Should I Accelerate My Mortgage Payments?

Contributed by: Josh Bitel, CFP®

Most homeowners make their regular mortgage payments every month for the duration of the loan term, and never think of doing otherwise. But prepaying your mortgage could reduce the amount of interest you'll pay over time.

How Prepayment Affects a Mortgage

Regardless of the type of mortgage, prepaying could reduce the amount of interest you'll pay over the life of the loan. Prepayment, however, affects fixed rate mortgages and adjustable rate mortgages in different ways.

If you prepay a fixed rate mortgage, you'll pay off your loan early. By reducing the term of your mortgage, you'll pay less interest over the life of the loan, and you'll own your home free and clear in less time.

If you prepay an adjustable rate mortgage, the term of your mortgage generally won't change. Your total loan balance will be reduced faster than scheduled, so you'll pay less interest over the life of the loan. Every time your interest rate is recalculated, your monthly payments may go down as well, since they'll be calculated against a smaller principal balance. If your interest rate goes up substantially, however, your monthly payments could increase, even though your principal balance has decreased.

Should I Prepay My Mortgage?

A common predicament is what to do with extra cash. Should you invest it or use it to prepay your mortgage? You'll need to consider many factors when making your decision. For instance, do you have an investment alternative that will give you a greater yield after taxes than prepaying your mortgage would offer in savings? Perhaps you'd be better off putting your money in a tax-deferred investment vehicle (particularly one in which your contributions are matched, as in some employer-sponsored 401(k) plans). Remember, though, that the interest savings from prepaying your mortgage is a certainty; by comparison, the return on an alternative investment may not be a sure thing.

Other factors may also influence your decision. The best time to consider making prepayments on your mortgage would be when:

• You can afford to contribute money on a regular basis.

• You have no better investment alternatives of comparable certainty.

• You cannot refinance your mortgage to obtain a lower interest rate.

• You have no outstanding consumer debts charging you high interest that isn't deductible for income tax purposes (e.g., credit card balances).

• You are in the early years of your mortgage when, given the amortization schedule, the interest charges are highest.

• You have sufficient liquid savings (three-to-six months' worth of living expenses) to cover your needs in the event of an emergency.

• You won't need the funds in the near future for some other purpose, such as paying for college or caring for an aging parent.

• You intend to remain in your home for at least the next few years.

Particularly against a fixed rate mortgage, regular contributions toward prepayment can dramatically shorten the life of the loan and result in savings on the total interest you're charged. As always, consult your financial planner before making any large financial moves. We’re here to look at the big picture and help you make the best decisions for your particular situation.

Josh Bitel, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

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UPDATED from original post on December 6, 2016 by Matt Trujillo.

Any opinions are those of the author and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James Financial Services, Inc. and your Raymond James Financial Advisor do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs.

3 Reasons to Get an Early Start on College Savings

Contributed by: Robert Ingram

The back-to-school season is right around the corner. And if you have school-aged children, the thought of planning for their college education may be enough to cause your own case of back-to-school jitters. Costs of a four-year education at many colleges and universities are already well into the six-figure range (per child!). For many families hoping to cover a large portion of the costs, significant savings goals are likely required. That’s why, more than ever, you should create a college savings plan as early as possible. 

College Costs Keep Rising

When planning to fund an education goal that may be years away, focusing on today’s costs is (unfortunately) just the beginning. Like the prices of many other goods and services, college costs have increased over time. These costs, however, have been rising much faster than those of other household expenses. According to JPMorgan Asset Management’s research, tuition costs have grown by an average annual rate of 6.4% since 1983. At this rate, today’s cost of tuition would double in about 11 years. Even if this rate of inflation slowed somewhat, potential college costs are eye-opening.

The illustration below shows projected total tuition, fees, and room and board expenses for a four-year, public or private college education, with a 5% annual increase in costs.

Source: JPMorgan Asset Management College Planning Essentials, using The College Board, 2018 Trends in College Pricing. Future college costs estimated to inflate 5% per year. Average tuition, fees and room and board for public college reflect four-year, in-state charges.

As you can see in this example, a child who is 10 years old today could expect a total cost of $136,085 at an in-state public college or university. Her education at a private college could cost over $308,000.

The power of compound growth on your savings and invested earnings can be one of your best allies as you save for these potential future costs. Let’s say the family of our 10-year-old child began saving $3,600 each year. At 7% growth compounded annually, they would have $36,935 by the time she turned 18. What if, instead, they began saving that same amount eight years earlier, when the child was age 2? At the same 7% annual return, they would have $100,396. The sooner you can begin saving and investing, the more time compounding has to work its magic.

The Burden of Student Loan Debt

As the costs of college have continued to rise, the amount of student loan debt has grown as well. A recent report from the New York Federal Reserve Consumer Credit Panel showed that outstanding student loan debt totaled $1.44 trillion as of September 30, 2018. In addition, studies from the Institute of College Access and Success found that 65% of students graduating in 2017 from public and private, non-profit colleges had student loans, and the average borrower owed $28,650.

Loans can help provide students the funds to complete their educations, but a large debt balance can have serious implications for a graduate’s personal finances. As new graduates begin their careers, servicing this student loan debt can take up a large portion of their budgets. More dollars going to pay down debt means fewer dollars available for other needs, for building an emergency fund, saving for a house, or saving for retirement. (Click here to see some financial tips for new graduates). Parents managing student loan debt can also feel similar constraints. Often, parents in the home stretch toward retirement are paying down debt instead of funding their own retirement plans. 

Of course, every dollar of college expenses paid from savings can mean one less dollar of debt to service. More than that, the longer you have to build college savings, the greater the difference between the out-of-pocket cost of paying for college with debt and the out-of-pocket cost of saving. Take a look at the following chart, which compares the cost of funding education through loans (the principal borrowed and interest) with the cost of saving over 18 years.

In this hypothetical example, the total out-of-pocket amount of $65,800 contributed to the savings plan combined with investment earnings of 6% annually provided the total balance of $117,698. Borrowing that same $117,698 could result in total spending of $168,390 for the loan principal and interest.

What about Financial Aid?

If you’re like many clients thinking about college planning, you may be concerned that your savings and investments will negatively affect your eligibility for college aid. You might be worried that the more you save, the less likely it is that you will receive assistance.

To determine financial aid eligibility, schools use an Expected Family Contribution (EFC), which is a measure of a family’s financial strength. The EFC formula takes into account the incomes and assets of both the student and the parents. While the amount of savings and investment assets are considered, assets – and particularly those held in parents’ names – are a much smaller factor than incomes.  

The EFC formula includes up to 50% of the student’s income and 47% of parents’ income. On the other hand, the EFC considers up to 20% of the student’s assets and only 5.64% of the parents’ non-retirement assets, above a protected amount. Although balances in college savings plans are counted along with other non-retirement assets, the smaller percentage applied to parental assets can allow parents to build some meaningful savings without drastically affecting their student’s EFC. For a closer look at the financial aid process, check out our college planning webinar.

As with other areas of financial planning, college savings involves balancing your goals and priorities in order to most effectively align your resources. Your own unique circumstances will determine the right amounts to save, and when and where to save. If we can be a resource for any of your college planning needs, please let us know!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

5 Financial Tips for Recent College Graduates

Contributed by: Robert Ingram

Congratulations Class of 2019! This is an exciting time for recent college graduates as they begin the next phase in their lives. Some may take their first job or start along their career path, while others may continue their education. Taking this leap into the “real world” also means handling personal finances, a skill not taught often enough in school. Fortunately, by developing good financial habits early and avoiding costly mistakes, new graduates can make time an ally as they set up a solid financial future.

Here are five financial strategies to help get your post-college life on the right path:

1. Have a Spending Plan

The idea of budgeting may not sound like a lot of fun, but it doesn’t have to be a chore that keeps you from enjoying your hard-earned paycheck. Planning a monthly budget helps you control the money coming in and going out. It allows you to prioritize how you spend and save for goals like buying a home, setting up a future college fund for children, and funding your retirement.

Everyone’s budget may be a little different, but two spending categories often consume a large portion of income (especially for younger people early in their careers): housing costs and car expenses. For someone who owns a home, housing costs would include not only a mortgage payment, but also expenses like property taxes and insurance. Someone renting would have the rental cost and any rental insurance.

Consider these general guidelines:

• A common rule of thumb is that your housing costs should not exceed about 30% of your gross income. In reality, this percentage could be a bit high if you have student loans, or if you want more discretionary income to save and for other spending. Housing costs closer to 20% is ideal.

• A car payment and other consumer debt, like a credit card payment, can quickly eat into a monthly budget. While you may have unique spending and saving goals, a good guideline is to keep your total housing costs and consumer debt payments all within about 35% of your gross income.

2. Stash Some Cash for Emergencies

We all know that unexpected events may add unplanned expenses or changes to your budget. For example, an expensive car or home repair, a medical bill, or even a temporary loss of income can cause major financial setbacks.

Start setting aside a regular cash reserve or “rainy day” fund for emergencies or even future opportunities. Consider building up to six months’ worth of your most essential expenses. This may seem daunting at first, but make a plan to save this over time (even a few years). Set goals and milestones along the way, such as saving the first $1,000, then one months’ expenses, three months’ expenses, and so on, until you reach your ultimate goal.

3. Build Your Credit and Control Debt

Establishing a good credit history helps you qualify for mortgages and car loans at the favorable interest rates and gets you lower rates on insurance premiums, utilities, or small business loans. Paying your bills on time and limiting the amount of your outstanding debt will go a long way toward building your credit rating. What goes into your credit score? Click here.

• If you have student loans, plan to pay them down right away. Automated reminders and systematic payments can help keep you organized. To learn how student loans affect your credit score, click here.

• Use your credit card like a debit card, spending only what you could pay for in cash. Then each month, pay off the accumulated balance.

• Some credit cards do have great rewards programs, but don’t be tempted to open too many accounts and start filling up those balances. You can easily get overextended and damage your credit.

4. Save Early for the Long Term

Saving for goals like retirement might not seem like a top priority, especially when that could be 30 or 40 years away. Maybe you think you’ll invest for retirement once you pay off your loans, save some cash, or deal with other, more immediate needs. Well, reconsider waiting to start.

In fact, time is your BIG advantage. As an example, let’s say you could put $200 per month in a retirement account, like an employer 401(k), starting at age 25. Assuming a 7% annual return, by age 60 (35 years of saving), you would have just over $360,000. Now, say you waited until age 35 to begin saving. To reach that same $360,000 with 25 years of saving, you would need to more than double your monthly contribution to $445. Starting with even a small amount of savings while tackling other goals can really pay off.

Does your employer offer a company match on your retirement plan? Even better! A typical matching program may offer something like 50 cents for each $1 that you contribute, up to a maximum percentage of your salary (e.g. 6%). So if you contribute up to that 6%, your employer would add an extra 3% of your salary to the plan. This is like getting an immediate 50% return on your contribution. The earlier you can contribute, the more time these matching funds have to compound. 

5. Get a Little More Educated (about money and finances)

Ok, don’t worry. Forming good financial habits doesn’t require an advanced degree or expertise in all money matters. To build your overall knowledge and confidence, spend a little time each week, even just an hour, on an area of your finances and learn about a different topic.

Start with a book or two on general personal finance topics. You can find reference books on specific topics, from mortgages and debt to investments and estate planning. Information offered through news media or internet searches also can provide resources. And you can even find a blog not too far away (Money Centered Blog).

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

Protect Your Credit by Checking and Correcting These Reports

Contributed by: Josh Bitel

If you’re like most people, you probably don’t think or worry about your credit score unless you’re getting ready to use it. Your credit report provides detailed information about your credit history and may even make or break your applications for loans, mortgages, or credit cards. Errors or false applications bogging down your score could also prevent you from receiving a better interest rate, for example.

Tips for checking your credit report

1. Visit annualcreditreport.com to request your free credit report from your choice of three agencies: Equifax, Experian, and TransUnion. Use all three. You are entitled to a free report from each every 12 months.

2. Set an annual reminder to pull your report with each agency. Stagger these reminders, so you can check your full report once every four months and keep a closer eye on it.

3. Review all information, including the basics – addresses, phone numbers, employers, etc. – to spot any errors or discrepancies.

4. Make sure you recognize all accounts, loans, credit cards, etc. listed on your report.

Fixing or disputing errors

When you notice a problem, first directly contact the credit reporting companies and let them know what information you believe is not correct. You may be asked to provide supporting documentation to dispute a claim as fraud. In some instances, that may be hard, if not impossible, to do. It can be difficult to produce proof that you never opened a credit card, for example. Still, putting forth your best effort is well worth your time.

Second, contact the fraud/security department at the company that reported the fraudulent information. They will send dispute paperwork for you to submit with supporting documentation. Inform them, in writing, that the account was opened or charged without your knowledge, explain why you dispute the information and are asking that it be removed or corrected. Keep a paper trail for yourself.

Also, verify whether the debt has been sold to a collections agency. If it has, make sure they will notify the collections agency that the debt is in dispute. And brace yourself! It could take 90 days (or more!) before you see a resolution. Set a reminder to follow up if you have not heard anything within the time promised. Once you have received confirmation that the fraudulent claim has been discharged, make sure they have also closed the account in your name.

Haggling with credit reporting agencies can be a pain, but the work is a necessary evil. Misreported information could lead to your credit score suffering by as much as 100 points, and unless you review and monitor your reports on a consistent basis, you’ll never know.

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®

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Repurposed from July 23, 2015 - Previous blog

Why Retirees Should Consider Renting

Contributed by: Nick Defenthaler, CFP®

“Why would you ever rent? It’s a waste of money! You don’t build equity by renting. Home ownership is just what successful people do.”

Sound familiar? I’ve heard various versions of these statements over the years, and every time I do, the frustration makes my face turns red. I guess I don’t have a very good poker face!

As a country, we have conditioned ourselves to believe that homeownership is always the best route and that renting is only for young folks. If you ask me, this philosophy is just flat out wrong and shortsighted.

Below, I’ve outlined various reasons that retirees who have recently sold or are planning to sell might consider renting:

Higher Mortgage Rates

• The current rate on a 30-year mortgage is hovering around 4.6%. The days of “cheap money” and rates below 4% have simply come and gone.

Interest Deductibility

• Roughly 92% of Americans now take the standard deduction ($12,200 for single filers, $24,400 for married filers). It’s likely that you’ll deduct little, if any, mortgage interest on your return.

Maintenance Costs

• Very few of us move into a new home without making changes. Home improvements aren’t cheap and should be taken into consideration when deciding whether it makes more sense to rent or buy.

Housing Market “Timing”

• Home prices have increased quite a bit over the past decade. Many experts suggest homes are fully valued, so don’t bank on your new residence to provide stock-market-like returns any time soon.

Tax-Free Equity

• In most cases, you won’t see tax consequences when you sell your home. The tax-free proceeds from the sale could be a good way to help fund your spending goal in retirement.  

Flexibility

• You simply can’t put a price tag on some things. Maintaining flexibility with your housing situation is certainly one of them. For many of us, the flexibility of renting is a tremendous value-add when compared to home ownership.

Quick Decisions

• Rushing into a home purchase in a new area can be a costly mistake. If you think renting is a “waste of money” because you aren’t building equity, just look at moving costs, closing costs (even if you won’t have a mortgage), and the level of interest you pay early in a mortgage. Prior to buying, consider renting for at least two years in the new area to make darn sure it’s somewhere you want to stay.

Every situation is different, but if you’re near or in retirement and thinking about selling your home, I encourage you to consider all housing options. Reach out to your advisor as you think through this large financial decision, to ensure you’re making the best choice for your personal and family goals.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

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Any opinions are those of Nick Defenthaler, CFP® and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Are You Retirement Ready?

Contributed by: Sandra Adams, CFP®

In our work with clients, one of the most common questions we get is, “How will we know when we are ready (and able) to retire?”  That can be a tricky question, because there are two sides to being ready for the next phase of your life – the technical side and the personal side.  While certainly you need to be financially secure for the next decades of your life, you also need to be comfortable with the transition from your life as a career individual to what you now wish to become in your next phase – and that is not as easy as it sounds.

From a financial-readiness perspective, many clients target age, monetary or benefit milestones to help them determine when they will be ready to retire:

• “When I have $1 million in assets saved, I will be ready to retire.”

• “When I am eligible to collect Social Security, I will be ready to retire.”

• “When I am eligible to collect my company pension OR I have reached my XX anniversary with my company, I will be ready to retire.”

• “When I am eligible to receive Medicare, I will be ready to retire.”

The real answer is, some or all of these may be true for you, and some or all of these may be false.Every client situation is different and no general guideline can determine whether or not you are financially ready to retire. Unfortunately, it is far more complicated than that. There are numerous financial factors that go into determining financial readiness.Let’s take a deeper look into the issues.

Financial Readiness Issues:

Retirement Savings:

Do you have enough saved?

• What might your other retirement income sources be (Social Security, Pensions, etc.)

• How much income will you need (what are your fixed costs versus lifestyle wants in retirement), and

• What are your longevity expectations (how long might you expect to live based on health, family history, etc.—expect it will be longer than you think!).

Where are your savings?

• Do you have retirement savings outside of retirement plans?

• Do you have some after-tax and reserve cash/emergency reserve savings?

• Do you have different types of accounts to provide tax diversification going into retirement (i.e. IRAs/401(k)s, ROTH IRAs, after tax investment accounts)?

Debt:

Have you paid down your debt or do you have a plan to be as debt free as possible by the time you retire?  This will allow you to control your retirement income for other fixed expenses and wants; it is desirable to have as little debt/fixed expenses as possible going into retirement as possible.

Retirement Income:

A large part to being retirement ready is understanding your retirement income sources, options and strategies and using them to your best advantage.  Take the time to consult with your planner to choose the option that works best for you and your family circumstance.

• Pensions: Do you understand all your options, including the income options available to your spouse as a survivor upon your death.  We find that in many cases it makes sense to choose an option that includes a lifetime income option for you with at least a 65% survivor income benefit for your spouse if you were to die first.

• Social Security: While many are under the false impression that because you are allowed to take Social Security benefits as early as age 62, they should, we might recommend otherwise.  For most individuals now approaching Social Security claiming age, Full Retirement Age for claiming Social Security is now age 66 and delaying benefits until age 70 results in an 8% per year increase in benefits.  Knowing and understanding the Social Security benefits, rules and strategies that can be employed, especially for married couples, to ensure the largest lifetime benefit can be an added supplement to long-term retirement income. We find that our most successful married couples in retirement employ a strategy where the lower Social Security earner draws at Full Retirement age while the higher Social Security earner waits to draw at age 70, insuring the highest possible Social Security benefit for the spouse that lives the longest.

Investments:

Preparing for retirement involves making appropriate adjustments to your investment strategy.  You should work with your financial planner to adjust your asset allocation to one that is appropriate for your new goals and time horizon. We find that our most successful retirees tend to have asset allocations ranging from 40% Bond/60% Stock to 50% Bond/50% Stock.

Insurance:

• For those retiring before age 65 (Medicare eligibility) and without retiree healthcare, finding health insurance to bridge them to Medicare is a must. 

• Retirement readiness does require addressing the issue of Long Term Care funding Having a plan, no matter what your choice, is something that must be done before retirement.

Estate Planning:

While not exactly monetary, having your estate planning documents (Durable Powers of Attorney, Wills and possibly Trust or Trusts in place) updated prior to retirement is a good idea.Part of this is making sure accounts are titled properly, beneficiaries are updated, and account holdings/locations and management are as simplified as possible going into your last phase of life.

Once you have determined your financial retirement readiness, you need to determine your personal retirement readiness, which may be even more difficult for many folks.  Why?  Many have spent the majority of their lifetimes to this point building careers that established them with titles, credentials and stature. They built reputations, networks, social and business circles and were well respected because of the work that they have done.  And now they are moving from that phase of their lives to another and that means starting over.  What will they be now?  What will their lives mean?  And to whom?

Until you are ready to start the next phase of your life knowing your purpose – what you want to wake up for every day – you are likely not ready for retirement.  Those that have not given the thought to their mission, values, and their “why” for their next phase will be left feeling lost and will likely fail at retirement and find themselves wanting to go back to their former lives.

How can you find your purpose?

• Ask yourself what is most important to you? (family, friends, spirituality, charity,etc)

• Ask yourself what are your life priorities? (family, health, knowledge, etc.)

• Ask yourself what you want to let go of and what you want to give yourself to.

• Realize that the rest of your life can be the best of your life if you embrace it with an open mind and enthusiasm.

• Consider reading the book “Purposeful Retirement” by Hyrum Smith if you need more help!

“Am I ready to retire?”  It is not a simple question and there is no simple answer.  It may take months or years to answer all of the questions and make all of the preparations.  If you think that retirement is in your not too distant future, the time is NOW to start planning.  Don’t let retirement sneak up on you…work with your financial planner and be Retirement Ready!

Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

The Mystery Surrounding Public Service Loan Forgiveness

Contributed by: Kali Hassinger, CFP®

The Public Service Loan Forgiveness program started in 2007, and in the fall of 2017, the first round of borrowers became eligible for possible loan forgiveness.  This program, however, has been the subject of confusion and frustration by those who were hoping to qualify, and, in some cases, planning for the reprieve of student loan forgiveness.  So confusing that the recent federal spending plan earmarked $350 million to help those who would have been eligible to receive loan forgiveness but may have unknowingly enrolled in the wrong repayment plan.  The Public Service Loan Forgiveness (PSLF) rules are stringent and require that the qualifying conditions are met for a period of 120 monthly payments, or 10 years!  Even for those who followed all of the rules and have been submitting the correct documents,

If you are hoping to qualify for Public Service Loan Forgiveness, you'll want to be sure that your loans and repayment plan are eligible under the program. 

Listed below are some of the requirements that you should be sure are in order.

1. You must work full time for a qualifying Employer in a qualifying role.

• Most jobs working for a state, local, or federal government qualify.

• Non-profit employers that qualify as tax-exempt under Section 501(c)(3) are eligible.

*Even if you think your employer and role qualify, you should complete and submit the Public Service Forgiveness Employment Certification Form on an annual basis and every time you switch employers

It can be accessed online:  https://studentaid.ed.gov/sa/sites/default/files/public-service-employment-certification-form.pdf 

2. Only Direct Loans are eligible for Public Student Loan Forgiveness.  There are four types of Direct Federal Student Loans:

• Direct Subsidized – These loans are for undergraduate students who demonstrate a financial need. The U.S. Department of Education pays the accrued interest while you're still in school, for the first six months after you graduate, and during periods of deferment.

• Direct Unsubsidized – These loans are for undergraduate and graduate students, but financial need isn't required to qualify. These loans accrue interest while you're in school and during periods of deferment.

• Direct PLUS Loans – These loans are for graduate students and parents of undergraduate students.

• -Direct Consolidation Loans – This loan allows you to combine all of your eligible federal student loans into a single loan.

3. You must be enrolled in an income-based federal repayment plan.  The required payments are based on what is deemed to be your "Discretionary" income in comparison to the current poverty level, and payments are updated on an annual basis.

• Income-Based Repayment Plan (IBR Plan) – Monthly payments are usually 15% of your discretionary income, but they can be as low as 10%. Loan terms can be 20 or 25 years.

• Income-Contingent Repayment Plan (ICR Plan) – Payments under this plan are the lesser of 20% of your monthly discretionary income or your monthly payment on a 12-year repayment term with an income factor calculation. Loan terms under this plan are 25 years.

• Pay as you Earn Repayment Plan (PAYE Plan) – Monthly payments are limited to 10% of your discretionary income. To qualify, you must have a partial financial hardship. The loan term is 20 years.

• Revised Pay as your Earn Repayment Plan (REPAYE Plan) – Under this plan, your monthly payments are equal to 10% of your discretionary income. Undergraduate loans have a 20-year term, and graduate loans have a 25-year term.

If you've gotten through this list and you think you still may qualify, there are a couple of additional items that you'll want to keep in mind. 

• The 120 qualifying payments don't need to paid consecutively. That means if you work for a non-qualifying employer for a bit, you won't lose credit for past payments that qualified.

• The income-based payment amounts are affected by your Adjusted Gross Income on your tax return. If you are married and file taxes separately to keep your payments low, this strategy could increase your family's tax obligation.

• If your income-based payments are suppressed low enough, they may be less than the amount of interest that accrues. If you leave the plan or no longer qualify for the repayment plan, the unpaid interest is capitalized and added to your loan's principal balance.

• Making additional and early payments won't help you in the PSLF program. The program requires monthly payments, and you can only receive credit for one payment per month. If you do want to make additional payments, contact your loan servicer to be sure that the extra amount is credited to cover future monthly payments.

Even with all of the variables that we've covered, some additional rules and qualifications can be incorporated into the program.  It's especially important to check with FedLoan Servicing throughout the process and at least on an annual basis.  Be sure that you are weighing all of the pros and cons of the program, and as with any financial strategy, staying organized is essential!

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

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Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Kali Hassinger, CFP© and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. You should discuss any tax or legal matters with the appropriate professional.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Helping Older Relatives? How to Help Without Jeopardizing Your Own Finances

Contributed by: Matthew E. Chope, CFP®

Helping elderly family members with financial issues can be tricky.  In many cases, you may feel an obligation to assist, especially if the older adult is on a fixed budget and has limited financial resources. In fact, a recent MetLife study found that 68% of American caregivers have been found to spend their own money to support the needs of their older adult relatives, which drained funds that they had planned to use for their own financial independence. If you sense that an elder you care about is on a trajectory for financial ruin, what can you do to help? 

How do you step in and assist without putting your own financial security in jeopardy? 

The first thing to do is to gather some information to get a better sense of your loved one’s financial picture.  You’ll want to have an understanding of their assets and debts, and their budget:  their sources of income and their expenses. With the understanding of what income and what bills and expenses the older adult is dealing with, you can better connect with resources that may be able to assist them.

A client (let us call him John) told me a story recently about how he helped his older sister in-law (let us call her Bonnie) make some difficult decisions.  Bonnie was not a high-income earner in her working years. Although she was able to purchase her home and pay off her mortgage; she didn’t save much, and she had now depleted her savings.  At age 75, the reverse mortgage that Bonnie had put in place, in addition to her minimal Social Security income were not enough to keep up with her rising costs for health care (Medicare premiums and prescription drug co-pays), property taxes, insurances and utilities.

Here are the actions John took to help Bonnie with her situation:

1. John discovered that the county would allow her to apply for a reduced or total removal of real estate taxes through the property tax poverty exemption. As a result, Bonnie received a full exemption from her property taxes. Each county has a program for low-income folks - you need to complete an application and appear before a board of review annually. Here is a link with more information: https://www.michigan.gov/documents/treasury/Bulletin7of2010_322157_7.pdf

2. John contacted low-income home energy assistance (LIHEAP) and received a reduction in electricity and heating costs for Bonnie. https://www.benefits.gov/benefits/benefit-details/1545

3. John contacted Human ARC Premium Assist about receiving a significant reduction in Medicare Part B premiums; as an added bonus, they also provided assistance with Bonnie’s prescription drug costs. https://screening.humanarc.com/PremiumAssist

4. While online at the premium assistance site, John found more information about special coverages for things like medical alert, ambulance/transportation assistance, and a 1.25% copay for prescriptions.

5. John contacted Social Services about food stamps and Bonnie is now receiving about $97 more a month through a program called SNAP. http://www.feedingamerica.org/need-help-find-food/

6. For Bonnie’s auto insurance, John pays the whole year upfront and Bonnie pays John back monthly so she can take advantage of the discount for paying the premium annually.

7. John pays Bonnie’s utility bills via automatic payments from his account to avoid late fees, which in the past were a wasteful and unnecessary expense. Bonnie also reimburses John monthly for this.

8. To save money on her cell phone bill, John added Bonnie’s phone line to his plan as an additional line.

9. Bonnie was willing to give up cable TV – John found that an inexpensive antenna works fine and they were able to rid Bonnie of her monthly cable bill.

With a little bit of creativity and resourcefulness, John was able to assist Bonnie while also preserving his own financial resources.  If you or someone you know is in the position of assisting an older adult and needs help putting together a strategy, please let us know.  We are here to help!

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.

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This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. The case study provided is hypothetical and has been included for illustrative purposes only. Individuals cases will vary. Links are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax, legal, or mortgage issues, these matters should be discussed with the appropriate professional. 

Tax Reform Series: Changes to the Mortgage Interest Deduction (including home equity loans/LOC implications)

Contributed by: Laurie Renchik, CFP®, MBA

The Tax Cuts and Jobs Act (TCJA) is now officially law. We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

Washington has been busy and after many twists and turns sweeping tax reform was signed into law on December 22, 2017.  There are key changes for homeowners regarding the mortgage and home equity line of credit (HELOC) interest deductions.

Mortgage

If you own a home, mortgage interest is still deductible. The debt cap of deductibility, however, has been lowered.  The new cap limits interest deductibility to the first $750,000 of debt principal.  Debt principal refers to acquisition indebtedness or loans used to acquire, build, or substantially improve a primary residence.  The new $750,000 cap is a reduction from $1,000,000 and an additional $100,000 of home equity debt. 

• The reduction to $750,000 expires December 31, 2025 and reverts back to $1,000,000 beginning in 2026.

• Mortgage debt incurred before December 15, 2017 is grandfathered under the $1,000,000 cap

• In the future, a mortgage refinance for debt incurred prior to December 15, 2017 will retain the $1 million debt limit (but only for the remaining debt balance and not any additional debt). In addition, any houses that were under a binding written contract by December 15th to close on a principal residence purchased by January 1, 2018 (and actually close by April 1st) will be grandfathered.

Home Equity Line of Credit (HELOC)

Home equity lines of credit give homeowners the ability to borrow or draw money using equity in the home as collateral.  New restrictions mean that home equity loan interest is not necessarily eligible for a deduction. 

While you may have read that interest on HELOC’s is no longer deductible, this is only if the loans are cash out or for purposes other than home purchase or improvement.  It’s important to note that deductibility is not based on whether the loan is a home equity loan or home equity line of credit. Instead, the determination is based on how the proceeds are used.

• If the money is used to consolidate debt, pay for college or used for any other personal spending not associated with home acquisition or substantial improvement, the interest is not deductible; without grandfathering.

• Interest on a HELOC up to the total $750,000 cap that is used to build an addition or substantially improve the home is deductible for taxpayers that itemize.

We are here to assist in any way we can.  This summary of mortgage and HELOC interest deductibility changes highlights key areas to keep in mind for 2018 tax planning.  If you have any questions regarding your personal situation, don’t hesitate to contact us.

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc.® In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie is a member of the Leadership Oakland Alumni Association and is a frequent contributor to Money Centered.

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Check out our other Tax Reform articles:

Changes to Federal Income Tax Brackets

Changes to Standard Deduction, Personal Exemption, Misc. Deductions, and the Child Credit

Changes to Investments and the Financial Market

Changes to State and Local Tax Deduction

Changes to Estate Tax Planning in 2018 and Beyond

Changes to Charitable Giving and Deductions

Changes to Medical Deductions

Changes to Business & Corporate Tax, and Pass-Through Entities

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Laurie Renchik and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Raymond James Financial Services and your Raymond James Financial Advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs.

Investing vs. Paying Off Debt

Contributed by: Matt Trujillo, CFP®

You can use a variety of strategies to pay off debt, many of which can cut not only the amount of time it will take to pay off the debt but also the total interest paid. But like many people, you may be torn between paying off debt and the need to save for retirement. Both are important; both can provide a more secure future. If you're not sure you can afford to tackle both at the same time, which should you choose?

There's no one answer that's right for everyone, but here are some of the factors you should consider when making your decision.

Rate of investment return versus interest rate on debt

Probably the most common way to decide whether to pay off debt or to make investments is to consider whether you could earn a higher after-tax rate of return by investing than the after-tax interest rate you pay on the debt. For example, say you have a credit card with a $10,000 balance on which you pay nondeductible interest of 18%. By getting rid of those interest payments, you're effectively getting an 18% return on your money. That means your money would generally need to earn an after-tax return greater than 18% to make investing a smarter choice than paying off debt. That's a pretty tough challenge even for professional investors.

And bear in mind that investment returns are anything but guaranteed. In general, the higher the rate of return, the greater the risk. If you make investments rather than pay off debt and your investments incur losses, you may still have debts to pay, but you won't have had the benefit of any gains. By contrast, the return that comes from eliminating high-interest-rate debt is a sure thing.

An employer's match may change the equation

If your employer matches a portion of your workplace retirement account contributions, that can make the debt versus savings decision more difficult. Let's say your company matches 50% of your contributions up to 6% of your salary. That means that you're earning a 50% return on that portion of your retirement account contributions.

If surpassing an 18% return from paying off debt is a challenge, getting a 50% return on your money simply through investing is even tougher. The old saying about a bird in the hand being worth two in the bush applies here. Assuming you conform to your plan's requirements and your company meets its plan obligations, you know in advance what your return from the match will be; very few investments can offer the same degree of certainty. That's why many financial experts argue that saving at least enough to get any employer match for your contributions may make more sense than focusing on debt.

And don't forget the tax benefits of contributions to a workplace savings plan. By contributing pretax dollars to your plan account, you're deferring anywhere from 10% to 39.6% in taxes, depending on your federal tax rate. You're able to put money that would ordinarily go toward taxes to work immediately.

Your choice doesn't have to be all or nothing

The decision about whether to save for retirement or pay off debt can sometimes be affected by the type of debt you have. For example, if you itemize deductions, the interest you pay on a mortgage is generally deductible on your federal tax return. Let's say you're paying 6% on your mortgage and 18% on your credit card debt, and your employer matches 50% of your retirement account contributions. You might consider directing some of your available resources to paying off the credit card debt and some toward

your retirement account in order to get the full company match, and continuing to pay the tax-deductible mortgage interest.

There's another good reason to explore ways to address both goals. Time is your best ally when saving for retirement. If you say to yourself, "I'll wait to start saving until my debts are completely paid off," you run the risk that you'll never get to that point, because your good intentions about paying off your debt may falter at some point. Putting off saving also reduces the number of years you have left to save for retirement.

It might also be easier to address both goals if you can cut your interest payments by refinancing that debt. For example, you might be able to consolidate multiple credit card payments by rolling them over to a new credit card or a debt consolidation loan that has a lower interest rate.

Bear in mind that even if you decide to focus on retirement savings, you should make sure that you're able to make at least the monthly minimum payments owed on your debt. Failure to make those minimum payments can result in penalties and increased interest rates; those will only make your debt situation worse.

Other considerations

When deciding whether to pay down debt or to save for retirement, make sure you take into account the following factors:

• Having retirement plan contributions automatically deducted from your paycheck eliminates the temptation to spend that money on things that might make your debt dilemma even worse. If you decide to prioritize paying down debt, make sure you put in place a mechanism that automatically directs money toward the debt--for example, having money deducted automatically from your checking account--so you won't be tempted to skip or reduce payments.

• Do you have an emergency fund or other resources that you can tap in case you lose your job or have a medical emergency? Remember that if your workplace savings plan allows loans, contributing to the plan not only means you're helping to provide for a more secure retirement but also building savings that could potentially be used as a last resort in an emergency. Some employer-sponsored retirement plans also allow hardship withdrawals in certain situations--for example, payments necessary to prevent an eviction from or foreclosure of your principal residence--if you have no other resources to tap. (However, remember that the amount of any hardship withdrawal becomes taxable income, and if you aren't at least age 59½, you also may owe a 10% premature distribution tax on that money.)

• If you do need to borrow from your plan, make sure you compare the cost of using that money with other financing options, such as loans from banks, credit unions, friends, or family. Although interest rates on plan loans may be favorable, the amount you can borrow is limited, and you generally must repay the loan within five years. In addition, some plans require you to repay the loan immediately if you leave your job. Your retirement earnings will also suffer as a result of removing funds from a tax-deferred investment.

• If you focus on retirement savings rather than paying down debt, make sure you're invested so that your return has a chance of exceeding the interest you owe on that debt. While your investments should be appropriate for your risk tolerance, if you invest too conservatively, the rate of return may not be high enough to offset the interest rate you'll continue to pay.

Regardless of your choice, perhaps the most important decision you can make is to take action and get started now. The sooner you decide on a plan for both your debt and your need for retirement savings, the sooner you'll start to make progress toward achieving both goals.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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You should discuss any tax or legal matters with the appropriate professional.