Home Equity Retirement Planning vs. Qualified plans

Preface to the discussion:  Most of the financial strategies put forth by the financial institutions are actually designed to give us less control of our own money.  Strategies such as "prepaying the mortgage" by acelerating payments or "bi-weekly payments" or "15 year mortgages" are all designed by the financial institutions {repeated as gospel by a confused but willing media} to make us believe we are doing a more conservative thing by following this "conventional wisdom."  My office teaches a very different story which, if the client is truly disciplined, actually is a much more conservative alternative and can create vastly significant results in quality of lifestyle.  Money means nothing until it is transferred into lifestyle!  A mortgage is, now more than ever, a financial tool that ought be utilized as the centerpiece of a broader financial plan touching in areas such as estate, tax, financial and of course retirement planning. 

Think about this for a second:  If the financial thrifts, banks, and insurance companies can convince us to give them our money, let them keep our money for as long as possible and pay us as back as little in return as possible, they stand to make a great deal of money.  This is called the Velocity of money principle:  The leading capitalist theory governing the flow of money between investors and consumers in our economy. 

     PUTTING THE PIECES TOGETHER:

                                                                                                       MORTGAGE RETIREMENT PLANNING VS.

                                                                                                       TRADITIONAL QUALIFIED PLANS {401(K), IRA, ETC.)

Case Study:

John and Mary Smith were placing aside $500 a month between them into their qualified 401(k) plan at work.  At a rate of 7.5% their $6,000 a year investment (total life-time contributions of $180,000 over 30 years) would grow tax free {during the accumulation phase} to $609,985 by year 30.  However, at the withdrawal phase, assuming they wanted to live on just the interest at 7.5% or $45,748 a year, they would pay taxes on this $45,748 as they withdrew.  At a 25% Federal and 8.3% California State income tax, the Smiths would pay $15,248.10 every year leaving them with only $30,499/year to survive on.  Their income goal was to earn $38,000 net minimum + social security in order to live, what for them would be, a comfortable retirement. 

Current Financial Picture:

• The Smiths owned a piece of property worth $510,000 and owed the bank $89,000.  Their monthly mortgage payment was $790.08 (not including insurance or taxes).
• Between the 401(k) payment and the mortgage, their monthly outflow was $1,290.08.
• They had no other revolving debt and good credit.

Recommendations:

• We advised a refinance of the existing mortgage into a 30 year fixed {based on the suitability and comfort, this is the product they liked} at a rate of 5.50%.
• We further advised taking a $227,197 mortgage leaving them with an extra $133,197 after paying off the existing mortgage and closing costs for the new mortgage. 
• At a 5.50% mortgage rate, their new monthly payment was $1,290.08.

Expected Results:

• Since the payment was exactly the same as their current outflow, the Smiths experienced no change in lifestyle. 
• The $227,197 loan amount had a yearly interest expense of $12,495.83 and created an even larger front-end mortgage tax deduction than what they had been receiving investing in their 401(k).
• The $133,197 was set aside in a simple tax free, liquid, side fund that earned 5.5% {100% tax free}by investing in "AAA" quality California Municipal Bonds offered through Charles Schwab at the time. 
• The $133,197 at a tax free rate of return of 5.50% was really a taxable equivalent of 9% based on their tax bracket but without the unnecessary risk associated with a stock mutual fund typically investing in high risk companies and markets.
• The $133,197 will grow to $690,944.49 by year 30.  The borrowers will be able withdraw at 5.50% for $38,001 tax free income while not depleting the principal.  Over time, they could utilize a pay-down of asset strategy and life insurance to further enhance their retirement while still protecting their heirs from disinheritance. 
• All the while the clients had access to the money in the side fund for emergency or investment opportunity not having the money tied up in a 401(k).  Further if they wanted to retire at an earlier age say 55 and not say 59 ½, they could do so without tax penalty.
• Further by investing in "investment grade" universal fixed life insurance earning 7.6% this side fund could have grown to $1,292,895 with tax free withdrawals of $98,260 / year.*

*Call for details.  Investment Grade Universal Life Insurance is a more complex financial instrument and should structured only by a licensed investment and insurance advisor who has experience in Defra, Tefra, Tamra and IRS code 264(b)(2) & 263(h)(c).  My advisors are experts in the legal structuring of these instruments utilizing an insurance security instrument as an investment grade tax free instrument. Call for details and to discuss whether this type of investment alternative is "suitable and prudent" for your situation.

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