When Should You Refinance into a Lower Interest Mortgage?

By David Munn, CFP

As mortgage rates have started to move lower from their 2023 peak, homeowners who have purchased or refinanced in the last 1-2 years may start to consider the benefits of refinancing. A lower interest rate can mean significant savings over the life of the loan, but there may be other benefits to refinancing as well.

Here are some factors to consider.

1. Interest Rates Have Dropped 

The most obvious reason to refinance is when interest rates drop below your current mortgage rate. A rule of thumb is to refinance if your new rate would be at least 1% lower than your current rate. This also assumes you plan to stay in the home for at least 2-3 years.

For example, if your current balance is $200,000, a 1% lower interest rate will save around $2000 interest/year for the next few years. So if additional closing costs and refinance fees add $4000 to the mortgage balance, you will still break-even in a little more than 2 years. 

2. Interest Rates May Not Continue Falling

There may be a hesitation to refinance even if rates have dropped enough to make it worthwhile, due to the expectation that rates will continue to drop. After all, if you’ll be able to refinance into a 2% lower rate in a few months, why would you refinance into a 1% lower rate today?  

However, this is a common blunder, as there is no guarantee rates will continue falling. In fact, rates could even go back up. The best decision is to refinance when it makes financial sense, and if rates continue falling, you may benefit from refinancing a second and even third time. While multiple refinances will result in additional closing costs and fees, each refinance decision must be evaluated independently on the financial merits, and not in light of previous “sunk costs”. 

3. Your Credit Score Has Improved

Refinancing at a lower rate may be beneficial when your credit score has significantly improved since you took out your original mortgage. Lenders offer better interest rates to borrowers with higher credit scores. If you initially obtained a mortgage with a lower score and have since improved your creditworthiness, you may qualify for better terms today.

4. You Want to Change the Loan Term

Refinancing can be a good opportunity to change the term of your loan to better suit your financial goals. Homeowners who initially opted for a 30-year mortgage may want to refinance into a 15-year mortgage, as the rates are typically around half a percent lower. In some cases, the combination of lower interest rates and a 15-year mortgage can result in a similar monthly payment, but a loan that will be paid off in half the time!

5. You Want to Tap Into Home Equity

If you have significant equity in your home due to appreciating property values, refinancing may offer an opportunity to access cash through a cash-out refinance. This can be especially appealing if you have high-interest debt or need funds for major expenses like home improvements. By refinancing at a lower interest rate, you could potentially borrow against your equity at a lower cost than using other forms of credit.

Conclusion

Refinancing into a lower interest mortgage can provide significant savings and financial benefits, but it’s important to evaluate your personal situation. Consider factors such as how long you plan to stay in your home, your current loan terms, and the costs of refinancing. If the numbers align, a refinance could be a smart way to save money and better align your mortgage with your financial goals.

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This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  This material is not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management, LLC, is registered as an investment adviser (RIA) with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training.  1323GRG

Retirement Planning in Your 20s and 30s

By David Munn, CFP

While retirement planning may not be a high priority for those who are navigating the financial challenges of their 20’s or 30’s, this is the opportune time to give thought to your long-term future and take action. Following are key steps to take now to avoid the regrets that many face as they approach retirement:

Define Your Retirement Goals

What do you envision your retirement years to be like? Do you dream of traveling, pursuing hobbies, relocating to a different climate, or spending quality time with family? Clearly defining your retirement goals will help you determine how much you need to save and provide motivation to take the necessary steps.

Start Early, Save Regularly

One of the most powerful tools in retirement planning is compound interest. The earlier you start saving, the more time your money has to grow. Automate your savings by setting up automatic transfers from your checking account or paycheck to a retirement account, such as a Roth IRA or 401(k). Even small contributions can make a significant difference over time. 

Consider that an 18 year old who invests only $100/mo will accumulate over $1 million by age 65, assuming a 10% annualized rate of return.  Of course, $1 million won’t have the same purchasing power in 47 years as it does today, so additional savings may be necessary, but the earlier the savings starts the more there will be.

Invest for Growth

A common mistake young savers make is being too concerned with the short-term volatility–or fluctuation–of their retirement funds, even though retirement may be decades away. This can lead either to a portfolio that is too conservative and won’t provide the necessary growth, or attempts to time the market by jumping in and out of the stock market, which may result in worse outcomes, wasted time, and elevated anxiety levels.

Instead, focus on selecting a diversified portfolio of investments with a level of risk you can stomach and an expected growth rate that will meet your long-term objectives.

Consider a Health Savings Account (HSA)

If eligible, an HSA can be a valuable tool for retirement planning. Contributions are tax-deductible, and the money grows tax-free. HSAs can be used for qualified medical expenses throughout your lifetime, providing flexibility and potential tax benefits, even throughout retirement.

Track your Progress

Every year or two, it is beneficial to review your portfolio, revisit your retirement goals, and evaluate your saving progress.  This can help identify if changes need to be made, such as adjusting your savings rate, investment allocation, or the type of retirement account.

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This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  This material is not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management, LLC, is registered as an investment adviser (RIA) with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training.  1323GRE

The Long-term Solvency of Social Security

By David Munn, CFP

The uncertainty surrounding the solvency of the Social Security system is growing as official reports forecast a long-expected shortfall drawing closer, and prompt important questions for current and future retirees. These concerns are not unfounded, but should also be considered with full context.

Every year the trustees of the Social Security system release a report detailing the financial status of the program. The most recent report predicted Social Security's Trust Fund is on track to be depleted by 2035. If this happens, the program would only have sufficient income to pay around 79% of promised benefits. 

It is crucial to make a distinction between the system running out of money entirely versus the Trust funds being depleted. Social Security's primary source of funding is payroll taxes. As long as individuals continue to work and pay these taxes, the program will have some funding.

The Trust funds are extra savings accumulated when more taxes were collected than were needed to pay benefits. The combination of a declining birth rate, longer life-expectancies and Baby Boomers reaching retirement age have all contributed to the program's fiscal deficit.

That being said, if no changes are made to improve Social Security's financial outlook, there will be a mismatch between incoming revenue and promised benefits. In this scenario, benefit cuts may indeed become a reality unless policymakers take action to address the shortfall.

Several policy measures can help shore up the health of the Social Security system. One approach could involve increasing payroll taxes or the cap on taxable earnings. Another option would be to modify the benefit formula, possibly reducing benefits for higher earners. Additionally, policymakers could choose to gradually raise the full retirement age to account for longer life expectancies. 

While the prospect of mitigated benefits might seem daunting, it's worth noting that over the past decades Congress has never allowed a situation where Social Security could not pay full benefits. Therefore, the probability of the government allowing a drastic reduction in benefits is relatively low considering the social and political fallout such action would precipitate.

Waiting for policy reforms, however, should not deter individuals from taking charge of their retirement planning. It would be wise to consider Social Security as just one pillar of your retirement income. Other sources, such as pensions, 401(k) plans, Individual Retirement Accounts (IRAs), and personal savings, should also play significant roles in your strategy.

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This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  This material is not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management, LLC, is registered as an investment adviser (RIA) with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training.  1323GRC

Navigating Stock Market Turbulence

By David Munn, CFP

Investing in the stock market, much like air travel, can sometimes be viewed as a necessary inconvenience to reach your desired destination. For a time it might feel exciting as your portfolio takes off and you see the progress being made toward the goal. Inevitably though, there are periods of choppiness that may cause investors to question–or altogether abandon–the plan.

The Analogy of Air Travel

When an airplane encounters turbulence, it's natural to feel a surge of anxiety and question your decision to fly. However, experienced travelers know these bumpy periods are temporary and rarely pose a serious threat. The aircraft, despite the shaking, is still on course to its destination. 

Similarly, the stock market may experience periods of intense volatility, but throughout history it has repeatedly recovered and continued upwards. While it's tempting to panic and make hasty decisions during market downturns, remember these fluctuations are a normal part of the investment experience. Just as a passenger would not be wise to jump out of a plane during turbulence, investors should resist the urge to make emotion-based decisions to their portfolio.

Travel Alternatives

Now for those who have had bad experiences and decided never again to step foot on an airplane, there are, of course, travel alternatives: trains, automobiles, boats, etc. But every alternative has its own tradeoffs.

Automobile travel, for example, will not have turbulence, but it is typically significantly slower and statistically more dangerous than air travel. Consequently, it is generally not the best for very long-distance trips.

Similarly, alternative investment vehicles, such as bonds, money market funds, annuities or commodities may seem attractive as they react and move differently than stocks, but they each have their own set of risks and may not be effective in achieving long-term investment objectives. 

The Importance of Staying the Course

Successful investing is a long-term endeavor. Even those approaching normal retirement age should be planning for a 20-30 year time horizon, and even longer in some cases. Market fluctuations are inevitable, and trying to time the market is often a losing proposition. Investors who maintain a disciplined approach and stick to their investment strategy are more likely to weather the storm and attain their desired objectives. 

While it's understandable to feel concerned about market volatility, it's important to keep perspective. Just as air travel has a proven safety record, the stock market has a history of delivering long-term returns. By staying calm, sticking to your plan, and maintaining a diversified portfolio, you can increase your chances of achieving your financial goals.

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 This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  This material is not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management, LLC, is registered as an investment adviser (RIA) with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training.  1323GRA

Should You Consider a Roth Conversion for Retirement?

By David Munn, CFP

Have you ever wondered if there's a way to reduce your annual income tax bill in retirement? A Roth conversion might be the answer. It's a strategy that involves moving money from a 401(k) or Traditional IRA (where contributions are typically pre-tax) to a Roth IRA (funded with after-tax dollars). The key benefit? Tax-free growth and withdrawals in retirement.

Understanding the Tax Trade-Off

There's a catch, of course. You'll likely owe income tax on the converted amount in the year of the conversion. So it's like paying taxes upfront in exchange for tax-free benefits later. This might seem counterintuitive, but it may be a smart move depending on your situation.

Why a Roth Conversion Could Be Right for You

Here are some scenarios where a Roth conversion might be advantageous:

• Lower Tax Bracket Now, Higher Later: Think you'll be in a higher tax bracket through your retirement years? Locking in today's potentially lower rate by paying taxes now on the conversion can save you money in the long run. This is especially true for young earners who expect their income (and tax bracket) to rise in the future, but could also apply to those who are temporarily unemployed or recently retired.

• Maximizing Heirs' Benefits: Roth IRAs don't have Required Minimum Distributions (RMDs) – mandatory withdrawals that begin at age 73. This means your money can continue to grow tax-free and potentially leave a larger inheritance for your heirs. They'll also enjoy tax-free withdrawals if they follow IRS distribution rules.

• Tax Diversification: Most retirement savings are in pre-tax accounts. A Roth conversion can diversify your holdings by adding a tax-free bucket, potentially lowering your overall tax burden in retirement, especially in years with higher expenses like vehicle purchases, expensive vacations, or home projects.

Things to Consider Before You Convert

While Roth conversions offer potential benefits, they're not a one-size-fits-all solution. Here's what to weigh before diving in:

• Your Current Tax Bracket: If you're already in a high tax bracket, the upfront tax hit of a conversion might outweigh the long-term benefits. Depending on your age and situation, you may also need to consider the impact on Medicare premiums, FAFSA benefits, taxation of Social Security benefits, health insurance subsidies, etc. 

• Retirement Income Needs: The amount of retirement income you will need to draw from savings, the role Qualified Charitable Distributions, and potential medical or long-term care costs might play in your retirement plan may impact the benefits of a Roth Conversion, as there may be alternative strategies to avoid paying taxes on IRA distributions.

• Short-Term Needs: The money used for the conversion tax bill needs to come from outside your retirement savings if you are under age 59.5. Make sure you won't need those funds for short-term goals.

Consulting an Advisor

A Roth conversion can be a complex financial decision. It's wise to consult with a financial advisor to determine if it aligns with your overall retirement strategy. They can help you assess your tax bracket situation, project future income, and ensure the conversion makes sense for your unique financial picture.

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This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  This material is not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management, LLC, is registered as an investment adviser (RIA) with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training.  1323GQZ

Helping Your Young Adult Children Avoid Common Financial Mistakes

By David Munn, CFP

Every parent wants to see their children be successful as they move into adulthood–to steward well the abilities, resources and opportunities they have been given. Yet all too often the transition from dependence to independence leads to mistakes that have long-lasting consequences and inhibit success, especially in the area of finances.

Understanding these common blunders can help parents prepare their loved ones and empower emerging adults to sidestep financial missteps and build a strong foundation for their future.

The first major financial mistake is being financially illiterate. An AICPA survey revealed that only 24% of young adult respondents demonstrate basic financial literacy. Lack of understanding around concepts such as credit, loans, and retirement planning often leads to uninformed decisions that could prove detrimental in the long run. 

Secondly, many young people succumb to the lure of instant gratification—prioritizing immediate pleasures over long-term financial stability. This tendency often manifests in impulse buying or accumulating unnecessary debts. The 'buy now, pay later' culture encourages each of us to live beyond our means, which results in a continuous cycle of debt repayment via credit cards, vehicle loans, cell phones, and other high interest loans that not only create stress and continual crises, but also inhibit the ability to build savings and wealth.  

Habits such as budgeting and investing are often neglected during early adulthood—a third notable financial mistake. Consistently tracking income and expenses fosters financial discipline and allows young adults to prioritize what is most important to them, both in the short and long-term. Similarly, beginning to invest at a young age taps into the power of compound interest, optimizing the growth of wealth over time that will pay major future dividends (pun intended).

Carrying inadequate or no life insurance when starting a family is a fourth major financial mistake. Many view insurance as an unnecessary expense instead of a safety net against unforeseen tragedy. In most cases, sufficient insurance can be obtained very inexpensively, and can provide the peace of mind that financial needs will be met if a parent dies prematurely.

Finally, many young adults fail to save for emergencies or irregular expenses. Vehicle repairs and  medical expenses may not be predictable, but they should be expected. Building the discipline to prioritize saving will not only help avoid financial disasters, but also develop habits that will lead to financial success as income and resources increase.

Parents and/or grandparents have an important role in preparing young adults for success and helping them get started on the right foot. In some cases, the parents themselves may recognize they have their own knowledge gaps that should be addressed so they can set a good example and be better equipped to mentor the younger generations.

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This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management, LLC, is registered as an investment adviser (RIA) with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training.  1323GQV

Simplifying Giving with a Donor Advised Fund

By David Munn, CFP

Managing your finances can be complex, especially when it involves giving to multiple charitable organizations. In cases where donors are seeking to simplify their giving and maximize tax benefits, we frequently recommend utilizing a Donor Advised Fund (DAF).

A DAF is essentially a charitable investment account that allows you to contribute cash or other assets, receive an immediate tax deduction, and recommend grants from the fund over time. This process can simplify giving and mitigate taxes significantly, making it an attractive choice for individuals, families, or businesses that wish to make a substantial societal impact.

In essence, a DAF allows you to separate the act of claiming a tax deduction from the decision about which charities to support, providing both convenience and strategic advantages.

Donating to a DAF is relatively simple. An individual or entity makes an irrevocable contribution to the fund, which is then invested based on the donor's preferences. The assets within the fund have the potential to grow tax-free. Although the donor relinquishes ownership of the donated assets, they retain advisory privileges to direct how the contributions are distributed to charities.

DAFs offer several significant tax advantages. First, donors receive an immediate tax deduction in the year they contribute to their DAF. This feature can be especially useful in years when donors have higher-than-normal income, such as from selling a business or receiving a large bonus. They can offset this income by making a sizable contribution to their DAF, thus reducing their taxable income.

Secondly, DAFs can accept donations of various types of assets, including cash, stocks, bonds, real estate, and private business interests. If you donate appreciated assets held for more than one year – particularly stocks or real estate - to a DAF, you can avoid capital gains tax. This arrangement is usually more tax-efficient than selling the assets and donating the after-tax proceeds.

Finally, by bunching or front-loading charitable donations into one year, donors can exceed the standard deduction limit and itemize their deductions, potentially reducing their tax liability further. In subsequent years, they could take the standard deduction, all while recommending grants from their DAF.

Donors also appreciate the simplicity of DAFs. They make one large contribution and then recommend grants to their chosen charities over time without worrying about record-keeping for tax purposes. The administrative tasks are managed by the sponsoring organization that oversees the DAF. Moreover, donors have the freedom to be as involved as they want in their grantmaking decisions, and can involve their family in the process as well.

A Donor Advised Fund represents a simple yet effective strategy for charitable giving with significant tax benefits. By consolidating charitable donations into a DAF, donors can simplify the giving process, optimize their tax deductions, and create a lasting impact. 

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This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management, LLC, is registered as an investment adviser (RIA) with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training.  1323GQS