Continuing Care Retirement Communities

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Continuing Care Retirement Communities or CCRCs are becoming more and more common. CCRCs are retirement communities that offer different levels of service and health care at the same location or campus. Most CCRCs have apartments, cottages, or small houses, which allow healthier residents to experience a neighborhood feel while still enjoying access to the amenities (restaurants, gyms, libraries, clubs, etc.) of the larger campus. CCRCs also usually have smaller apartments or rooms for residents who need more assistance in addition to skilled nursing facilities and rehabilitation centers. The idea is to not have to move to multiple residences towards the end of one’s life, and to not have to be separated from a healthier or sicker spouse.

The growing popularity of CCRCs is due to a number of reasons. For one, residents want to keep their independence as long as possible and CCRCs allow them the flexibility to do so. CCRCs also allow many sick residents to stay with, or at least in the same facility as, their healthier spouse. Additionally, many residents either do not want to be a burden on their spouse or family, or simply do not have spouses or families that are able to handle the burden of care necessary to support them. With people living longer and longer, I would expect this trend to continue. I’ve already seen it as I have helped a growing number of clients transition themselves or their parents to CCRCs. It’s a big decision; emotionally and financially, and one that should not be taken lightly. In that spirit, I’d like to offer a few financial tips I’ve learned along the way.

1. Know what you can do. As you might imagine, there are varying qualities of CCRCs with varying costs. It’s important to look at what your new living expenses would be and whether that is a feasible “burn rate” given your amount of assets and life expectancy. Many people have to sell their primary residence to make a move to a CCRC possible.
2. Figure out your real estate options. If you need to sell your primary residence when moving into a CCRC, talk with the CCRC before making any decisions. In some cases they have people or relationships that can help you clean out and even sell a home at discounted rates. I’m talking estate sale experts, realtors, and mortgage brokers. Some CCRCs offer financing on a short term loan between the time you sell your primary residence and move in, but sometimes “outside” financing on a loan to bridge you between the sale of your old home and the purchase of your new CCRC home may be necessary.
3. Consider refundable versus nonrefundable options. Some CCRCs charge you more up front, but promise to give your heirs a portion of your down payment back after you pass away or if you pass away within a certain period of time. Depending on the specific offer, your financial capabilities, and your life expectancy, there can be a strategic decision to be made here.
4. Consult with a CPA. At certain CCRCs, a portion of your initial down payment can qualify as a medical deduction for income tax purposes. Ask any CCRC you are considering if this is the case, and then if so, talk with your CPA. A really large medical deduction might cause you to have a really low or negative income tax year in the year you move into a CCRC, so it may make sense to pull some income forward or recognize some extra income in such a year if possible. Perhaps the CCRC will let you pay the down payment over two tax years so you can spread out the deduction? A medical deduction for moving into a really nice CCRC can near six figures, so the tax planning on this isn’t something to just do yourself or with your generic tax software!
5. Get on a waiting list sooner rather than later. There are more people interested in CCRCs than there are spots available. If you know there is a particular facility you are interested in or you have friends going into, inquire if there is a waiting list. Usually you can get on a waiting list for several hundred to a few thousand dollars that may even be refundable if you change your mind. You may not be able to get into the CCRC you want to when you need it if you don’t go ahead and get on the list beforehand!

As always, if I can be of assistance to you or someone in your family considering a move into a CCRC, please let me know. You know where to find me.

-Tom

Compounding – The Good, The Bad, and The Ugly

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• If you were to invest $5,000 per year for 30 years in a portfolio that averaged 5% per year, you’d end up with around $332,000.
• If you were to invest $5,000 per year for 30 years in a portfolio that averaged 6% per year, you’d end up with around $395,000. 
• If you were to invest $6,000 per year for 30 years in a portfolio that averaged 5% per year, you’d end up with around $399,000. 
• If you were to invest $6,000 per year for 30 years in a portfolio that averaged 6% per year, you’d end up with around $474,000. 

That’s the “miracle” of compounding. Sure, investment returns matter a lot, but as you can see from the examples above, how much you save can matter even more! The good part about compounding savings and investment returns is that slow and steady really can win the asset accumulation race in a big way. You might not think you could ever save up $474,000, but do you think you could save $6,000 this year?

 

Recently my wife and I have been looking at houses, and nothing gives me more indigestion than looking at how much a house costs. I’m not talking about the sticker price; I’m talking about how much a house costs over the life of a mortgage. For those of you who have bought a house, this is usually the number that shows up in the top, right-hand corner of one of your loan documents indicating the total amount expected to be paid over the life of the loan. Once interest is baked in on a thirty-year loan, it’s horrifying to see the difference between the initial sales price and what you will actually end up paying. Interest payments alone could be in the hundreds of thousands of dollars! The bad part about compounding interest on a home loan, car loan, student loan, and certainly credit cards is that you keep trying to pay off principal, but you keep getting charged interest. It’s like you have a hole in your bucket. I’ve tried Pepcid, Pepto, and Tums, and the only thing that seems to work is paying off more debt at a faster pace.

 

The ugly part of compounding has to do with the relationship between money and purchasing power. If you have $100,000 in cash and you bury it in the backyard, when you dig it back up, what do you have? That’s right, $100,000. The problem is that while your money was safely hiding underground, there’s a pretty good chance that the cost of goods and services went up (inflation). Think groceries, health care, and education expenses. You might still have the same amount of money, but you are actually poorer than you were because you can no longer buy as many goods and services as you used to since they are now at a higher price. Said another way, your purchasing power has gone down. I don’t see a lot of people burying money in their backyards, but I do see people hold on to exorbitant amounts of cash or an alarming amount of low-interest CDs and bonds. I don’t ever want to take away someone’s “cash blanket,” and I firmly believe that bonds have a place in most people’s investment portfolios to help provide for short-term liquidity needs, reduce overall volatility, and act as an income-producing alternative to stocks. However, just like chocolate cake, too much can be a bad thing. If you have too much invested in cash, CDs, or bonds, your minimal investment returns can lag the rate of inflation, and, compounded over time, you can lose purchasing power even if your assets are slightly growing or staying about the same.

 

That’s the good, the bad, and the ugly truths about compounding.

 

-Tom

 

Your Humble Abode(s)

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I want you to think about a few things with me. Think about how much the property taxes are on your home. Think about how much your homeowner’s insurance costs. Think about your monthly water bill, gas bill, and electric bill. If you pay someone to mow your lawn, think about that. Do you have an exterminator or a cleaning person? What about the annual fee for your alarm system monitoring? Do you have HOA fees or neighborhood dues? Do you need a pencil and paper yet to add all of that up? Don’t forget there are also those periodic home maintenance surprises that come up like replacing an air conditioning unit, hot water heater, dishwasher, or roof. The point I’m trying to make is that owning and maintaining real estate is expensive.

If you’re a homeowner you already knew that, but have you ever thought about the significant portion of your living expenses that is tied to the upkeep of your residence? Even when not considering any outstanding debt you might have on your house, having your own place requires a lot of cash flow and chews up a lot of assets. It’s important to realize this when you are working, but it is absolutely critical to understand this when you are planning for retirement.

In order to make it in retirement, you have to live off of any income you have coming in (like pensions or Social Security) plus small portions of your investment assets. Some people can live solely off of their retirement income streams, but most people slowly draw down their investment assets over time to supplement their lifestyle in retirement. The thing is, you don’t want to outlive your investment assets, so you’ve got to have a plan to make your nest egg last. A big part of making your investment assets last in retirement is by reducing your fixed expenses, and as we just discussed, a big part of your fixed expenses is often tied to your humble abode(s).

Whether you are planning for retirement, nearing retirement, or finding that you're eating up your nest egg too fast in retirement, here are some tips that might help:

• Pay off your mortgage(s) before you retire. This will likely reduce your fixed expenses significantly and help you make ends meet in retirement.
• Do major capital improvements to your real estate before you retire. If you’re going to redecorate, finish a basement, or get a new refrigerator, do it while your working cash flow is still coming in. It will make you feel better and give you peace of mind. Think of it as investing in staying put.
• Don’t keep multiple residences if you find it difficult financially or physically. Dusting one house stinks. Dusting two houses is awful! Pick one. Think of all of the property taxes, insurance premiums, utility costs, and lower back pain you will save!
• Get out of town. Sure, stay near the kids, but move to the suburbs or the country. Homes are cheaper, property taxes are lower, and the cost of living is likely lower, too. You’ll feel like you have more purchasing power, and you can add the difference between your urban home selling price and suburban home purchase price to your nest egg to strengthen your overall financial position.
• Consider state taxes on retirees. It’s probably not worth moving states just to save on state taxes, but if you’re on the border or a good portion of your family is in a different state, why not consider it? Take a look at this interactive map, and you’ll see that all states’ taxation is not created equal!
• Finally, think about downsizing. All I’m saying is that if you no longer need five bedrooms, why have five bedrooms? If all of the kids come at once, you can help fund their stays in a nice hotel, and you’ll probably still save money versus maintaining your own five-bedroom “bed and breakfast.” If you do decide to downsize, be careful and make sure you don’t more elegantly furnish a smaller house as opposed to actually downsizing and leaving yourself with some extra proceeds to put with your nest egg.

 

Personally, I plan to have a place on the beach when I retire. If my wife and I can swing it, we’d probably like to keep a place near my parents and her parents and/or near our eventual kids and their families. If we can’t swing it, we’ll just visit a lot because it is often a lot cheaper to pay for a hotel or even rent a place for a few weeks than it is to maintain an extra humble abode!

 

The How to Retire Early Series will continue next time with a look at an important piece of everyone’s retirement puzzle: health insurance.

 

-Tom

How to Fix Your Credit

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I know a lot of good people with not-so-good credit. Most people who ask me how to improve their credit are not repeat offenders. They had an emergency, they decided to take a big trip, or they got a little carried away with their first credit cards. Still, some people have serious, recurring credit problems and are headed in the wrong direction. In this post, I'd like to share five tips on how you can right the ship and start improving your credit once and for all.

1. We’ll call this “1(a),” as in order to have credit at all (good or bad), you need to have used credit. If you don’t have a credit card, get one. The sooner you start wisely using a credit card and paying it off every month, the longer your credit history will be. The longer your credit history is good, the higher your credit score, which will help you get the most favorable terms when it comes time to buy that house or car. If you’re solely focused on trying to improve your credit score, you might even consider using your oldest card (the one you’ve had the longest) over your newer ones.
2. Pay off what you owe every month! If you have a mortgage payment or a car loan payment due, at least pay what is due. If you have a credit card bill, don’t just pay the minimum - pay it all off! If you can’t pay it all off, I understand, but you really need to spend less next month so you can pay it off then. Building up credit card debt doesn’t usually end well, trust me.
3. Even if you can comfortably pay off your credit card every month, try to pay it off before it gets near its limit, even if that means making payments several times a month. Some people have low limits (and some people want low limits, which isn’t a bad thing), but believe it or not, letting your credit card bill rise to near its maximum allowable limit can have negative consequences for your credit score.
4. Long-term debt can help. Associated with a long, good credit history is often the steady reduction of student loans, car loans, mortgages, and home equity lines of credit. Steady, recurring payments (with a little extra principal every now and then) are really one of the best things you can do to improve your credit score. Now I’m not suggesting you go take out a huge thirty-year note on a line of credit in the name of boosting your credit score, but I am saying that by steadily paying your long-term debts you are literally showing other lenders that you would likely be a good steward of any funds they lend you in the future.
5. I’ve mentioned this in previous posts (The Best Home Loan You Could Possibly Hope For and TARGETed to cite a few), but you really should check your credit reports from time to time at annualcreditreport.com. You can check your credit once a year with all three credit bureaus for free if you like, but I also like the strategy of people who check their reports with a different bureau each year, and they just rotate to make the task seem less daunting (unless they find an error and then they check with all three bureaus). I would suggest that you check your credit reports at least every several years, but definitely before you buy a car or take on a mortgage. When you get your credit report, you’re looking for errors, to make sure all the types and forms of credit you are using are listed, and to make sure the limits on each type of credit are up-to-date. While we’re not usually talking massive improvements to your credit score, correcting the fact that you made your October 2013 payment on time and that your Visa actually has a $10,000 limit instead of your initial $5,000 limit can only help. If you find an error, here’s a helpful site listing tips and contact information for the three credit bureaus provided by the Consumer Financial Protection Bureau.

Your credit score can range from around 350 to 850, and anything above a 720 or so is usually considered pretty good. Now just like Rome, your credit score cannot be built (or improved) in a day, but unlike Rome, it can be destroyed pretty quickly. Credit reports usually go back about seven years, so unless you find and correct a serious error or two on your credit report, there really aren’t any “silver bullets” (contrary to what some billboards and late-night commercials will try to tell you). If you’ve done a good job handling your debts and you have a great credit score, keep up the good work. If you’ve had some struggles with credit cards and being able to make payments on all of your debts, I’d encourage you to implement these tips and simply do better going forward. As they say, time heals wounds...and credit scores!

 

-Tom

Dealing with Debt

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One of the most common questions I receive is about paying down debt. If you only have one debt, be it a student loan, a car loan, or a home loan, it’s pretty easy: make the monthly payments and pay a little extra when you can until you don’t owe any more. Paying off that loan will remove a recurring, fixed expense from your monthly cash flow, eliminate your interest expense, and free up some more cash for you to save or invest. However, if you have multiple debts, things can get a little more interesting…

Let’s say you have a car loan for $15,000 at a 4.5% interest rate and a $200,000 mortgage at 4.75%. What should you do? Any financial advisor with any sense at all would encourage you to make the minimum payments on both of your personal liabilities at the very least, but if you ask some of the great financial minds out there which debt you should focus on beyond your minimum payments should you have a little extra cash lying around, you would probably start hearing conflicting answers. What I mean, is that from a longer-term point of view, you should always attack the debt with the higher (or highest) interest rate to maximize your net worth, but from a shorter-term point of view, you should probably go ahead and pay off the smaller (or smallest) debt to lower your fixed expenses a little bit and take some pressure off your cash flow. Every case is different, but if the interest rates of the two debts you are trying to decide between paying more towards are very close AND the amount owed on one of them is significantly smaller than the other one, I’d usually recommend you go ahead and eliminate the smaller debt. The interest rate savings you are giving up are most likely minimal compared to the satisfaction you will feel and progress you will see by eliminating a debt.

Credit card debt is often another matter entirely. Let’s say you have six credit cards with balances on them that you can’t pay off at the end of the month. What do you do? First, read this blog more often, and unless you find yourself in a really, really bad situation, don’t ever rack up a credit card bill you can’t completely pay off at the end of the month! Just say no! Seriously though, what should you do? I’d get a sheet of notebook paper and write down the name of each credit card, the balance you have worked up, the interest rate you will be charged, the minimum payment due, and the maximum credit limit of each card. Make a nice little chart if you like. Either way, I’d advise you to make minimum payments on all of them and then go after whichever credit card has the highest interest rate regardless of the balance you owe. Credit card interest rates have teeth and fangs, so when we’re talking 15% to 25% interest rates or higher, you should really focus on stopping the “interest rate bleeding” as quickly as you can. One other thing probably worth mentioning is that if you have some credit left on some of the cards with lower interest rates, you could potentially take advantage of that remaining credit and try to pay down (or pay off) some of the cards with higher interest rates if your particular credit card(s) will allow you to do so. It’s a creative approach, and you’d need to be careful, but it could work and save you some interest. If you actually resort to this tactic, don’t just pat yourself on the back: go get a pair of scissors and cut that paid-off credit card down its back!

Everyone with debt is in a different financial position with different cash flows and different assets at their disposal, so my proposed debt reduction strategy is not always the same. Whatever path I advise, or more importantly, whatever path you choose to take, I encourage you to take that “freed-up” cash you have every time you pay off a debt and go ahead and put it towards paying down your next debt. This practice is often referred to as a “snowball,” and if you hold true to this strategy, you can really pick up some momentum towards becoming debt-free. 

Almost everyone has debt or has had debt. Please don’t hesitate to let me know if I can help you come up with a plan tailored to deal with your debt.

-Tom

The Best Home Loan You Could Possibly Hope For

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In January 2010, my wife and I needed to take out a loan so that we could purchase our present home. We ended up with a pretty good loan that fit our needs, and it was at an interest rate that the home buyers of the 1970s and 1980s could have only dreamed of. I tell you this because I was pleased with the result of my efforts, but I would not wish that huge, confusing, time-consuming, frustrating endeavor of getting a loan on anyone! So when my wife's friend asked for my thoughts on how to get the best loan possible, I thought it was a great topic for a post. Based on my own personal walk through the loan application “minefield” and my client experiences since then, here is what I suggest you do to get the best home loan you could possibly hope for.

I first suggest that you go to http://www.annualcreditreport.com/. You are allowed to view your credit report once a year for free, and you definitely should. While this will not tell you your credit score (unless you are willing to pay $8 or so), it gives you a chance to verify your credit history and correct any inaccuracies before banks and lenders start looking at your credit report for themselves. Once you know the report is accurate, your credit score is what it is. Just so you know, anything above a 720 is usually considered a pretty good credit rating.

The second thing I would do is figure up how much of a down payment you can cook up. 20% is the magic number. Although most lenders do not require a 20% down payment, not being able to put 20% down usually leads to the lender requiring the buyer to purchase PMI (private mortgage insurance). This will be an additional expense that must be factored into your purchase analysis. Without destroying your quality of life and financial security, I would generally advise you to put down as much as you can, but it really is a lot easier to get a favorable loan if you can hit at least 20%.

Third, you need to determine what time frame works best for you. The shorter the loan period, the less interest you will pay, but that means higher monthly payments. If you have concerns, I would advise you to get a longer term loan with no prepayment penalty so you can enjoy the lower required monthly payments. This way you still have the option to contribute additional funds to pay off the loan sooner without having to worry about any extra fees.

Now it’s time for the “fun” part: letting lenders compete for your business. Try to tell yourself throughout this process that they need you more than you need them because someone out there is going to be willing to give you a loan! I would start with your home bank, I would ask for your realtor’s recommendation, and I would ask your soon-to-be neighbors who they used. You’re trying to find out who was pleasant to work with, not the numbers at this point. If you are feeling lonely or want to feel important, go ahead and enter in your information like I did on a website like Lending Tree or Quicken Loans. The response was overwhelming, but quite informative as my phone rang off the hook for 2 days with people wanting to give me a loan!

Once you narrow your lenders down to 3 or 4 based on likability, think R-P-F; rates, points, fees. Determine who has the lowest rate and pitch it to the others to drive them down or mark them off your list. Will they let you lock in that rate for free? Find out how much points are, decide if that is something you want to do, and then pitch it to the others. Get the lenders to provide you with an estimate of fees and pitch the lowest fee amount to the others to drive them down or mark them off your list. Suddenly you will be left with a couple of lenders that you have squeezed as much as you can, and they will be offering you the best home loan you could possibly hope for. At that point, go with whoever is nicer!

-Tom