IRA is the 1st savings vehicle we typically recommend for taxpayers that qualify because it has numerous benefits over 529 College Savings Plans and the Tax Deductible IRA.

ROTH IRAs are especially attractive for younger participants or for participants that do not want to be forced to withdraw money from an IRA at 70½.  ROTH IRAs provide more investment control than an employer plan and more flexibility than other savings vehicles. The ROTH IRA grows tax deferred, is creditor protected, and the earnings can eventually be withdrawn tax free if you play by the rules and access the earnings after 59½ for retirement.  Because contributions have already been taxed and the contributions are withdrawn before investment earnings, ROTH contributions can be accessed for college funding and the investment earnings can be left in the account to continue to grow until 59 ½ or beyond.

Most Southlake residents cannot utilize this type of account because married taxpayers with Adjusted Gross Incomes that exceed $150,000 – $160,000 don’t qualify for a ROTH based on current IRS rules; however we have uncovered a solution that allows everyone to fund a ROTH IRA for the next 3 years regardless of your income.

How can I Fund a ROTH IRA if I make above $150,000 / Year?

A provision of the Tax Increase Prevention and Reconciliation Act of 2005 (a recent change in the tax law) allows conversions of traditional IRA’s to ROTH IRA’s in the year 2010 with no limitation on Income (AGI).  Furthermore, the taxes attributable to a conversion from an IRA to a ROTH IRA in 2010 can be spread evenly over a two year period.

In English, this means a high income Southlake family can contribute to a Traditional IRA (probably a Non-Deductible IRA for most of you) for the next several years (2007-2010) and then in the year 2010 convert from an IRA to a ROTH IRA.  If you funded a Non Deductible IRA, at the time of conversion some taxes will be owed, but only on the gains in the account, so taxes should relatively small as a total percentage of the account.

It is probable that we could face higher taxes at some point in the future (possibly beginning with the next election). Our government has promised benefits like Social Security and Medicare to our citizens, but we have spent the savings and soon there will be less people in the work force to shoulder the cost of providing these promises.  If you believe taxes will be equal or higher in the future and you don’t intend to access your savings in the short run, a tax free savings vehicle like a ROTH IRA will probably be a better option than a tax deductible vehicle like a Traditional IRA or a qualified plan like a 401k.

The following chart compares the difference between a tax free account and a tax deferred account.  In our experience, many Americans fail to save the tax savings generated from locking up money in a tax deductible retirement plan, thus making a tax deferred retirement option much less attractive than a tax free retirement option as evidenced by the chart below.

Account Type 10 Years 20 Years 30 Years
Traditional IRA (30% tax bracket) $49,086 $176,407 $506,641
Traditional IRA (40% tax bracket) $42,074 $151,206 $434,263
Traditional IRA (50% tax bracket) $35,062 $126,005 $361,886
Roth IRA (Tax Free withdrawal) $72,124 $252,010 $723,773

The following chart illustrates the net amount you would have after paying taxes at the assumed rate if you liquidate the entire account at the end of each time period specified based on an annual contribution of $4000/year and a 10% rate of return.

There can  be a significant difference in wealth if you do not save the tax deductions generated from a tax deductible plan. A common theme in our planning is to minimize tax, not just defer it until a later date; and to maintain as much control over your assets as possible.  Most savings plans that are afforded government tax incentives come with rules as to who qualifies and what hoops must be jumped through to qualify for the tax benefits.  Most of the rules reduce liquidity & limit investment flexibility which can often lead to lower long term returns.  As you contemplate the structure of your investment accounts, consider beginning with the end in mind, and splitting your money by tax type into 3 buckets: taxable assets, tax deferred assets, and tax free assets.  The ROTH IRA is a great way to get more money into the tax free bucket which will provide attractive long term benefits to a properly structured financial plan.

Michael Mills, CFP® CFS is the owner of Mike Mills Wealth Management, LLC.  He is a registered representatives of BFT Financial Group, LLC, Member NASD/SIPC/MSRB 1121 S Caroll Ave. Suite 215 Southlake, TX  76092  817-416-7300.

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Use Your Home Like a Business ATM

Posted on January 11, 2011 by Admin

Get the best loan terms in a tough lending environment

Short term Interest Rates are currently at 0%, unemployment is near 10%, the Federal Reserve is printing billions of dollars in an attempt to devalue the dollar and push up asset prices, so businesses can export more goods overseas and consumers will feel wealthy enough to spend again.  The Fed is using the printed dollars to buy long term US bonds to artificially lower long term interest rates in an attempt to spur economic activity and pump up the housing sector.  The only problem is the economy is crawling along, there is no velocity in the system, investors are hoarding cash, and banks are not lending.

Given the timeliness of the Fed’s “quantitative easing” policy, I believe a unique situation exist for business owners with strong balance sheets to use their home like an ATM, defying conventional wisdom and borrow the maximum allowable against their personal residence to insure the business has access to low cost capital under significantly better terms than the business could get from traditional sources.  By executing a 30 year cash-out refinance mortgage you could lock in long term borrowing at today’s effective interest rates of 3.5% – 5% (net of tax), which are the best interest rates and terms and conditions ever offered. While the idea of actually executing a cash-out refinance in place of conventional business financing might feel emotionally repulsive, it holds the potential to, much like a bank, make money on the spread between borrowing cost and investment return. This is a smart way to create considerable wealth with little additional risk over the life of the mortgage term (30 years).

The goal of owning your home free and clear by a certain date should in no way be associated with the length or amount of your home’s mortgage loan.  By focusing on creating maximizing efficiency (the highest return with the least risk of loss), any wealth created can be used to pay off the home loan faster if that is the highest priority.

Logic vs. emotion

Many of the clients we counsel tend to view business assets differently than personal assets.  Much has been written about how human emotions influence financial decisions and in study after study logic is rarely a match against emotion. The emotions surrounding home ownership are usually some of the strongest and often the most illogical.  I’m well aware the reasons to pay your house off.  It feels safe because no one can ever take your house.  Plus, once equity is in your house it is locked away from other creditors. But, I would argue money tied up in equity is a dead asset growing at 2- 3% per year.  What amount of money would you need to shift your paradigm about having a mortgage balance?  Have you ever stopped to consider the opportunity cost of leaving the equity in your home at today’s interest rates?   For most business owners their opportunity cost of capital is in the double digits and could amount to millions of dollars lost in their lifetime. If you were able to get better terms on your business debt, could you take a higher salary, put more money in your retirement plan, or even buy another CD.

Isn’t more liquid money the answer to having more security, more freedom, and more choices?

Only the future will tell how productive using a refinance to redistribute your wealth will be, but if it is possible to lock a 1% or greater spread on your money with very little risk today, imagine how productive it will be if rates on AAA municipal bonds go back to 7% or 8%, a very possible outcome given the US Government’s financial policy and deficit spending. Based on simple modeling, every $300,000 of debt accessed today could easily create from $500,000 – $1,000,000 of additional wealth (depending on your cost of capital.  Let’s look at a real world example using today’s SBA rates for fixed financing:

Option 1:  Use SBA fixed loan (7%, 25 year amortization for $300,000) and leave as is $300,000 in equity alone growing at estimated 2.5% home appreciation rate.

Option 2:  Borrow $300,000 out of Home at 4.5%, 30 year amortization to fund the $300,000 business need (pay loan off in the 25th year (same as Option 1)  Don’t use SBA Financing.

Cost of 7% 25yr loan             = -$1,628,229

Cost of 4.5% 25yr loan             = -$901,630

Difference in financing cost   =    $726,599

Difference in Payments                   $34,893 ($600/month at 6% 25 years)

Total Productivity over 25 yrs  = $761,492

In this real world example the business owner could easily create almost a quarter of a million dollars in excess wealth by using a mortgage instead of higher rate business debt.  While we understand that a home mortgage is often viewed as a sacred cow that should be left alone, for some this cow may need to be slaughtered.  Business owner’s that routinely make in excess of $250,000 are going to be in Uncle Sam’s sights over the next couple of decades to help pay for more than your share of the deficit.  The mortgage tax deduction is one of the last effective government subsidies available to the “wealthy”, and while it may be limited by income, it is still a legal tax deduction that can lead to significant additional wealth.

I’m not advocating that you take the money out of your home to buy a boat or other depreciating asset.  What I am advocating is responsible borrowing to control the terms of your debt.  Rely on logic, math, and current tax law to guide your decision making looking forward.

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Is it Time to Raid the Corporate Cookie Jar?

Posted on July 9, 2010 by Admin

In 2008 when Lehman cracked and the financial system temporarily stopped breathing many small businesses in Tarrant County braced for the impact by layoffs, reducing inventories, and lowering expenses. As markets rebound and consumption resumes, lean running businesses are producing higher profits. This presents business owners with a new set of challenges. There are two questions that I am commonly asked by business owners in our current low interest rate environment.

How much cash should I keep in my business?
In our meetings with business owners we find that the amount of liquidity inside of their business is often times not well thought out. It should be a function of several common factors such as monthly payroll, working capital, payment terms, operating expenses or an emergency fund. Despite the practical need to keep some funds in your business, we encourage our clients to keep cash as close to zero as possible. Businesses face more potential liabilities than individuals. Holding these same funds on the personal side of the ledger (outside the company) is a safer proposition. We recommend owners pay out expected profits regularly through salary, shareholder dividends or benefits. Should those funds be needed by the company in the future we recommend they execute a shareholder loan placing the funds back in the business. Creating a formal shareholder loan or line of credit legally creates a prior lien. In the event of a lawsuit or unforeseen event the business owner would have a mechanism to claim the borrowed funds.

I realize that moving funds from the business to a shareholder’s personal accounts requires additional work and a change in ones paradigm, but the long term benefits can be substantial. Most companies keep liquid reserves inside checking or money market accounts which pay little interest. While these accounts provide convenience and safety, they are highly inefficient when compared with other savings vehicles.

Where can I invest short term reserves personally to produce higher investment returns?
Should a business owner decide to follow the advice above they will need a place to store this liquidity. Remember, with these vehicles return of principal is the primary objective.

US Money Markets: Many online banks offer special rates to individuals that are higher than you can get on a checking account at a local bank. Take time to search the net to see if there are teaser rates or special introductory rates you can take advantage of.

Cash Value inside a permanent life insurance policy. One of the easiest ways to increase short term returns is to get two benefits from same dollar. Life Insurance cash value is a great place for storing liquid funds for business owners because it provides long term returns similar to bonds (currently about 5-6%) and the business owner gets the additional perks of creditor protection and tax deferral. In addition to these benefits should the business owner become disabled or die prematurely the policy provides a waiver of premium and a tax free death benefit to their beneficiaries. The best recommendation I can make to most business owners is to store some of your short term funds in cash value. The flexibility it can provide is necessary to the success of any financial plan.

Ultra short term bonds and foreign denominated debt: There are several mutual funds and exchange traded funds that selectively buy ultra short term (less than one year) US debt or foreign denominated government debt from broadly diversified emerging markets. Ultra short term US debt is a good option because duration is low therefore any change in interest rates causes minimal bond price fluctuation. Foreign denominated debt is another great option. The credit risk on these funds is relatively low, but there is currency risk. These funds should perform well due to the fact that the US is printing money and many emerging countries have faster growth rates and lower debt. Their currency should, over time, appreciate faster than the US dollar providing a higher return than our banks can offer.

Hedged Products with monthly or daily liquidity: During the credit crisis many so called “safe liquid investments” turned out to be quite the opposite. However, by selectively adding the right types of hedged equity to a portfolio, overall returns can be increased and risk can be mitigated. Two types of hedge funds that can be an excellent choice for cash reserves are merger arbitrage or an absolute return strategy that sells volatility. These strategies add diversification and target about a 1% per month return.

Regularly shifting extra cash out of business accounts is a great strategy to increase creditor protection and achieve personal financial goals. Although it may seem hopeless in our low interest rate environment, employing the right strategies will allow business owners to safely and effectively grow their cash reserves while maintaining liquidity for their business.

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