Why Sabbaticals Could Be the New Pre-Retirement

Brad N. Shaw, a Dallas, Texas-based serial entrepreneur, took a two-year sabbatical from 2011-2013 to spend more time with his family. He’s pictured here with his family in Vail, Colorado. (Photo courtesy of Brad M. Shaw)

Serial entrepreneur Brad M. Shaw made a bold decision several years ago to take two years off from work and move his family to Vail, Colo.

Taking a two-year sabbatical had its challenges, the major one being uprooting his family in pursuit of more work-life balance and a change of scenery. But overall, he says taking time off was more than worth it — both for his family and his business.

“My daughter was growing up so fast,” says Shaw, who is CEO of a web design firm in Dallas. “As a serial entrepreneur, I was always away traveling or at the office. I wanted to be a present father and play a role in her upbringing. I also wanted to show her a life outside of the Dallas suburbia bubble.”

‘No reason to wait’

The concept of taking a sabbatical is not new. People have been taking them for decades. They’re typically thought of happening in academia, in which professors are paid to take time off for research. But sabbaticals have transcended academia and have spread into the general workforce in recent decades.

Thanks to a new wave of workers who value purpose over stability, the upswing of the gig economy, and companies that offer unlimited vacation time or paid sabbaticals, taking an extended break is becoming more of a reality for many. Many major companies in the United States offer unlimited vacation time or paid sabbaticals, such as Groupon, General Electric, and Adobe.

There’s also the reality that today’s American workers are not able to retire as early as previous generations — and they’re living longer, healthier lives. So a sabbatical can serve as a mini retirement, or a chance to take a break from the grind of 9-to-5 life.

Ric Edelman, the founder and executive chairman of Edelman Financial Services, explores this topic in his new book, “The Truth About Your Future: The Money Guide You Need Now, Later, and Much Later.” He says the combination of people living longer and being healthier in old age means the notion of retiring at 65 will be gone in the near future, both because it won’t be affordable and people will get restless.

Daniel Howard took a one-year, unpaid sabbatical in 2008 following the financial crisis to recharge and return to work with a fresh perspective. (Photo courtesy of Daniel Howard)

“You’ll be healthy enough to work, you’re going to want to work, and economically, you’re going to need to work,” he says. “For all those reasons, you’ll continue working. And so that notion that you’ll wait until you’re 60 to take that around-the-world cruise really won’t exist. There won’t be a particular reason to wait.”

Edelman says that instead of the traditional life path (go to school, get a job, retire, die), we’ll have a cyclical one in which people go to school, get a job, take a sabbatical, go back to school, take a different job, etc. Instead of having one big chunk of a 30-year retirement, people will take two years here, three years there, six months here, and they’ll enjoy time off throughout their life at various intervals.

Research has also proven that companies and the economy benefit when employees take sabbaticals. According to a report by Project: Time Off, an offshoot of the U.S. Travel Association, there has been a jump in employees taking time off in the last year. Unused vacation days cost the economy $236 billion in 2016 — an amount that could have supported 1.8 million jobs. In essence, employees not cashing in on their paid time off hurts the economy because employees are forfeiting money that could instead have been used to create new jobs.

Dan Clements, author of “Escape 101: The Four Secrets to Taking a Career Break Without Losing Your Money or Your Mind,” says the biggest benefit of taking a sabbatical is the perspective change it offers.

“People come back from sabbaticals with a completely different vision for how they want to live their life,” Clements tells MagnifyMoney. “They come back and they change jobs or they transform themselves in the company they’re in or they change their business.”

Upon returning to Dallas, Shaw says he made the decision to forgo scaling up his business in favor of running it on a smaller scale so he could be less stressed.

“The time away allowed me to reset my business ideas,” he says.

Clements thinks many companies have begun to offer unlimited vacation days or paid sabbaticals to keep up with the new generation entering the workforce, because by and large, millennials value purpose over stability. Companies want to keep employees happy by offering them the opportunity to find purpose in a way their 9-to-5 job might not be able to.

“You have a different generation of people entering the workforce for whom work means something different,” Clements says. “What they expect from work is not necessarily security and a paycheck, but what they expect is meaning from work more than previous generations have. Part of the way companies can supply that is to give people the time and flexibility to find it.”

Taking the plunge

Tori Tait, the director of content and community for The Grommet, an e-commerce website that helps new products launch, took a 30-day sabbatical in August. Her company offers paid sabbaticals at employees’ five-year mark. Tait, who lives in Murrieta, Calif., spent time relaxing in Huntington Beach, Calif., boating on the Colorado River, and living on a houseboat in Lake Mead, Ariz. Like Shaw, she says the biggest benefits for her were time off with family and a fresh perspective once she returned to work.

“I’m a working mom, so summers are often filled with me in the office, and [my kids] wishing we were at the beach,” she says. Tait says she enjoyed how during her month off, she didn’t have work in the back of her mind the way people often do when on a five- or six-day vacation.

Tori Tait, pictured with her daughters London, 10, and Taylor, 16, took a company-sponsored, 30-day sabbatical in August 2017. (Photo courtesy of Tori Tait)

Her biggest piece of advice for those planning a sabbatical is to not dwell on the planning aspect of it. “I grappled with trying to plan how I would spend my time,” she says. “Would I travel abroad? Volunteer? Finally do that side project I’ve been thinking about? In the end, I just thought, What is it that I always wish I had more time to do? The answer for me was: spend quality time with my family. So that’s what I did.”

Daniel Howard, the director at Search Office Space, a website that helps businesses all over the world find office space, took a sabbatical after the financial crisis in 2008. He says he took 12 months off to recharge in hopes of returning to work with more optimism and drive. His employers didn’t pay him for the time off, but promised him his job would be there upon his return.

He traveled with his then-girlfriend (now his wife) to Southeast Asia, Australia, New Zealand, Fiji and Central America. They left their phones at home and relied on physical maps to get around. Aside from the occasional email to family to check in, they were completely disconnected. The biggest benefit for him? “The ability to completely disconnect from my working life and the opportunity to become a more well-rounded person by immersing myself in different cultures and experiences,” Howard says.

Although many people take their sabbaticals overseas, one doesn’t need to travel around the world to reap the benefits. Extended time away from work and technology is beneficial no matter where you are.

“I think for a lot of people, a sabbatical is the first real vacation they’ve ever taken,” Clements says. “I tell people that taking a one-week vacation is sort of like trying to swim in a puddle. You wade in a little bit, and you’re barely wet, and then you have to go inside. When you actually get away from your life for two or three times longer than you’ve ever taken a break from work, you get this sense of perspective that I think most people don’t normally get a chance to experience.”

The 4 stages of preparing for a sabbatical

If you don’t work for a company that offers unlimited vacation days or paid sabbaticals, that doesn’t mean you can’t take one. Clements shares his steps for saving up for a sabbatical:

  1. Boost your earnings. Try to figure out if there’s a way you can earn more before taking your sabbatical. Can you finally ask for the raise you’ve been wanting? Can you do freelance work on the side? Can you rent out part of your home on Airbnb, or drive for Uber? Consider all of your options.
  2. Make it automatic. Have money automatically withdrawn from your bank account the same way you would for retirement, a mortgage or automatic bill payments.
  3. Put it out of reach. Once you set aside money in a separate account, make sure it’s out of reach. Put it in a savings account that isn’t accessible online or via the ATM. If you have to physically go to the bank to withdraw cash, you’ll be less tempted to do so.
  4. Stretch yourself. Don’t be afraid to make your automatic savings plan more aggressive than you think you can handle. Challenge yourself to save more than you think you need, because you can always change the amount if you have to.

The post Why Sabbaticals Could Be the New Pre-Retirement appeared first on MagnifyMoney.

7 Ways to Lower the Cost of Divorce

iStock

As a newlywed, the very last thing on your mind is probably getting divorced. But, unfortunately, divorce is something you may encounter — there were over 813,000 divorces in 2014 alone, according to the latest CDC data, compared to 2.1 million new marriages.

The cost of getting divorced can be just as expensive as getting married. Some estimate the legal fees alone can cost thousands of dollars, not to mention other costs that may be involved in changing your life post-divorce.

The difference is, when you get married you likely had time to prepare your finances. This may not always be the case when you get ready to get divorced.

So, what can you do if you can’t afford to get divorced? Here are some options that may be able to help lower the high cost of divorce.

Shop around for the right attorney

Brette Hankin, a business development manager for S&T Communications in Colby, Kan., says she visited several divorce attorneys to find one that was within her price range.

“The first lawyer I talked to said the retainer fee would be $10,000,” she says. “There was no way I could afford that.”

Eventually, Hankin visited other attorneys in her community and was able to find one who was more affordable.

“The lawyer I chose had a $5,000 retainer fee and was willing to return whatever money was not used for my case,” she says.

Ask friends and family for referrals to good attorneys in your area, or see if your state’s bar association has a way to search for attorneys specializing in divorce/family law.

Work out a “limited scope” arrangement or a payment plan

To help clients who may not be able to pay for their entire legal fees up front, some attorneys may also be willing to take payment plans, or work in a limited scope. Limited scope means they only handle certain parts of your case and you can handle the others.

“In cases where a client cannot afford traditional representation, I will sometimes represent a client in what is referred to as limited scope representation,” says Darlene Wanger, Esq., an attorney based in Los Angeles. “This means that I could represent a client for a single hearing, and then I am no longer the attorney of record.”

To cut costs even more, Wanger says she sometimes acts behind the scenes as a consulting attorney, helping clients fill out paperwork and working through the process without appearing in court.

“Never appearing in court can save a very large expense,” Wanger says.

If you still feel sticker shock at the cost of your legal fees, ask your attorney if you can work out a payment plan. This can help relieve some of the pressure to pay their fees all at once.

Reduce your filing fees

If you’re the spouse filing the divorce petition, ask about the filing fee with your local courthouse. The fee for filing a divorce petition varies based on the state and county in which you live and file your divorce. Filing fees can vary from $70 in Wyoming to $435 in California.

For simple divorces, without children or a large amount of property, you can usually fill out the petition yourself. This can save you from paying attorney fees.

Many individuals who are unable to afford a divorce don’t realize that they can get the divorce petition filing fee waived as well. A judge will review a written affidavit stating your economic hardship so the filing fee can be waived.

Keep things amicable (if possible)

When people think that they can’t afford to get divorced, it’s usually because they’ve heard about long, drawn-out court battles that cost thousands. But if you work with your spouse as much as possible, you can save a lot of money on attorney fees and court costs.

For example, after the filing of a divorce petition, the responding spouse will generally file an answer, even if they agree with everything stated in the petition.

While this can speed up the divorce process, it will cost more money. Any time an answer is filed with the court, it is subject to another filing fee. You could apply for the fee to be waived again, or if you and your spouse are in agreement, the answer could be written as a formality but not filed with the court.

Filing a joint petition for divorce can also save money as neither spouse would have to be served by a sheriff or certified mail.

Get divorced for free

Lizzie Lau, a 47-year-old travel blogger, used as many resources as she could to help her save money during her divorce. She was able to get divorced for free in California, the state with the highest filing fee.

“Initially, I assumed I would have to pay several hundred dollars in filing fees even though I had no income and no support,” Lau says. “But I went to the courthouse and talked to them. I was told that based on my income the fee would be waived, and as long as we didn’t go to court, it would be free. Although, they told me it was pretty rare for a divorce to go through without going to court. I assured them that I was going to be the exception to the rule.”

Lau got the filing fee waived for her petition. Plus, she and her spouse worked together to avoid other costs. Because they were in agreement, he didn’t file a response, and they were able to get divorced without appearing in court, saving them from paying for attorneys and other court costs.

File a pro se divorce

Part of Lau’s strategy included filling out her own legal paperwork and representing herself for her divorce case. This is called a pro se divorce, meaning you represent yourself without an attorney.

This is not a strategy that would work well for divorce cases involving disputes over child custody or property and asset division.

There are a wealth of resources online that can assist people with filing pro se divorces by explaining things in common language.

Prepare for life after divorce

One of the other overlooked costs of getting divorced is the cost to set up a new household. In Hankin’s case, her ex-husband kept the family home while she moved to an apartment.

“He offered to let me stay in the family home, but I couldn’t afford the house payment,” she says. “Instead I got an income-based apartment.”

In other cases, assets may have to be sold if neither party can afford to keep them. Hankin says she got financial help from her parents and did her best to save money and live frugally.

“You don’t think about the costs of setting up a new household until you have to do it,” Hankin says. “Getting pots and pans, furniture, restocking your pantry. All of those things you never think about. We were married for 19 years before we got divorced.”

Hankin shopped at garage sales to save as much as possible. She also got a second job and cashed in her retirement savings. “I felt that it was my only option,” she says. “Now I’m starting from scratch to save for retirement again.”

The post 7 Ways to Lower the Cost of Divorce appeared first on MagnifyMoney.

How to Get ‘Unstuck’ From Your Starter Home

Source: iStock

Andrew Cordell bought his first home at the worst possible time — 10 years ago, right before the housing bubble burst.

He’s not going to make that mistake again.

“We had immediate fear put in us as homeowners,” says Cordell, 40. “We know how dangerous this can be.”

So the small “starter home” he purchased in Kalamazoo, Michigan back in 2007 now feels just about the right size.

“When we bought, we figured we’d get another home in a few years,” he says. “But the more we settled, the more we thought, ‘Do we really need more space?’ We don’t actually need a large chest freezer or a large yard. Kalamazoo has a lot of parks.”

Apparently, plenty of homeowners feel the same way.

It’s a phenomenon some have called “stuck in their starter homes.” Bucking a decades-long trend, young homeowners aren’t looking to trade up — they’re looking to stay put. Or they are forced to.

According to the National Association of Realtors, “tenure in home” — the amount of time a homebuyer stays — has almost doubled during the past decade. From the 1980s right up until the recession, buyers stayed an average of about six years after buying a home. That’s jumped to 10 years now.

Expected Median in Tenure in Home
Source: 2017 National Association of Realtors® Home Buyer and Seller Generational Trends

 

Other numbers are just as dramatic. In 2001, there were 1.8 million repeat homebuyers, according to the Urban Institute. Last year, there were about half that number, even as the overall housing market recovered. Before the recession, there were generally far more repeat buyers than first-timers. That’s now reversed, with first-time buyers dwarfing repeaters, 1.4 million to 1 million.

This is no mere statistical curiosity. Trade-up buyers are critical to a smooth-functioning housing market, says Logan Mohtashami, a California-based loan officer and economics expert. When starter homeowners get gun-shy, home sales get stuck.

“Move-up buyers are especially important … because they typically provide homes to the market that are appropriate for first-time buyers,” he says. When first-timers stay put, the share of available lower-cost housing is squeezed, making life harder for those trying to make the jump from renting to buying.

Getting unstuck from your starter home

There are plenty of potential causes for this stuck-in-a-starter-home phenomenon — including the fear Cordell describes, families having fewer children, fast-rising prices, and flat incomes. But Mohtashami says the main cause is a hangover from the housing bubble that has left first-time buyers with very little “selling equity.”

Buyers need at least 28 to 33 percent equity to trade into a larger home, and often closer to 40 percent, he says. Those who bought in the previous cycle might have seen their home values recover, but many purchased with low down payment loans, leaving them still equity poor.

That wasn’t such a problem before the recession, as lenders were happy to give more aggressive loans to trade-up buyers. Not any more.

“In the previous cycle you had exotic loans to help demand. Now you don’t. [That’s why] tenure in home is at an all-time high,” Mohtashami says. “Even families having kids aren’t moving up as much.”

Fast-rising housing prices don’t help the trade-up cause either. While homeowners would seem to benefit from increases in selling price, those are washed away by higher purchase prices, unless the seller plans to move to a cheaper market.

“You’re always trying to catch up to a higher priced home,” Mohtashami says.

Cassandra Evers, a mortgage broker in Michigan, says she’s seen the phenomenon, too.

“It’s not for lack of want. It seems to be the inability to afford the cost of the new home,” she says. “It’s not the interest rate that’s the problem, obviously because those are at historic lows and artificially low. It’s because to buy a ‘bigger and better house,’ that house costs significantly more than their current home. The cost of housing has skyrocketed.”

U.S. Homebuyers and Student Loan Debt (by Age)
Source: 2017 National Association of Realtors® Home Buyer and Seller Generational Trends

There’s also the very practical problem of timing. In a fast-rising market, where every home sale is competitive, it’s easy to lose the game of musical chairs that’s played when a family must sell their home before they can buy a new one.

“Folks are concerned about selling their current house in one day and being unable to find a suitable replacement fast enough,” Evers says.

Cordell, who lives with his wife and eight-year-old son, says the family considered a move a few years ago and briefly looked around. But they quickly concluded that staying put was the right choice.

“We looked at some homes and we thought, ‘I guess we could afford that. But we don’t want to be house broke’,” he says. “We don’t want to take on so much debt that ‘What else are we able to do?’ What if one of us loses our job? I guess you could say we have a Depression-era sensibility. … Who would want to get upside down on one of these things?”

The Urban Institute says this stuck-in-starter-home problem shows a few signs of abating recently. Repeat buyers were stuck around 800,000 from 2013 to 2014. Last year, the number pierced 1 million. But that’s still far below the 1.5 million range that held consistently through the past decade.

There are other signs that relief might be on the way, too. ATTOM Data Solutions recently released a report saying that 1 in 4 mortgage-holders in the U.S. are now equity rich — values have risen enough that owners hold at least 50 percent equity, well above Mohtashami’s guideline. Some 1.6 million homeowners are newly equity rich, compared to this time last year, and 5 million more than in 2013, ATTOM said.

“An increasing number of U.S. homeowners are amassing impressive stockpiles of home equity wealth,” says Daren Blomquist, senior vice president at ATTOM Data Solutions.

So perhaps pent-up repeat homebuying demand might re-emerge. Evers isn’t so sure, however.

“Most folks I talked with are no longer interested in being house poor and maxing out their debt to income ratios. They seem to be staying put and shoving money into their retirement accounts,” Evers says.

The Cordells are content where they are in Kalamazoo and plan to stay long term. If anything would make them move, it’s not growing home equity but a growing family.

“If we ended up with a second (kid), I suppose we’d have to look,” Cordell mused. “But we have no plans for that.”

4 Signs You’re Ready to Trade Up Your Home

  • YOU’VE GOT PLENTY OF EQUITY: Your home’s value has risen enough that you safely have at least 28 percent equity and, preferably, more like 35 to 40 percent.
  • YOU’RE EARNING MORE: Your monthly take-home income has risen since you bought your first home by about as much as your monthly payments (mortgage, interest, insurance, taxes, condo fees, etc.) would rise in a new home.
  • YOU STAND TO MAKE A HEALTHY PROFIT: You are confident that if you sell your home, you’d walk away from closing with at least 30 percent of the price for your new home — or you can top up your seller profits to that level with cash you’ve saved for a new down payment. That would let you make a standard 20 percent down payment and have some left over for surprise repairs and moving costs that will come with the new place. Remember, transaction costs often surprise buyers and sellers, so be sure to build them into your calculations.
  • YOU CAN HANDLE THE RISK: You have the stomach for the game of musical chairs that comes with selling then buying a home in rapid succession. Also, if you are in a hot market, you have extra cash to outbid others or a place for your family to stay in case there’s a time gap between selling and buying.



The post How to Get ‘Unstuck’ From Your Starter Home appeared first on MagnifyMoney.

How to Get ‘Unstuck’ From Your Starter Home

Source: iStock

Andrew Cordell bought his first home at the worst possible time — 10 years ago, right before the housing bubble burst.

He’s not going to make that mistake again.

“We had immediate fear put in us as homeowners,” says Cordell, 40. “We know how dangerous this can be.”

So the small “starter home” he purchased in Kalamazoo, Michigan back in 2007 now feels just about the right size.

“When we bought, we figured we’d get another home in a few years,” he says. “But the more we settled, the more we thought, ‘Do we really need more space?’ We don’t actually need a large chest freezer or a large yard. Kalamazoo has a lot of parks.”

Apparently, plenty of homeowners feel the same way.

It’s a phenomenon some have called “stuck in their starter homes.” Bucking a decades-long trend, young homeowners aren’t looking to trade up — they’re looking to stay put. Or they are forced to.

According to the National Association of Realtors, “tenure in home” — the amount of time a homebuyer stays — has almost doubled during the past decade. From the 1980s right up until the recession, buyers stayed an average of about six years after buying a home. That’s jumped to 10 years now.

Median Tenure in Home by Age
Source: 2017 National Association of Realtors® Home Buyer and Seller Generational Trends

 

Other numbers are just as dramatic. In 2001, there were 1.8 million repeat homebuyers, according to the Urban Institute. Last year, there were about half that number, even as the overall housing market recovered. Before the recession, there were generally far more repeat buyers than first-timers. That’s now reversed, with first-time buyers dwarfing repeaters, 1.4 million to 1 million.

This is no mere statistical curiosity. Trade-up buyers are critical to a smooth-functioning housing market, says Logan Mohtashami, a California-based loan officer and economics expert. When starter homeowners get gun-shy, home sales get stuck.

“Move-up buyers are especially important … because they typically provide homes to the market that are appropriate for first-time buyers,” he says. When first-timers stay put, the share of available lower-cost housing is squeezed, making life harder for those trying to make the jump from renting to buying.

Getting unstuck from your starter home

There are plenty of potential causes for this stuck-in-a-starter-home phenomenon — including the fear Cordell describes, families having fewer children, fast-rising prices, and flat incomes. But Mohtashami says the main cause is a hangover from the housing bubble that has left first-time buyers with very little “selling equity.”

Buyers need at least 28 to 33 percent equity to trade into a larger home, and often closer to 40 percent, he says. Those who bought in the previous cycle might have seen their home values recover, but many purchased with low down payment loans, leaving them still equity poor.

That wasn’t such a problem before the recession, as lenders were happy to give more aggressive loans to trade-up buyers. Not any more.

“In the previous cycle you had exotic loans to help demand. Now you don’t. [That’s why] tenure in home is at an all-time high,” Mohtashami says. “Even families having kids aren’t moving up as much.”

Fast-rising housing prices don’t help the trade-up cause either. While homeowners would seem to benefit from increases in selling price, those are washed away by higher purchase prices, unless the seller plans to move to a cheaper market.

“You’re always trying to catch up to a higher priced home,” Mohtashami says.

Cassandra Evers, a mortgage broker in Michigan, says she’s seen the phenomenon, too.

“It’s not for lack of want. It seems to be the inability to afford the cost of the new home,” she says. “It’s not the interest rate that’s the problem, obviously because those are at historic lows and artificially low. It’s because to buy a ‘bigger and better house,’ that house costs significantly more than their current home. The cost of housing has skyrocketed.”

U.S. Homebuyers and Student Loan Debt (by Age)
Source: 2017 National Association of Realtors® Home Buyer and Seller Generational Trends

There’s also the very practical problem of timing. In a fast-rising market, where every home sale is competitive, it’s easy to lose the game of musical chairs that’s played when a family must sell their home before they can buy a new one.

“Folks are concerned about selling their current house in one day and being unable to find a suitable replacement fast enough,” Evers says.

Cordell, who lives with his wife and eight-year-old son, says the family considered a move a few years ago and briefly looked around. But they quickly concluded that staying put was the right choice.

“We looked at some homes and we thought, ‘I guess we could afford that. But we don’t want to be house broke’,” he says. “We don’t want to take on so much debt that ‘What else are we able to do?’ What if one of us loses our job? I guess you could say we have a Depression-era sensibility. … Who would want to get upside down on one of these things?”

The Urban Institute says this stuck-in-starter-home problem shows a few signs of abating recently. Repeat buyers were stuck around 800,000 from 2013 to 2014. Last year, the number pierced 1 million. But that’s still far below the 1.5 million range that held consistently through the past decade.

There are other signs that relief might be on the way, too. ATTOM Data Solutions recently released a report saying that 1 in 4 mortgage-holders in the U.S. are now equity rich — values have risen enough that owners hold at least 50 percent equity, well above Mohtashami’s guideline. Some 1.6 million homeowners are newly equity rich, compared to this time last year, and 5 million more than in 2013, ATTOM said.

“An increasing number of U.S. homeowners are amassing impressive stockpiles of home equity wealth,” says Daren Blomquist, senior vice president at ATTOM Data Solutions.

So perhaps pent-up repeat homebuying demand might re-emerge. Evers isn’t so sure, however.

“Most folks I talked with are no longer interested in being house poor and maxing out their debt to income ratios. They seem to be staying put and shoving money into their retirement accounts,” Evers says.

The Cordells are content where they are in Kalamazoo and plan to stay long term. If anything would make them move, it’s not growing home equity but a growing family.

“If we ended up with a second (kid), I suppose we’d have to look,” Cordell mused. “But we have no plans for that.”

4 Signs You’re Ready to Trade Up Your Home

  • YOU’VE GOT PLENTY OF EQUITY: Your home’s value has risen enough that you safely have at least 28 percent equity and, preferably, more like 35 to 40 percent.
  • YOU’RE EARNING MORE: Your monthly take-home income has risen since you bought your first home by about as much as your monthly payments (mortgage, interest, insurance, taxes, condo fees, etc.) would rise in a new home.
  • YOU STAND TO MAKE A HEALTHY PROFIT: You are confident that if you sell your home, you’d walk away from closing with at least 30 percent of the price for your new home — or you can top up your seller profits to that level with cash you’ve saved for a new down payment. That would let you make a standard 20 percent down payment and have some left over for surprise repairs and moving costs that will come with the new place. Remember, transaction costs often surprise buyers and sellers, so be sure to build them into your calculations.
  • YOU CAN HANDLE THE RISK: You have the stomach for the game of musical chairs that comes with selling then buying a home in rapid succession. Also, if you are in a hot market, you have extra cash to outbid others or a place for your family to stay in case there’s a time gap between selling and buying.



The post How to Get ‘Unstuck’ From Your Starter Home appeared first on MagnifyMoney.

The Best Mortgages That Require No or Low Down Payment

 

If you’re considering buying a home, you’re probably wondering how much you’ll need for a down payment. It’s not unusual to be concerned about coming up with a down payment. According to Trulia’s report Housing in 2017, saving for a down payment is most often cited as the biggest obstacle to homeownership.

Maybe you’ve heard that you should put 20% down when you purchase a home. It’s true that 20% is the gold standard. If you can afford a big down payment, it’s easier to get a mortgage, you may be eligible for a lower interest rate, and more money down means borrowing less, which means you’ll have a smaller monthly payment.

But the biggest incentive to put 20% down is that it allows you to avoid paying for private mortgage insurance. Mortgage insurance is extra insurance that some private lenders require from homebuyers who obtain loans in which the down payment is less than 20% of the sales price or appraised value. Unlike homeowners insurance, mortgage protects the lender – not you – if you stop making payments on your loan. Mortgage insurance typically costs between 0.5% and 1% of the entire loan amount on an annual basis. Depending on how expensive the home you buy is, that can be a pretty hefty sum.

While these are excellent reasons to put 20% down on a home, the fact is that many people just can’t scrape together a down payment that large, especially when the median price of a home in the U.S. is a whopping $345,800.

Fortunately, there are many options for homebuyers with little money for a down payment. You may even be able to buy a house with no down payment at all.

Here’s an overview of the best mortgages you can be approved for without 20% down.

FHA Loans

An FHA loan is a home loan that is insured by the Federal Housing Administration. These loans are designed to promote homeownership and make it easier for people to qualify for a mortgage. The FHA does this by making a guarantee to your bank that they will repay your loan if you quit making payments. FHA loans don’t come directly from the FHA, but rather an FHA-approved lender. Not all FHA-approved lenders offer the same interest rates and costs, even for the same type of loan, so it’s important to shop around.

Down payment requirements

FHA loans allow you to buy a home with a down payment as low as 3.5%, although people with FICO credit scores between 500 and 579 are required to pay at least 10% down.

Approval requirements

Because these loans are geared toward lower income borrowers, you don’t need excellent credit or a large income, but you will have to provide a lot of documentation. Your lender will ask you to provide documents that prove income, savings, and credit information. If you already own any property, you’ll have to have documentation for that as well.

Some of the information you’ll need includes:

  • Two years of complete tax returns (three years for self-employed individuals)
  • Two years of W-2s, 1099s, or other income statements
  • Most recent month of pay stubs
  • A year-to-date profit-and-loss statement for self-employed individuals
  • Most recent three months of bank, retirement, and investment account statements

Mortgage insurance requirements

The FHA requires both upfront and annual mortgage insurance for all borrowers, regardless of their down payment. On a typical 30-year mortgage with a base loan amount of less than $625,500, your annual mortgage insurance premium will be 0.85% as of this writing. The current upfront mortgage insurance premium is 1.75% of the base loan amount.

Casey Fleming, a mortgage adviser with C2 Financial Corporation and author of The Loan Guide: How to Get the Best Possible Mortgage, also reminds buyers that mortgage insurance on an FHA loan is permanent. With other loans, you can request the lenders to cancel private mortgage insurance (MIP) once you have paid down the mortgage balance to 80% of the home’s original appraised value, or wait until the balance drops to 78% when the mortgage servicer is required to eliminate the MIP. But mortgage insurance on an FHA loan cannot be canceled or terminated. For that reason, Fleming says “it’s best if the homebuyer has a plan to get out in a couple of years.”

Where to find an FHA-approved lender

As we mentioned earlier, FHA loans don’t come directly from the FHA, but rather an FHA-approved lender. Not all FHA-approved lenders offer the same interest rates and costs, even for the same type of loan, so it’s important to shop around.

The U.S. Department of Housing and Urban Development (HUD) has a searchable database where you can find lenders in your area approved for FHA loans.

First, fill in your location and the radius in which you’d like to search.

Next, you’ll be taken to a list of FHA-approved lenders in your area.

Who FHA loans are best for

FHA loans are flexible about how you come up with the down payment. You can use your savings, a cash gift from a family member, or a grant from a state or local government down-payment assistance program.

However, FHA loans are not the best option for everyone. The upfront and ongoing mortgage insurance premiums can cost more than private mortgage insurance. If you have good credit, you may be better off with a non-FHA loan with a low down payment and lower loan costs.

And if you’re buying an expensive home in a high-cost area, an FHA loan may not be able to provide you with a large enough mortgage. The FHA has a national loan limit, which is recalculated on an annual basis. For 2017, in high-cost areas, the FHA national loan limit ceiling is $636,150. You can check HUD.gov for a complete list of FHA lending limits by state.

SoFi

For borrowers who can afford a large monthly payment but haven’t saved up a big down payment, SoFi offers mortgages of up to $3 million. Interest rates will vary based on whether you’re looking for a 30-year fixed loan, a 15-year fixed loan, or an adjustable rate loan, which has a fixed rate for the first seven years, after which the interest rate may increase or decrease. Mortgage rates started as low as 3.09% for a 15-year mortgage as of this writing. You can find your rate using SoFi’s online rate quote tool without affecting your credit.

Down payment requirements

SoFi requires a minimum down payment of at least 10% of the purchase price for a new loan.

Approval requirements

Like most lenders, SoFi analyzes FICO scores as a part of its application process. However, it also considers factors such as professional history and career prospects, income, and history of on-time bill payments to determine an applicant’s overall financial health.

Mortgage insurance requirements

SoFi does not charge private mortgage insurance, even on loans for which less than 20% is put down.

What we like/don’t like

In addition to not requiring private mortgage insurance on any of their loans, SoFi doesn’t charge any loan origination, application, or broker commission fees. The average closing fee is 2% to 5% for most mortgages (it varies by location), so on a $300,000 home loan, that is $3,000. Avoiding those fees can save buyers a significant amount and make it a bit easier to come up with closing costs. Keep in mind, though, that you’ll still need to pay standard third-party closing costs that vary depending on loan type and location of the property.

There’s not much to dislike about SoFi unless you’re buying a very inexpensive home in a lower-cost market. They do have a minimum loan amount of $100,000.

Who SoFi mortgages are best for

SoFi mortgages are really only available for people with excellent credit and a solid income. They don’t work with people with poor credit.

SoFi does not publish minimum income or credit score requirements.

VA Loans

Rates can vary by lender, but currently, rates for a $225,000 30-year fixed-rate loan run at around 3.25%, according to LendingTree. (Disclosure: LendingTree is the parent company of MagnifyMoney.)

Down payment requirements

Eligible borrowers can get a VA loan with no down payment. Although the costs associated with getting a VA loan are generally lower than other types of low-down-payment mortgages, Fleming says there is a one-time funding fee, unless the veteran or military member has a service-related disability or you are the surviving spouse of a veteran who died in service or from a service-related disability.

That funding fee varies by the type of veteran and down-payment percentage, but for a new-purchase loan, the funding fee can run from 1.25% to 2.4% of the loan amount.

Approval requirements

VA loans are typically easier to qualify for than conventional mortgages. To be eligible, you must have suitable credit, sufficient income to make the monthly payment, and a valid Certificate of Eligibility (COE). The COE verifies to the lender that you are eligible for a VA-backed loan. You can apply for a COE online, through your lender, or by mail using VA Form 26-1880.

The VA does not require a minimum credit score, but lenders generally have their own requirements. Most ask for a credit score of 620 or higher.

If you’d like help seeing if you are qualified for a VA loan, check to see if there’s a HUD-approved housing counseling agency in your area.

Mortgage insurance requirements

Because VA loans are guaranteed by the Department of Veterans Affairs, they do not require mortgage insurance. However, as we mentioned previously, be prepared to pay an additional funding fee of 1.25% to 2.4%.

What we like/don’t like

There’s no cap on the amount you can borrow. However, there are limits on the amount the VA can insure, which usually affects the loan amount a lender is willing to offer. Loan limits vary by county and are the same as the Federal Housing Finance Agency’s limits, which you can find here.

HomeReady

 

The HomeReady program is offered by Fannie Mae. HomeReady mortgage is aimed at consumers who have decent credit but low- to middle-income earnings. Borrowers do not have to be first-time home buyers but do have to complete a housing education program.

Approval requirements

HomeReady loans are available for purchasing and refinancing any single-family home, as long as the borrower meets income limits, which vary by property location. For properties in low-income areas (as determined by the U.S. Census), there is no income limit. For other properties, the income eligibility limit is 100% of the area median income.

The minimum credit score for a Fannie Mae loan, including HomeReady, is 620.

To qualify, borrowers must complete an online education program, which costs $75 and helps buyers understand the home-buying process and prepare for homeownership.

Down payment requirements

HomeReady is available through all Fannie Mae-approved lenders and offers down payments as low as 3%.

Reiss says buyers can combine a HomeReady mortgage with a Community Seconds loan, which can provide all or part of the down payment and closing costs. “Combined with a Community Seconds mortgage, a Fannie borrower can have a combined loan-to-value ratio of up to 105%,” Reiss says. The loan-to-value (LTV) ratio is the ratio of outstanding loan balance to the value of the property. When you pay down your mortgage balance or your property value increases, your LTV ratio goes down.

Mortgage insurance requirements

While HomeReady mortgages do require mortgage insurance when the buyer puts less than 20% down, unlike an FHA loan, the mortgage insurance is removed once the loan-to-value ratio reaches 78% or less.

What we like/don’t like

HomeReady loans do require private mortgage insurance, but the cost is generally lower than those charged by other lenders. Fannie Mae also makes it easier for borrowers to get creative with their down payment, allowing them to borrow it through a Community Seconds loan or have the down payment gifted from a friend or family member. Also, if you’re planning on having a roommate, income from that roommate will help you qualify for the loan.

However, be sure to talk to your lender to compare other options. The HomeReady program may have higher interest rates than other mortgage programs that advertise no or low down payments.

USDA Loan

USDA loans are guaranteed by the U.S. Department of Agriculture. Although the USDA doesn’t cap the amount a homeowner can borrow, most USDA-approved lenders extend financing for up to $417,000.

Rates vary by lender, but the agency gives a baseline interest rate. As of August 2016, that rate was just 2.875%

Approval requirements

USDA loans are available for purchasing and refinancing homes that meet the USDA’s definition of “rural.” The USDA provides a property eligibility map to give potential buyers a general idea of qualified locations. In general, the property must be located in “open country” or an area that has a population less than 10,000, or 20,000 in areas that are deemed as having a serious lack of mortgage credit.

USDA loans are not available directly from the USDA, but are issued by approved lenders. Most lenders require a minimum credit score of 620 to 640 with no foreclosures, bankruptcies, or major delinquencies in the past several years. Borrowers must have an income of no more than 115% of the median income for the area.

Down payment requirements

Eligible borrowers can get a home loan with no down payment. Other closing costs vary by lender, but the USDA loan program does allow borrowers to use money gifted from friends and family to pay for closing costs.

Mortgage insurance requirements

While USDA-backed mortgages do not require mortgage insurance, borrowers instead pay an upfront premium of 2% of the purchase price. The USDA also allows borrowers to finance that 2% with the home loan.

What we like/don’t like

Some buyers may dismiss USDA loans because they aren’t buying a home in a rural area, but many suburbs of metropolitan areas and small towns fall within the eligible zones. It could be worth a glance at the eligibility map to see if you qualify.

At a Glance: Low-Down-Payment Mortgage Options

To see how different low-down-payment mortgage options might look in the real world, let’s assume a buyer with an excellent credit score applies for a 30-year fixed-rate mortgage on a home that costs $250,000.

As you can see in the table below, their monthly mortgage payment would vary a lot depending on which lender they use.

 

Down Payment


Total Borrowed


Interest Rate


Principal & Interest


Mortgage Insurance


Total Monthly Payment

FHA


FHA

3.5%
($8,750)

$241,250

4.625%

$1,083

$4,222 up front
$171 per month

$1,254

SoFi


SoFi

10%
($25,000)

$225,000

3.37%

$995

$0

$995

VA


VA Loan

0%
($0)

$250,000

3.25%

$1,088

$0

$1,088

HomeReady


homeready

3%
($7,500)

$242,500

4.25%

$1,193

$222 per month

$1,349

USDA


homeready

0%

$250,000

2.875%

$1,037

$5,000 up front,
can be included in
total financed

$1,037

Note that this comparison doesn’t include any closing costs other than the upfront mortgage insurance required by the FHA and USDA loans. The total monthly payments do not include homeowners insurance or property taxes that are typically included in the monthly payment.

ANALYSIS: Should I put down less than 20% on a new home just because I can?

So, if you can take advantage of a low- or no-down-payment loan, should you? For some people, it might make financial sense to keep more cash on hand for emergencies and get into the market sooner in a period of rising home prices. But before you apply, know what it will cost you. Let’s run the numbers to compare the cost of using a conventional loan with 20% down versus a 3% down payment.

Besides private mortgage insurance, there are other downsides to a smaller down payment. Lenders may charge higher interest rates, which translates into higher monthly payments and more money spent over the loan term. Also, because many closing costs are a percentage of the total loan amount, putting less money down means higher closing costs.

For this example, we’ll assume a $250,000 purchase price and a loan term of 30 years. According to Freddie Mac, during the week of June 22, 2017, the average rate for a 30-year fixed-rate mortgage was 3.90%.

Using the Loan Amortization Calculator from MortgageCalculator.org:

Assuming you don’t make any extra principal payments, you will have to pay private mortgage insurance for 112 months before the principal balance of the loan drops below 78% of the home’s original appraised value. That means in addition to paying $169,265.17 in interest, you’ll pay $11,316.48 for private mortgage insurance.

The bottom line

Under some circumstances, a low- or no-down-payment mortgage, even with private mortgage insurance, could be considered a worthwhile investment. If saving for a 20% down payment means you’ll be paying rent longer while you watch home prices and mortgage rates rise, it could make sense. In the past year alone, average home prices increased 16.8%, and Kiplinger is predicting that the average 30-year fixed mortgage rate will rise to 4.1% by the end of 2017.

If you do choose a loan that requires private mortgage insurance, consider making extra principal payments to reach 20% equity faster and request that your lender cancels private mortgage insurance. Even if you have to spend a few hundred dollars to have your home appraised, the monthly savings from private mortgage insurance premiums could quickly offset that cost.

Keep in mind, though, that the down payment is only one part of the home-buying equation. Sonja Bullard, a sales manager with Bay Equity Home Loans in Alpharetta, Ga., says whether you’re interested in an FHA loan or a conventional (i.e., non-government-backed) loan, there are other out-of-pocket costs when buying a home.

“Through my experience, when people hear zero down payment, they think that means there are no costs for obtaining the loan,” Bullard says. “People don’t realize there are still fees required to be paid.”

According to Bullard, those fees include:

  • Inspection: $300 to $1,000, based on the size of the home
  • Appraisal: $375 to $1,000, based on the size of the home
  • Homeowners insurance premiums, prepaid for one year, due at closing: $300 to $2,500, depending on coverage
  • Closing costs: $4,000 to $10,000, depending on sales price and loan amount
  • HOA initiation fees

So don’t let a seemingly insurmountable 20% down payment get in the way of homeownership. When you’re ready to take the plunge, talk to a lender or submit a loan application online. You might be surprised at what you qualify for.

The post The Best Mortgages That Require No or Low Down Payment appeared first on MagnifyMoney.

How to Buy a House With a Friend — The Right Way

It’s completely possible for you to purchase a house or other property with someone who isn’t your spouse, like a friend or family member.

“It’s a beautiful occasion, but it’s also a complex business transaction,” says Senior Managing Partner of New York City-based Law Firm of Kishner & Miller, Bryan Kishner. “There are tremendous positives to the overall thing, but people need to be careful with the unforeseen items, and a lot of people say they didn’t think about that.”

For friends who are unable to afford a home in their area on a single income, or cohabiting couples, buying a home together can help both parties boost their net worth or simply achieve a goal of becoming a homeowner.

That being said, purchasing a home with a friend can be more complicated than buying a house with your spouse. The key to a successful co-homeownership arrangement is to set yourselves up for success from the get-go.

Choose the Right Joint Homeownership Structure

When you buy a home, you’ll get a title, which proves the property is yours. The paper the title is printed on is called a deed, and it explains how you, the co-owners, have agreed to share the title. The way the title is structured becomes important when you need to figure out what happens when a co-owner needs to part with the property.

These are the two most common ways to approach joint homeownership:

1. Tenants in Common

A tenants in common, or tenancy in common, is the most common structure people use when they purchase a property for personal use. This outlines who owns what percentage of the property and allows each owner to control what happens if they pass away. For example, a co-owner can pass their share onto any beneficiaries in a will, and that will be honored.

The TIC allows co-owners to own unequal shares of the property, which can come in handy if one owner will occupy a significant majority or minority of the shared home. For example, if two friends decide to buy a multifamily home, but one friend pays more because one friend’s space has much more square footage than the other friend’s space, they can split their shares of the home accordingly.

Kishner says to make sure you “reference and evidence your intent to use the tenants in common structure on the deed,” as it’s the primary evidence of your ownership — meaning you would write who owns what percentage of the property on the deed and note the parties chose a TIC structure.

The Pros of a TIC structure

Ownership can be unevenly split

You can own as much or as little as you want of the property as long as the combined ownership adds up to 100%. So, if you’re putting up 60% of the down payment, you can work it out with the other co-owner(s) to own 60% of the property on the title.

You don’t have to live there

You can own part of the property without living there. This is relevant for someone who simply wants to be a partial owner, but doesn’t want to live at the property.

You get to decide what happens to your share after you pass away

The TIC allows you the flexibility to decide what happens to your interest in the property in the event you pass away. You can decide if it will go to the other co-owners or to an heir. Regardless, the decision is yours.

The Cons of a TIC structure

Co-owners can sell their interest without telling you

Co-owners in a TIC can sell their interest in the property at any time, without the permission of others in the agreement. However, if they are also on the mortgage loan, they are still on the hook to make payments, says Rafael Reyes, a loan officer based in New York City.

2. Joint Tenants with Rights of Survivorship

This arrangement is different from a tenants in common arrangement in that in the case of one co-owner’s death, the deceased party’s shares will be automatically absorbed by the living co-owners. For this reason, this type of structure is more common among family members or cohabiting partners looking to purchase property together.

If, for example, you are purchasing with a family member and would like them to automatically absorb your portion in case you pass away unexpectedly, this is the option you’d go with. Even if the deceased has it written in their will to pass their interest to a beneficiary, that likely won’t be honored.

A joint tenants agreement requires these four essential components:

  1. Co-owners must all acquire the property at the same time.
  2. Co-owners must all have the same title on assets.
  3. Each co-owner must own equal interests in the property. So if you buy with one friend, you’ll own 50%, but if you buy with two friends, you’d own one-third of the property. This may be an important consideration if co-owners will occupy different amounts of space in the property.
  4. Co-owners must each have the same right to possess the entirety of the assets.

The Pros of a joint tenants agreement

Everyone owns an equal share in the property

There’s not arguing over shares if you go with a joint tenants arrangement, since it requires all co-owners to have an equal interest. So each co-owner has the same right to use, take loans out against, or sell the property.

No decisions to make if someone dies

There’s nothing for co-owners or family members to fight over after you pass away. Your ownership shares are automatically inherited by the other co-owners when you pass away, regardless of what might be written in a will.

The Cons of a joint tenants agreement

Equal ownership

Equal ownership can be a con as much as it’s a pro. If you’re going to occupy more than 50% of the space, or put up more of the mortgage or down payment, you may want to own more than your equal share of the property. If that will bother you, a TIC agreement is best.

How to Create a Co-ownership Agreement

Before you even start the mortgage lending process, it’s recommended to work out an agreement on how you’ll split equity in the home, who will be responsible for maintenance costs, and what will happen in the event of major life events such as death, marriage, or having children.

“You are more or less going into business together” when you purchase a home with a friend or relative, says Kishner. And like any smart business owner, you’ll want to protect yourself in case things go south down the road.

A real estate attorney can help you set up an official co-ownership agreement.

Kishner recommends each person in the agreement get their own attorney, who can represent each party’s personal concerns and interests during negotiation. Rates vary by location, but he estimates a good real estate lawyer would charge around $1,000.

Ideally, Kishner says, this agreement is created and signed before closing the mortgage loan. That way, if simply going through all of the what-ifs scares someone off, they have the opportunity to pull out.

3 Questions Every Co-ownership Agreement Should Answer

The co-ownership agreement you draft and sign will need to address many issues. Here are three common scenarios the experts offered us:

1. What happens if someone wants out?

Your agreement should outline an exit plan in case one or more of you want out of the property. This could be because of a number of reasons but is the area where things can get extremely complicated. For example, what if one of the co-owners wants to be bought out by the other co-owners?

Let’s say you’ve got three people on a mortgage and on the title to a property. If the other two can come up with the money for the equity, you’ve solved that problem.

But if someone wants to sell their interest in the property, for example, Reyes says they can’t just take the cash and walk away, since they’ll still have some financial obligation to the home if they are on the mortgage. So you’d need to also refinance the mortgage to get them off of it, and that could affect the other co-owner’s financial picture. The only way to relieve someone of their financial obligation to the mortgage is to refinance with the lender. That’s because if they leave and decide to stop making mortgage payments, that will affect your credit score.

Be prepared. When you refinance, the remaining co-owners will need to qualify again for the mortgage. If you decided to add a co-owner because you couldn’t originally qualify for the property based on your income, you might not qualify to own after a refinance.

If you can’t refinance, you all may decide to arrange for the departing member to rent out their living space in the household … then you’d need to deal with the issues surrounding finding a roommate or having a tenant. However you all want to go about handling this kind of situation should already be outlined in the co-ownership agreement, so you’ll have one less thing to argue over in a split.

2. What happens if a co-owner loses their job?

You want to be prepared to fulfill your financial obligations if someone loses their income. That’s why it’s recommended to create a shared emergency fund, which you can draw from in the case that one of the owners runs into financial issues (or, of course, to handle any maintenance needs). You can establish the contributions and rules surrounding a shared emergency fund in your co-ownership agreement.

Reyes advises putting away about six months’ worth of the property expenses into a shared savings account.

“That six-month reserve, at least, is important because ultimately, God forbid, if there is some kind of financial turbulence like job loss, they can cover the mortgage or they could sell the home within six months in this market,” said Reyes.

3. How will you pay bills and taxes?

The co-ownership agreement also needs to address how you all will split up housing costs. Kauffman says you should set up a joint account and agree on what each party should contribute to the fund each pay period.

You should consider the repairs, maintenance, and upkeep on the house, as well as things that could increase over time such as property tax and homeowner’s insurance, too, Kauffman adds. In the event those costs exceed what you’ve set aside to pay for them in escrow accounts, the co-ownership agreement needs to outline how the extra bill will be paid.

Applying for a Mortgage as a Joint Homeowner

If you want to purchase a home with a friend or relative, you’ll first have to decide whether or not both of your names will be on the mortgage.

A lender will consider both of your credit scores during the underwriting process, which means a person with a lower credit score could drag down your collective credit score, leading to higher mortgage rates.

Kauffman strongly advises reaching out to figure out your financing before applying for a loan with friends.

“Each of them might understand what they can afford on their own, but they may not be aware of how their purchasing power changes,” Kauffman says. You may find you qualify for more or less house than you thought you could afford.

He adds there are some serious things to consider when you decide to enter into an investment with other people that you’re not necessarily tied to. Carefully consider your personal relationships with the people you’re going into homeownership with.

“You’ve got to really consider who you’re getting into it with and really consider all of these things that are bound to happen when you have [multiple] lives,” says Kauffman.

It can also be potentially awkward when friends or colleagues realize they must reveal aspects of their finances that they might prefer to keep private, such as their credit score, credit history, and total income.

“Oftentimes people learn a lot about their [co-owner] through a credit report, and it becomes embarrassing and uncomfortable sometimes,” says Rick Herrick, a loan officer at Bedford, N.H.-based Loan Originator.

The post How to Buy a House With a Friend — The Right Way appeared first on MagnifyMoney.

Here’s How to Withdraw Your Savings When You Finally Retire

There isn’t a shortage of material on how to build up your retirement nest egg. But once you get it, and you’re ready to retire, how do you actually spend it? Withdrawing from your retirement account (also referred to as “taking a distribution”) isn’t as simple as withdrawing from an ATM. In fact, there is an entire strategy as to which account you should take from first, when you should file for Social Security, and how much to withdraw each year.

The main objective of retirement is to have your money outlive you; and making your money last throughout retirement is harder now than it used to be. This can be attributed to three big factors: people are living longer, the number of pension plans are declining, and the costs of living and health care are rising. If your retirement savings isn’t large enough, you could be forced to go back to work, assuming you’re physically capable to do so, or rely on family.

Also, taking from the wrong account could result in losing some of your money to taxes; withdrawing too much can shorten your money’s overall lifespan. Here are some key points you’ll want to know.

Withdrawing Savings in Retirement: Key Rules to Follow

Age matters

Generally speaking, you cannot start withdrawing from pre-tax retirement accounts like a 401(k), 403(b), or traditional IRA until age 59½ without a penalty. This does not apply to Roth accounts, however. You are allowed to withdraw any principal funds from your Roth accounts without penalty because you paid taxes up front on those funds — you just can’t withdraw any of the gains you’ve earned over the years. To keep everything simple, we’ll assume that you’re already over 59½ and all of your retirement savings are in tax advantaged accounts like a 401(k).

Don’t cash out everything at once

Let’s go back to our original assumption that you’re over 59½ and ready to retire. One of the biggest mistakes would be to liquidate all of your account into a lump sum. This causes two problems.

First of all, taxes. Taking large lump-sum distributions could leave you with a very large tax bill because whatever you withdraw will be treated as additional income. The second problem is that once you liquidate your investments, that means they are no longer growing. It may be a mistake to become too conservative with your investments in retirement, because many of us will live well into our 80s. With potentially 20 years ahead of you, you’ll want your money to keep growing, keep beating inflation, and give you the best shot at not outliving your funds.

The solution: periodic distributions

It’s recommended that retirees take periodic distributions, usually on a monthly basis. This allows you to take a portion of your money out to spend while letting the remainder stay in the market to grow. Figuring out how much you’ll need can be tricky. Many retirees stick to the 4% rule, which seeks to provide steady income while preserving the principal. If you had $1 million saved, you could withdraw $40,000 each year. A person with a $1.25 million retirement savings withdrawing 4% could receive $50,000 per year.

It is considered a best practice to withdraw your investments proportionately, also known as pro rata. To understand what that means, say you have a retirement account with four investments: Stock A, Stock B, Stock C, and Stock D, and each of them makes up 25% of your portfolio, or $250,000 each, for a total of $1 million.

If you follow the 4% rule, you need to withdraw $40,000. It could be a mistake to take the full $40,000 from one single stock as this would throw off the allocation. Pro rata means that you would take $10,000 from each stock, which keeps your portfolio balanced.

Depending on how many investments you hold, calculating a pro rata distribution can become difficult. Your best bet is to consult a financial planner in your area or call your investment firm’s customer service line.

Don’t forget to factor in taxes

Remember, if you’re withdrawing from a pre-tax account, the amount you take out and the amount you actually receive will be different. These funds will be taxed as regular income in your top tax bracket. For example: If you need $2,000 per month to meet your needs, you may need to take out an amount closer to $2,500 to leave room to pay taxes.

Tap into non-retirement savings first

It’s common to have more than one retirement account. To avoid taking a tax hit, many financial experts recommend tapping into non-retirement savings first. “Very generally, and depending on your tax bracket, you should typically take money out of your non-retirement accounts first to keep your taxable income lower,” says Neal Frankle, CFP and blogger at Wealth Pilgrim.

This way, you can give your retirement funds an even longer time to grow before you’re ready (or forced by the required minimum distribution) to start making withdrawals.

Of course, this is an oversimplified strategy and won’t fit every case. Again, it’s wise to seek professional help, at least in the last few years before you retire, to map out a game plan. “This takes a little time and may cost a bit, but it is by far the best investment a pre-retiree can make in my experience,” says Frankle.

Delay Social Security withdrawals as long as possible

We’ve saved the best (worst?) for last. If trying to decide whether to dip into your savings account or 401(k) first was complicated, it doesn’t get much trickier than figuring out the right time to start tapping your Social Security.

In an ideal world, you would ignore your Social Security until at least age 70. That’s when you can capture your maximum benefit. The longer you wait to take Social Security, the more you will receive. Sure, you can start withdrawing funds at age 62, but you’ll only get 75% of your potential earnings.

To get 100% of your potential benefit (for those born between 1943 and 1954), you’ll have to wait till age 66.

But the deal gets even sweeter if you can hold off till 70, when you’ll get your full benefit plus another 32%.

Of course, that’s an ideal world.

In reality, most people start tapping their Social Security funds at age 62.

To visualize the benefit of delaying Social Security for as long as possible, check out this chart from Merrill Edge:

Planning Your Social Security Strategy

There are a lot of complexities attached to Social Security and when to start taking benefits; some of which include your tax bracket, life expectancy, marital status, and how much you’ve saved. The easiest way to help sort this out is to decide the amount of money you could live on each year. For some, this amount is 75%-80% of their pre-retirement income. Someone living on $60,000 might be comfortable with having about $48,000 per year in retirement. It is up to you and your financial planner to decide what combination of options can get you to that number.

But here are some things to consider:

If you’re married

The bulk of the complexities around Social Security are with married couples. When you tally up the options, married couples have dozens of strategies to choose from compared to a handful for singles.

The two main concepts you’ll want to be familiar with are the spousal benefit and the survivorship benefit.

The spousal benefit can allow a spouse to collect up to 50% of their spouse’s benefit based on the spouse’s full retirement age. This could allow for the higher earning spouse to wait to file later to receive the maximum benefit. You can look up your full retirement age here.

For example, Jack and Jill are married, and both are 66 years old. Jill earns significantly more than Jack, and her full retirement age for Social Security is 66. Jack could file Social Security on his own age and earnings history or for the spousal benefit. Since 50% of Jill’s benefit is higher than what he would have gotten on his own, he can file for the spousal benefit now, and Jill can file at age 70. This could help them maximize their total benefit as a couple.

The survivorship benefit is much more straightforward; it allows the surviving spouse to collect a portion of a deceased spouse’s benefits. You can learn more here.

If you’re single

Figuring out Social Security if you’re single can be a lot simpler. You could begin taking Social Security at 62 for a reduced benefit or wait until age 70 to get the highest possible payout. Those who are single due to death or divorce may have a few more options.

In the case of divorce, if you were married for at least 10 years and you have not remarried, you may be eligible to claim a spousal benefit. This is also the case for an ex-spouse who is deceased.

How much do you have saved?

This is perhaps the biggest component: the longer you wait to file for Social Security, the more you could earn. If your nest egg can cover the majority of your retirement lifestyle and your health is good, you may be better off waiting until later to start Social Security.

What’s Required Minimum Distribution?

There’s also the pesky required minimum distribution (RMD) to consider. When it comes to any retirement funds that were set aside, tax deferred during your working years, the RMD rule makes sure that workers eventually withdraw those funds. Why? Because the IRS isn’t going to leave billions of tax dollars on the table forever.

In a nutshell, the RMD is the amount of money you have to begin withdrawing from your tax-deferred retirement accounts by age 70½. There’s a whole complex way to figure out what your RMD is exactly, but the truth is that you probably won’t have to worry about it.

In fact, most retirees who are living off of their retirement funds meet the RMD by default. Someone with $100,000 in a traditional IRA on December 31 of last year would have to withdraw about $3,780 if they turn 71 this year. If you’re close to 70½ and want to estimate your RMD, you can use this link.

Not taking your RMD, or less than what is required, from a traditional IRA or 401(k) will cost you. The IRS will levy a 50% penalty on the difference between the amount you withdrew and the amount you should have withdrawn.

What if you’ve got more than one retirement account?

If you have multiple traditional IRAs, your RMD will be calculated using the combined value of each account. This allows you to choose which IRA to withdraw from, or to divide the RMD between the accounts.

What if you’re still working in your 70s?

If you are still working beyond 70½, you do not have to take an RMD from your 401(k) until the year you retire. You would still have to take it from your traditional IRA whether you’re working or not. If you are not working and you still have old 401(k)s at different employers, you would be forced to calculate and withdraw the RMD amount from each account separately.

What about Roth retirement accounts?

The RMD rule does not apply to Roth accounts. “Your money grows tax-free in the account and will pass to heirs without any tax obligations,” says Joseph Hogue, a Chartered Financial Analyst. Roth accounts can be a great tool when you’re withdrawing because you have much more control of what you pay in income taxes while in retirement.

The post Here’s How to Withdraw Your Savings When You Finally Retire appeared first on MagnifyMoney.

Guide to Liability Insurance: What It is and Why You Need It

When it comes to protecting yourself financially, things like an emergency fund, health insurance, and life insurance are typically some of the first topics that come up. And rightfully so, given that each is an important part of a secure financial foundation.

Liability insurance is a protection that often gets overlooked. If you have an auto, homeowners, or renters insurance policy, then you likely already have some level of liability insurance in place. But it may not be enough to fully protect you, and in this guide you’ll learn how to make sure you have the right coverage for your needs.

What Is Liability Insurance and Why Is It Important?

Liability insurance protects you financially in case you accidentally injure someone or damage their property. Common situations include:

  • You’re at fault in a car accident, and the other party experiences neck pain as a result.
  • Someone slips and falls in your driveway and breaks their tailbone.
  • You accidentally back your car into someone else’s mailbox.
  • Your dog bites someone while you’re out for a walk.

Each of those situations are accidents in which someone else experiences either an injury or property damage that will cost them money to fix. And in each case, they could legally hold you responsible for paying those bills.

That’s where liability insurance kicks in. Instead of having to spend your own money, your insurance company would cover the bill as long as it fell within the limits of your coverage. Any costs beyond those limits would be yours to bear.

And truth is that some of these situations could be very expensive. Imagine, for example, a car accident in which multiple other passengers are seriously injured.

That kind of situation isn’t fun to think about. But it could happen, and at the very least you can protect yourself from the financial impact. Otherwise, you could be on the hook for:

  1. Medical bills.
  2. Fixing or replacing the other person’s property.
  3. Lost income if the other person is forced to miss work.
  4. Legal bills for both you and the other person if there is any disagreement about who is at fault.

That’s why liability insurance is so valuable. It ensures that even if the financial impact of an accident is high — such as someone being forced to miss work for an extended period of time — you won’t be on the hook for the cost.

Who Needs Liability Insurance?

Just about everyone should have some level of liability insurance, but the truth is that the more money you have, the more likely you are to need it.

The simple reason is that if you have either a sizable income or a significant amount of savings and investments, there’s more for the other party to go after. They know that you can afford it, so they’re more likely to push for getting it.

On the the other hand, if you don’t have much savings and you don’t earn much money, there’s less potential for the other party to get a financial benefit, and they may therefore be less likely to pursue it.

Still, you can be held financially liable for your actions no matter how much money you have, and in certain situations you can even be required to pay a part of your income to the injured party. Plus, with liability insurance in place, you get the benefit of an insurance company handling all the procedural aspects of dealing with a claim, which can make the entire process a lot easier.

So again, just about everyone should have some base level of liability insurance. But if you’re a high-earner, and especially if you have significant assets, you’ll probably want to make sure you have at least enough coverage to protect your entire net worth.

Four Major Types of Liability Insurance

There are four major types of liability insurance policies, two of which are simply part of insurance policies you may already have in place.

1. Auto Insurance

You typically face the greatest risk of financial liability when driving. The simple reality is that driving is risky, accidents are common, and even careful drivers make mistakes that could leave them financially liable for fixing someone’s car and paying their medical bills.

Most states require you to have a minimum amount of liability coverage as part of your auto insurance policy, typically covering the following things:

  1. Property damage
  2. Per person bodily injury
  3. Per accident bodily injury (for when more than one person is injured)

Some states also require you to have uninsured motorist bodily injury coverage, which actually covers you and other passengers in your car if you’re in an accident and the other driver is at fault, but either doesn’t have liability coverage or doesn’t have enough to satisfy your claim.

For example, the minimum coverage requirements in New York currently look like this:

  • $10,000 for property damage
  • $25,000 bodily injury and $50,000 for death per person
  • $50,000 bodily injury and $100,000 for death per accident
  • $25,000 uninsured motorist coverage per person
  • $50,000 uninsured motorist coverage per accident

The minimum required coverage is often enough to cover the most common scenarios, but typically doesn’t provide sufficient protection in the case of major accidents. When you consider the medical bills and potential lost income in an accident involving multiple people, the total cost could be much higher than even the amounts listed above.

And given that the main value of your coverage is the protection against financially ruinous outcomes, it often makes sense to increase your coverage above the minimum. Most auto insurers allow you to get up to $250,000 of coverage per person and $500,000 per accident.

Unfortunately, it can be fairly expensive to secure liability coverage through your auto insurance policy, ranging anywhere from a couple of hundred dollars per year to $1,000 or more at the upper limits. The cost depends on the amount of coverage you want and on your driving history, so a clean record could lead to lower premiums.

2. Homeowners or Renters Insurance

Like auto insurance, liability coverage is a standard part of both homeowners and renters insurance policies, although it’s not always required. And the good news is that it usually provides broad coverage at a relatively low cost.

First, it covers any accidents that happen while someone is on your property, from falling down the stairs to tripping over your toddler’s walker. If someone is injured while at your house, your liability insurance has you covered.

Second, it covers non-auto-related accidents that happen away from your home as well. If your dog bites someone while you’re out for a walk, you accidentally bump into your neighbor’s ladder while they’re cleaning the gutters, or your child damages someone’s property, your liability insurance has you covered.

And all of that coverage comes at a relatively low cost too, with even several hundred thousand dollars of coverage typically only costing a couple of hundred dollars per year.

Most homeowners and renters insurance policies start with $100,000 of liability coverage, though you can typically increase it to $300,000.

3. Umbrella Liability Insurance

An umbrella insurance policy provides additional liability coverage above the limits in your auto and homeowners or renters insurance policies. And you typically have to do two things before you can get a policy:

  1. Secure your auto insurance and homeowners or renters insurance with the same company you’re getting your umbrella policy with. Not all insurers require this, but most do.
  2. Increase the liability coverage in both your auto insurance and homeowners or renters policies to a minimum level set by your umbrella policy insurer, which is often $300,000 for homeowners or renters insurance and $250,000/$500,000 for auto insurance. This is to make sure that your umbrella coverage only covers situations in which there are extraordinarily significant damages.

Because of that second point, umbrella liability insurance is typically more than most people need. Unless your income is high enough or you have more than $500,000 in net worth, it’s probably not worth considering this additional coverage. Your auto and homeowners or renters policies are likely enough.

But if you have significant income or assets to protect, an umbrella policy can provide substantial coverage at a small cost. Coverage typically starts at $1 million, and according to the Insurance Information Institute typically costs $150-$300 per year for the first $1 million in coverage and increases by $50-$75 per year for every additional $1 million in coverage.

4. Business Liability Insurance

If you run a business, even if it’s a small side hustle, the insurance policies listed above will not cover those business activities. You will need to get a separate policy.

The tricky part here is that liability coverage varies from profession to profession, so it’s not as easy as going out and getting a generic liability insurance policy like it is on the personal side of things.

Business liability insurance is beyond the scope of this guide, but if you’re in a business where you could be held financially liable for your mistakes, getting the right liability coverage in place could be well worth your time and money.

Business liability insurance can vary so much profession to profession. For example, doctors have a completely different type of liability insurance than lawyers. And even within those professions, it will vary by specialty. So it’s pretty difficult to give a price range or even offer general resources.

Three Ways to Get Liability Insurance

When it comes to actually getting liability insurance in place, you have three main options

1. Your Current Auto and Homeowners or Renters Insurance Policies

If you already have auto insurance in place, then you already have some amount of liability insurance. You just need to check your policy to see how much you have, and ask your insurer about the cost of increasing your coverage if you’d like more.

The same is true if you have homeowners or renters insurance. Check what you have in place now, and, if necessary, ask your insurer what the cost would be to either add liability coverage or increase it.

If you’re renting and you don’t already have renters insurance, you can check with your auto insurance company about adding it. You can also refer to this guide to help you find a policy that meets your needs: Guide to Renters Insurance: When You Need it and When You Don’t.

2. Shop Around

While sticking with your current insurance company is the easiest way to secure liability insurance, it may not be the most cost-effective. You could save a lot of money by shopping around, especially if you’d like to add an umbrella policy, which would likely require you to have all three insurance policies with the same company.

Here’s a process you can follow, borrowed from the renters insurance guide mentioned above:

  1. Google “auto insurance” plus your city/state. Almost every company that offers auto insurance also offers homeowners, renters, and umbrella insurance, so this will give you a solid list to start with.
  2. Get a phone number for each of the major insurers providing coverage in your state.
  3. Call each insurance company directly and ask for quotes for both auto insurance and either homeowners or renters insurance, making sure to include the amount of liability coverage you’d like to have for each.
  4. If you are looking for umbrella liability coverage, make sure to ask for a quote on that policy as well.
  5. If you have any possessions that are particularly valuable, such as jewelry or artwork, ask how much it would cost to get additional coverage for those possessions in your homeowners or renters policy.
  6. Make sure to ask if they offer a multi-policy discount and, if so, to get the premiums quoted with that discount applied.
  7. If there are any particular threats in your region, such as flooding or earthquakes, ask about their coverage of those specific threats.
  8. Compare the coverage and cost from each insurance company, including your current insurer. If you can get a better deal elsewhere, it should be relatively easy to switch.

3. Independent Insurance Agent

A good independent insurance agent will be able to help you evaluate your need for coverage and find that coverage at the best possible price given your needs and situation.

To find one in your area, you can Google “independent property and casualty insurance agents” + your city/state.

It won’t cost you any extra to work with an agent, but you should be aware that some agents may try to direct you to higher levels of coverage than you need, simply because it provides them a better commission. You should interview a few to make sure you find someone you trust.

The Forgotten Insurance

Unless you’re running a high-risk business, liability insurance probably doesn’t need to be at the top of your list of financial priorities.

But it provides valuable protection, and it’s something that shouldn’t be forgotten. It’s typically easy to add or increase the coverage you have through your existing policies, and doing so ensures that no accident will put you in a situation where you can’t reach your other financial goals.

The post Guide to Liability Insurance: What It is and Why You Need It appeared first on MagnifyMoney.

The Ultimate Guide to Creating an Estate Plan

Estate planning is probably the last thing you want to think about as you start your family.

You’re bringing life into the world, which is joyous and happy. But estate planning is all about what happens when life ends, which is morbid and depressing.

You may also think that estate planning is only for rich people. If you haven’t yet built up much savings, or if you’re still working your way out of debt, you might wonder whether it’s actually important to tell people what to do with your money.

The truth is that estate planning is both important and empowering, no matter how much money you have. And that’s especially true when you have young children, because your estate plan is how you ensure that your family will always be taken care of, no matter what.

In this guide you’ll learn everything you need to know about estate planning so that you can make sure your family’s future is secure.

Why You Need an Estate Plan

The main reason to create an estate plan is to make sure that your family will be taken care of both physically and financially after you’re gone.

Physically, you get to decide ahead of time who would take care of your children — and other dependents — if you and your spouse or partner are no longer able to do it yourselves.

Financially, you get to make sure that there’s money available for your children, and you get to decide who would be in charge of managing that money until they’re old enough to do it themselves.

In other words, your estate plan is how you get to keep being a parent after you die. Your kids will continue to be taken care of because you set it all up ahead of time.

And if that isn’t enough, Bomopregha Julius, an estate planning attorney in New York City, suggests two other reasons to create an estate plan:

  1. It’s really for your family, not for you. Whether you have an estate plan or not, your surviving family members will have to figure out what financial assets you have and what to do with them, all at a point in time when they’ll be grieving your death. By creating an organized estate plan, you give them the tremendous gift of making that process as easy as possible.
  2. Build generational wealth. An estate plan is how you break the cycle of poverty and build generational wealth. By being intentional about leaving money behind to the people you care about, you create a stronger foundation for the next generation to build upon.

With that as your motivation, let’s talk about what goes into a good estate plan.

8 Key Components of a Solid Estate Plan

1. Your Will

A will serves two main purposes.

First, and most important, it’s the only place where you can name guardians for your children. This is why a will is essential for all young families, regardless of your financial situation.

Second, your will is how you pass on assets and possessions that don’t allow you to designate a beneficiary (more on beneficiaries below). Things like cars, furniture, and jewelry can all be passed down through a will.

The downside of a will is that it has to go through a process called probate. Probate is the court process of reviewing and executing your will, and it can be time-consuming and expensive. Family and friends can also challenge your will during probate, with the final decision up to the judge, which can lead to outcomes that may not be exactly what you intended.

For that reason, it’s usually a good idea to pass on as much of your money and possessions as possible through other avenues. Which brings us to…

2. Your Beneficiary Designations

Many bank and investment accounts, as well as life insurance policies, allow you to name beneficiaries or make payable on death designations. These designations allow you to specify who the money in those accounts would go to upon your death.

The benefit of these designations is that they allow the money to be transferred without going through probate, which means your family can get the money quicker, easier, and with more certainty.

You just need to be aware that these designations take precedence over anything you have in your will. That’s what allows them to skip probate, but it also means that updating your will often isn’t enough to keep your estate plan up to date. You need to make sure you keep your beneficiary designations current as well.

3. Life Insurance

Life insurance is one of the best ways to make sure that there will always be enough money for your surviving family members. This is particularly true when you have young children, since there is a long time between now and the point at which they’ll be able to support themselves.

Typically, both working and non-working parents should have at least some amount of life insurance.

For working parents, it primarily serves to replace lost income. For non-working parents, it helps the family pay to replace all of the duties they perform. And in all cases it can help the surviving family members navigate a challenging transition period without worrying about how they’ll pay their bills

Term life insurance is the type that most people need, but you can get a detailed breakdown of the options available to you here: Term vs Whole Life Insurance.

4. Financial Power of Attorney

A financial power of attorney designates someone to handle your finances in the situation where you’re temporarily incapacitated. This could, for example, allow someone to access your checking account and pay your bills.

You could set this up as a permanent right or you could make it conditional upon certain medical diagnoses. You can also limit which accounts the person is able to access and which actions he or she is able to perform.

Regardless, this ensures that your financial obligations can be handled even when you’re not able to do it yourself.

5. Health Care Power of Attorney

A health care proxy is essentially the same as a financial power of attorney, but for health care instead of finances.

It designates someone to be in charge of your medical decisions in case you’re ever not able to make them for yourself. Designating someone you trust as your health care proxy will make it easier for your doctors to care for you in a way that aligns with your personal values.

6. A Living Will

Your living will allows you to decide ahead of time how you’d like end-of-life decisions to be made. That might sound pretty morbid, but this helps ensure that you’re treated the way you want to be treated AND takes some of the responsibility off the shoulders of your family members to make some of those difficult decisions for you.

7. List of All Your Important Accounts

One of the most difficult jobs for surviving family members is often simply finding and accessing your bank and investment accounts. If they don’t know where they are, it’s pretty challenging to claim the money.

So at the very least, making a list that details which accounts you have at which institutions can eliminate a lot of the struggle. For some accounts, it may also make sense to securely share your username and password so that there’s always someone who can access them if needed.

8. A Written Summary of Your Wishes

While your estate plan should always be laid out formally using the tools above, it can also be helpful to provide a written summary of what you want to happen.

While it won’t be legally binding, it can help to explain your wishes in an easily understood format, which could make it easier for your survivors to execute your plan correctly.

When to Consider a Living Trust

While the eight items above are essential for any good estate plan, some people might also benefit from creating a revocable living trust.

A revocable living trust is a legal entity that you create and control. You can then transfer ownership of certain assets to the trust, and those assets are then bound by the terms of the trust, which specify how those assets should be disbursed upon your death.

For example, it’s common for spouses to create a living trust in which they are both trustees, meaning that they both have full access to all the assets owned by the trust and can modify the terms of the trust at any time.

Then they will transfer checking accounts, savings accounts, and non-retirement investment accounts to the trust. They can also name the trust as the beneficiary of their life insurance policies. And because they are trustees, they can manage those assets in the exact same way as if they owned them individually, with the difference being that those assets will now automatically pass to surviving family members according to the terms of the trust.

That might sound like a lot, and it may also sound redundant with the purpose of your will and your beneficiary designations. But there are two big benefits to this approach.

The first is that all assets owned by the trust skip probate. Probate can be a long and expensive process, and skipping it means that your money is passed on to your family members quicker, at a smaller cost, and with less chance for your desires to be overturned.

The second is that you have more control over certain decisions, such as when your children get access to your money. Instead of them inheriting your life insurance proceeds at age 18, for example, you can stipulate that they wouldn’t receive the money until age 25, when they might be better prepared to handle it. You can even put in provisions that protect the money from a messy divorce or from creditors. Trusts are flexible tools with a lot of room for you to set them up as you please.

The Cost

The big downside is the upfront cost. A will and all the other documents might cost anywhere from $50 to a few hundred dollars to set up, while a living trust will usually cost a couple of thousand dollars. The flip side is that it may actually save your family money in the long run by cutting out most of the probate process, but that doesn’t make it any easier to afford the bill now.

In general though, a living trust is a good idea if you can afford the upfront cost without sacrificing your basic financial security. It makes things quicker, easier, less expensive, and more certain for your surviving family members.

And remember that even if you don’t have much in the way of savings, your children might stand to inherit significant life insurance money. A living trust can make sure that that money is managed properly by the right people until your children are old enough to manage it themselves.

Hiring an Estate Planning Attorney vs. Doing It Yourself

Armed with all that information, there’s still one big question left to answer: how should you get it all in place?

It used to be that you had to go through an estate planning attorney, but as the world turns digital there are now a number of online tools that can help you get these documents in place quickly and inexpensively.

So which route should you take? Let’s look at the pros and cons of each approach.

The Pros and Cons of Doing It Yourself

There are a number of websites now that offer guided, DIY estate planning packages with all the essential documents. Some of the biggest are Nolo, LegalZoom, and Rocket Lawyer.

The biggest appeal of these tools is typically the cost. They currently range from $54.99 to $149 per person, which in some cases could be significantly cheaper than working with an attorney.

They’re also quick. Working with an attorney likely requires at least one in-person meeting, and often more to get everything handled, while the online tools might allow you to complete everything in just a couple of hours.

And for simple situations, many attorneys use a template similar to what these tools offer anyway, so you may not be getting a much different product.

The biggest downside is that you don’t get the guidance that comes from working with a good estate planning attorney. Given the importance of getting your estate plan right, that could be costly.

The DIY tools aren’t great for more complicated situations either, such as setting up a living trust or creating a plan for a second marriage. Those situations have more moving parts, and that’s where an experienced attorney can be very helpful.

The Pros and Cons of Hiring an Estate Planning Attorney

Working with an estate planning attorney has essentially the opposite set of pros and cons.

The biggest downside is simply the cost. It’s typically at least a few hundred dollars to work with an attorney, and it may be upward of $1,000. It really depends on where you live though, and even then there’s often a wide range, so it’s worth calling around.

The main reason to work with an estate planning attorney is for the guidance they offer. A good attorney will take the time to get to know you, to understand what’s important to you, and to explain all of the options available to you. The decisions you’re making are not always simple or easy to understand, so that kind of guidance can be invaluable.

Along with that comes the confidence of knowing that your plan is done right, both in terms of being set up the way you want and in terms of adhering to specific state laws that the online tools may or may not be aware of.

Similarly, your surviving family members may be in a better position to carry out everything with the guidance of the attorney who helped you create your plan and knows exactly what you wanted and how everything should work. Again, anything you can do to make things easier for your family is a huge gift.

Finally, working with an attorney may make it easier for you to make changes and updates as you move along, since he or she will already be familiar with your plan and have all the documents you originally created. So if you have a child, get divorced or remarried, or want to update the guardians in your will, your attorney can help you make those changes efficiently within the context of your overall estate plan.

Questions to Ask Before You Hire an Estate Attorney

Can you afford the cost of the attorney without sacrificing your financial security?

Can you find an attorney who cares about getting to know you personally and helping you craft a personal estate plan?

If the answer to both of those questions is yes, the cost of hiring an attorney is well worth it. Otherwise, the DIY tools are probably sufficient as long as your situation is relatively simple.

How to Find an Estate Planner

  1. You may have access to discounted legal services through your employee benefits.
  2. The National Association of Estate Planners & Councils has a search tool you can use.
  3. WealthCounsel is another organization that offers a helpful search tool.
  4. You can always simply Google “estate planning attorney” + your city/state to find one near you.

Where to Keep Your Estate Planning Documents

Once you have your estate planning documents in place, there’s still one big question to answer: where should you keep them?

This may sound trivial, but it’s actually pretty important. Remember, these documents tell everyone else how your family and your money should be cared for after you die, meaning you won’t be around to help them figure it out. So your main goals here are two-fold:

  1. Ensuring that there are always up-to-date copies stored somewhere.
  2. Making it easy for your surviving family and friends to access those documents if needed.

Here are a few options.

1.Your Attorney

If you work with an attorney, he or she will usually be able to keep a copy of all of your important documents on hand. This is a great way to make sure that those documents will always be available, even if something happens to your copies.

It’s also a good way to make sure that someone who knows what they’re doing is leading the way. Your attorney will already know who’s in charge of what and should be able to guide everyone else to make sure that things run smoothly.

2. A Safe

Even if you’re relying on an attorney, you’ll walk away with a number of physical copies of all your documents that you should hold onto in case originals are eventually needed. And it may be a good idea to keep them in a fireproof and waterproof safe, just to make sure they won’t get damaged in an accident.

3. With Friends and/or Family

Throughout the estate planning process, you’ll be naming a number of people who would be in charge of taking care of your children and handling your financial affairs if you die. You should already be talking these decisions through with them so that they know what’s expected of them, and it may also be a good idea to give them a copy of important documents so that they’re easily accessible if the need arises.

4. Digital File Share

Storing your files digitally using a service like Google Drive or Dropbox is a great way to make sure you always have backup copies, and it also makes sharing those documents with others easy.

You could also looked into a paid service like Everplans, which is specifically designed for storing and sharing sensitive estate planning documents. They also offer some customer support that may be helpful if you need a little guidance.

The Gift of a Good Estate Plan

If you’re like most people, you’ll probably procrastinate on putting your estate plan in place. It’s not an enjoyable topic, and it’s a cost that’s not easy to take on when you’re already paying for child care and everything else.

But a good estate plan is a gift, both to you and your family.

You get the gift of knowing that your family will be taken care of, no matter what. And your family gets the gift of having the transition period after your death be as easy as possible, giving them space to grieve and get their lives together without worrying about the financial side of things.

That’s the value of a good estate plan.

The post The Ultimate Guide to Creating an Estate Plan appeared first on MagnifyMoney.

More Rich People Are Choosing to Rent Than Ever Before — Here’s Why

Renting a home or condo has become a status symbol for some wealthy Americans.

Karen Rodriguez, an Atlanta, Ga., real estate agent, says people frequently contact her who are interested in condos renting for $10,000 to $15,000 a month in properties such as the Ritz-Carlton Residences, which have floors of condos above upscale hotel rooms.

“I do see a lot of high-net-worth renters,” says Rodriguez, with Berkshire Hathaway HomeServices Georgia Properties. “They have the disposable income to pay top dollar.”

Renter households increased by 9 million during 2005-2015, reaching nearly 43 million in 2015, according to the State of the Nation’s Housing report, an annual study by Harvard University’s Joint Center for Housing Studies that analyzes U.S. Census Bureau data. Of those, 1.6 million renter households earn $100,000 or more, representing 11% of all renters.

“Indeed, renter households earning $100,000 or more have been the fastest-growing segment over the past three years,” the report stated.

Here are four reasons why high earners are choosing to rent.

They’re frustrated with market trends.

stock market numbers and graph

Rob Austin, a biotech account manager in the Los Angeles area with a household income of over $350,000, rents a 1,700-square-foot townhome with his wife and two children.

In the last 10 years, 1.2 million households that earn $150,000 became renters, up from 551,000 in 2005. Using data from the U.S. Census Bureau’s 2015 American Community Survey, RentCafe.com reported in late 2016 that “wealthy households” that earn more than $150,000 annually increased by 217%, compared to an 82% rise in homeowners in the same income bracket.

The $150,000-and-up dollar amount served as the benchmark for “wealthy” renters because that’s the top of the bracket used in the American Community Survey to identify renters and homeowners.

Even when they had their second child in 2016, Austin says they were more steadfast to keep renting the two-bedroom, two-and-a-half bath townhome instead of buying. Prices are increasing so much that they’re “priced beyond perfection,” he says.

“It’s gotten worse,” he says. “Everything is mispriced at this point.”z

They want the next best thing.

Some buyers’ mindset is, “I don’t love it, so I’m just going to go rent a house,” says Atlanta, Ga., real estate agent Ben Hirsh.

Some may be bored with what’s on the market and are holding out for a home or condo with even more extravagant features or amenities. “They’re not happy with what’s out there,” says Rodriguez, also founder of Group Kora Real Estate Group, which sells new and luxury condos.

If they’re in a location or price range that’s hot, they could get more for their home if they sell now. Some wealthy homeowners take advantage of the resale market by going ahead and selling a home or condo and biding their time while renting. For example, if they’re sold on news about ultraluxe condos that have been announced, but are not under construction, they don’t mind renting in the interim.

“People think there’s more coming,” Rodriguez says.

Some clients have so much wealth that they’re willing to pay for the entire year up front for an unfurnished condo, she adds. Investors also have noticed the market trends and are buying condos for $1 million to $2 million with the intention to rent them out.

They don’t want a long-term commitment.

retirement retire millionaire happy couple on the beach

Some wealthy homeowners are ready to sell their million-dollar estates for a lock-it-and-leave-it lifestyle, but aren’t sold on townhome or condo living.

Instead, they’re willing to spend what can amount to the down payment on a starter home for monthly rent to experience the luxury condo lifestyle with privacy and ritzy amenities, like 24/7 room service and spa access.

“They want to test out a high-rise,” Rodriguez says. “They are people who definitely can afford to buy.”

A 2016 report by the National Association of Realtors identified the top 10 markets in the U.S. with the highest share of renters qualified to buy. The study analyzed household income, areas with job growth above the national average, and qualifying income levels (a 3% down payment in each metro area’s median home price in 2015) in about 100 of the largest U.S. metro areas. The markets that are above the national level (28%) were:

  • Toledo, Ohio (46%)
  • Little Rock, Ark. (46%)
  • Dayton, Ohio (44%)
  • Lakeland, Fla. (41%)
  • St. Louis, Mo. (41%)
  • Columbia, S.C. (41%)
  • Atlanta, Ga. (40%)
  • Columbus, Ohio (38%)
  • Tampa, Fla. (38%)
  • Ogden, Utah (38%)

The short-term mentality also may be the nature of the industry that brings people to a city. Some prospective renters whom Rodriguez meets are planning to live in Georgia for a couple of years because of work, such as jobs in the growing entertainment sector. Films such as the “Avengers” and TV shows such as “The Walking Dead” shoot in metro Atlanta.

They don’t want to live out of a suitcase in a hotel and have the income to afford high-priced rentals, joining political figures and international executives who also are among those making the same choice, Rodriguez says.

They want cash in the bank.

Townhomes sell for about $800,000 in Austin’s neighborhood in California. To make a 20% down payment, he’d have to shell out $160,000 up front.

“Why would I want to tie up $160,000 in cash in an asset that most likely is not going to go up a lot more — and more than likely has topped and has nowhere to go but down in the next cycle?” Austin asks.

Austin says he’s not wavering from his decision, although he’s “taking heat” from friends since he has the income to purchase a home.

“We’re bucking the trend by saying, ‘No thanks, we don’t want to play (the real estate market),’” he says. “We’ll just wait.”

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