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January 2005 |
Capital Retirement Strategies, Inc.
Specializing in retirement plans
and personal investment management
Happy New Year! It's hard to believe the decade is already half over! It seems like only yesterday we were preparing for Y2K and the new millennium. Time certainly has a way of getting away from us sometimes, and every now and then we need to stop to take stock of where we are. I'm not a big believer in New Year's resolutions, but I've always felt that January provides us with a clean slate- the perfect time to evaluate and set goals for the coming 12 months. As you set your objectives for the coming year, I hope you'll take a minute to review the articles listed below. If improving your financial situation is one of your goals, I hope you'll find value in "5 Easy Ways to Improve Your Finances in 2005." If you have questions about maximizing the financial effectiveness of your home mortgage, please check out "Proper Mortgage Planning Helps Build Wealth." Joe Biggins, a highly-regarded mortgage consultant with Countrywide Home Loans, has generously contributed this interesting piece. If you know someone who might appreciate any of the information here, I hope you'll consider forwarding this newsletter to them. As always, thanks for reading, and thanks for your continued support! Best regards,
In This Issue 5 Easy Ways to Improve Your Finances in 2005 1. Make Your Savings and Investments Automatically Most people, if given the choice between saving or spending their money, will choose spending. Let’s face it- spending is more fun! Most of us lack the discipline to live within our means, and save or invest on a regular basis. Don’t beat yourself up over it. Set up your investment plans so that they take place automatically. If you work for a company that offers a 401(k) plan, that’s one of the easiest and most popular ways to make your savings automatic. You make your retirement investments through the ease of payroll deduction, and you never have to think about it! Even if you don’t have a 401(k) plan, most mutual fund companies offer systematic investment plans that allow you to transfer as little as $50 or $100 a month from your checking or savings account into a mutual fund. 2. Bump Up Your Retirement Savings When was the last time you increased the percentage of income that you’re saving for your retirement? The IRA contribution limits have been raised for 2005. If you make contributions to an IRA or Roth IRA, you can now contribute up to $4,000 a year. If you’re over 50 years old, you can put in $4,500. If you have a 401(k) plan, consider bumping up the percentage of your pay that you contribute. For example, if you’re currently deferring 5% of your salary each pay period, consider increasing it to 6 or 7%. By increasing it just slightly, you’ll hardly notice the difference in your paycheck. If you’re already maxing out your 401(k) or other company-sponsored retirement plan, open a Roth IRA and begin contributing to that on a regular basis. 3. How’s Your Credit? There are several compelling reasons to check your credit at least once a year. Identity theft has become a significant threat to us all. You can catch a possible theft of your identity early by getting a copy of your credit report from one of the major credit reporting agencies. You can get a free report once a year or any time you’ve been denied credit. And don’t overlook your monthly credit card statements. Before sending in your payment, check the bill for any suspicious activity or charges that you don’t recognize. Another reason to check your credit report is that mistakes are made frequently- as many as 79% of reports contain errors according to the U.S. Public Interest Research Group. If you see something incorrect on your report, you can dispute it by writing to the agency that reported it. If they can’t confirm the validity of the report within 30 days, they are required to remove the negative item from your record. 4. Rebalance Your Portfolio Remember way back when you picked your funds? Or maybe you remember sitting down with your financial advisor when he showed you this great portfolio of some stocks, some bonds and maybe some money market funds… If you haven’t reviewed the performance of your portfolio and the asset allocation in the past year or two, it’s probably time to do it now. Over time, some investments in your portfolio may have outperformed others. If that’s the case, you may be exposed to more risk than you had planned when you set up your account. The actual stocks and funds you own are important, but not nearly as important as the asset allocation of your portfolio. Make sure your account is properly diversified. 5. Review Your Insurance Policies Chances are, there have been some changes in your life since you bought your last policy. Do you have enough life insurance? Remember when a life insurance policy of $100,000 or $250,000 seemed like a lot of money? If you’re providing for a family and paying a mortgage, that’s probably not enough. Term life insurance can provide a large amount of coverage at a surprisingly affordable cost. For example, $1 million of 20-year level term insurance costs less than $60 a month for a healthy 35 year old. It’s a good idea to consider the purchase of disability insurance as well. This is the insurance that replaces your income (generally up to about 60%) if you’re disabled and unable to work due to an injury or illness. And don’t overlook your property coverages- ask your insurance agent about an umbrella policy. This is a personal liability policy that will protect your assets in the event of a lawsuit. Again, this is surprisingly affordable, even for $1 million. Don’t let another year go by without getting your finances in order. A few relatively easy changes can make a significant impact on your financial situation. Let this be the year!
Proper Mortgage Planning Helps Build Wealth By Joe Biggins
Too many borrowers shop just for the lowest rate. The lowest rate on the wrong loan program is far more costly than a competitive rate on the program that best suits your needs. Are the days of the 30 year fixed rate mortgage are numbered? Even Federal Reserve Board Chairman Alan Greenspan has stated that ARM mortgages are a much better alternative, for example, a 7/1 ARM offers a lower interest rate that is fixed for 7 years, and is very applicable since the average homeowner moves every 7.1 years, and the average mortgage loan only lasts 4.1 years. The size of the loan is perhaps the most neglected aspect of the mortgage loan. Borrowers often shy away from larger mortgages because they don’t understand the alternate uses of their money. Most people fear debt, often to a fault. Debt, when used properly, can result in a meaningful transformation, making life-changing differences. Many homeowners do not realize that they have better alternatives for their money than putting it toward the purchase of a home, merely to cut down the size of the mortgage. When you eliminate your mortgage interest expense through traditional methods you eliminate one of your best partners (Uncle Sam) in accumulating wealth and financial security. Wealth is created through use of arbitrage, that is, earning a higher rate of return than the net cost of borrowing. There are many attractive and safe tax-free and tax deferred investment vehicles that can make this a reality. A mortgage is a very powerful financial tool. It should not be obtained the way you would buy a book online. It’s your money and your financial future. COMMON MYTHS ABOUT MORTGAGES AND WEALTH BUILDING: Home equity is liquid The best way to pay off a home early is to pay extra principal on your mortgage Home equity is a safe investment Home equity has a rate of return Any and all debt is undesirable Equity in your home enhances your net worth Financial security is achieved when your home is paid for Refinancing at a higher interest rate should be avoided. Joe Biggins is a Mortgage Banker with Countrywide Home Loans. His mortgage planning approach ensures that his client’s mortgage and debt strategies are aligned with their long and short-term financial planning goals. Joe can be reached at joe_biggins@countrywide.com or 978-263-6362.
2005 Retirement Plan Contribution Limits Contribution limits for most retirement plans have again been raised for the 2005 tax year. The maximum contribution for each plan is listed in the first column, and the maximum with “catch-up” is listed in the second column. (If you’re over 50 years old, you can take advantage of the “catch-up” provision which allows you to contribute more than those under 50 years of age.) Plan Name Max Contribution Over 50 Max Contribution 401(k) $14,000 $18,000 IRA $4,000 $4,500 Roth IRA $4,000 $4,500 SEP IRA $42,000 Not Applicable SIMPLE IRA $10,000 $12,000 Individual 401(k) $42,000 $46,000
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