Real Estate…A Terrible Investment?

The title might take many of you by surprise and this topic is not to discourage homeownership but is more geared to explaining why your home (and possibly other properties) may not be the best investment or why your home should not be viewed as an investment.

The primary focus of this article will be on your primary residence and not on rental properties. We are also going to assume that this is just an average community without any additional factors such as a gold rush, or a green rush, or an establishment as the next Silicon Valley. In those circumstances, real estate can outpace the national average. Do not forget the three things that matter in real estate is location, location, location!

The ability to use leverage (borrow money from the bank) is what attracts people to invest in real estate. When you buy the home you only have to put down 20% or less in some cases and the bank gives you a loan to pay on over the next 30 years (or whatever term you select). For example, purchasing a home for $500,000 in a traditional scenario requires 20% down ($100,000) and the bank provides a loan over 30 years for $400,000. With rates near historic lows (2.75%) the payment for this 30-year loan is about $2,041 per month.

The downside to using leverage is that it has a cost. Looking at the loan above ($400,000 loan at 2.75% interest for 30 years) you would pay over $187,000 in interest over the life of the loan! To put this another way, instead of buying the home at $500,000 you are paying $687,000 for the home ($500k purchase price + $187k interest paid). Owning a home is expensive and has many additional costs besides the loan. With a home, you have to pay property taxes, homeowner insurance, repairs, and potentially other costs like homeowner’s association (HOA) or mortgage insurance if your down payment is less than 20%. Below are the estimated costs for a $500,000 home in Orange County:

Source: Redfin

What we see is that the true cost of homeownership is much higher than we realize. The example above does not take into account any upgrades or repairs and maintenance the home may need as well. With the costs for owning a home so high, this lowers the actual investment return of the home.

We all know that home prices go up over time, but many people are not aware that the primary driver for the increase in home prices has been inflation.  If you look at the chart below, it shows since March 1999 until now real estate home prices (1) have grown 131.37% and stocks (2) have grown 342.27%.

Source: Bloomberg

Another factor that needs to be considered when looking into real estate as an investment is liquidity. Other investments like the equity and bond markets provide liquidity and you can have access to your money quickly. For real estate, this is not necessarily the case and it can be difficult to get your money back. If major employers move out of the area, you cannot quickly sell your home before home prices drastically shift downward.

Please understand we are not telling you to not buy a home. Homeownership is one of the biggest accomplishments one can achieve and provides security and stability for you and your family. We just caution against considering your primary residence to be considered an investment like many people recommend. Real estate is good as part of an overall portfolio but can be done in many ways in a more liquid manner. Please feel free to contact us to discuss how this article impacts your circumstances.

  1. U.S. Existing-Home Sales, National Association of Realtors (www.nar.realtor.com)
  2. The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.

Disclosure:

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Benefit Financial Services Group (“BFSG”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from BFSG. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BFSG is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of BFSG’s current written disclosure Brochure discussing our advisory services and fees is available upon request

BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Monthly Economic Summary

We know trying to keep up with everything going on in the market is difficult. We do this full time with several experienced professionals to help make sure we can get as much information as possible to help us try and make the best investment decisions for our clients. Below is a monthly summary we will be doing going forward to help you track some of the most important data points in one place. As always, if you have any questions or want to discuss more in-depth don’t hesitate to give us a call!

Sources:

  1. Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov)
  2. Sources: J.P. Morgan Asset Management – Economic Update; U.S. Bureau of Labor Statistics (www.bls.gov)
  3. Sources: J.P. Morgan Asset Management – Economic Update; Federal Open Market Committee (www.federalreserve.gov)
  4. Indices:
    • The Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
    • The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
    • The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
    • The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure:

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Benefit Financial Services Group (“BFSG”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from BFSG. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BFSG is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of BFSG’s current written disclosure Brochure discussing our advisory services and fees is available upon request.

BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

How President Biden Could Impact Social Security and Medicare

It is no secret that both Social Security and Medicare are underfunded, and changes are needed. This is a common concern that we hear from many clients approaching retirement. These programs are vital to retirees and it is clear that President Biden has some clear plans to help these programs remain solvent and also provide some benefit expansions.

Social Security

During his campaign, President Biden had a clear plan for Social Security. Below are some of the highlights:

  • Add a new tier for payroll tax contributions for incomes over $400,000. The current tax is 6.2% that is paid by both the employee and employer for a total of 12.4% on income up to $142,800.
  • Offer credits for Social Security to caregivers for time spent out of the workforce. This is designed to specifically help women and deal with the current gender gap in benefits.
  • Change the Cost-of-Living Adjustment (COLA) to be linked to CPI-E. This should increase the annual COLA that individuals would receive on their benefits.
  • Currently, the surviving spouse gets the higher of the two Social Security benefits, which can cause a large decrease in the benefits they receive going forward. To help survivors there is a proposal to have the surviving spouse receive 75% of the combined benefits, so long as the new payment does not exceed the benefit received by a two-earner couple with average career earnings.
  • Phase in a bonus equal to 5% of the average benefit to beneficiaries who had collected payments for 20 years.

Medicare

There are many parts to Medicare. The focus on the plan changes is on Part A (covers hospitalizations) as it is the most underfunded and does not have the same revenue streams as the other parts of Medicare.

  • Decrease the age for Medicare to age 60 or lower to expand the benefits.
  • Change Part A funding to general revenue so it would be funded like the other parts of Medicare.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

The 5 Rules to Building Wealth

“How do I get rich?” This is one of the most common questions we get from friends, family, and clients.

There is no set definition of ‘being rich’. There is not a one-size-fits-all solution. Everyone has a different situation and financial goal. Also, it is important to mention that becoming rich or building wealth takes time – it is not an overnight process. Well…unless you win the lottery. But let us be realistic. You likely are not winning the lottery. You could, but chances are you should be working on Plan B.

There are some common rules that most financially successful people follow that have helped them achieve their goals:

1. The first rule is quite simple. You must earn it. If you want money, you must work for it. For some, that means a second job. For others, it means you must get a job to pay for school to open the door for a higher paying job. We are in the middle of a pandemic, and we understand that it is easier said than done. But if you cannot land a job, you can always do side projects or provide a service for someone who is not able to do the task on their own. It might not be a long-term fix, but it is a good temporary fix. Where there is a will, there is a way.

2. The second rule is without a doubt much harder than the first. You must save and invest your money wisely. If you spend everything you earn, you will not get the opportunity to let your money work for you. The power of compounding interest is a marvelous thing that you may not be taking advantage of. To get to the second rule and the following rules, you must have rule one checked off.

3. For the third rule, you must control your spending. Yes, this is the cousin of saving. We can not tell you not to buy that fancy watch or that lottery scratch-off ticket. If you can afford something that you want, sure you can go buy it. But, do not spend money you do not have yet. Most people who are well off, try to get the most bang for their buck. That means to maximize the benefits of what you are purchasing while keeping the costs low.

4. If you have gotten to rule four, you are on the right track. What you must do now is to minimize your tax liabilities. The more you pay in taxes, the less you have to save and invest. The power of compounding interest works better when you have a large nest egg, to begin with. How can you minimize your taxes? Well, you should be taking advantage of tax-deferred investment accounts. You can do that through a retirement account through your employer such as a 401(k) or a 403(b). You also can use an IRA. There are some rules regarding these retirement vehicles, but more on that in another discussion.

5. The fifth rule is to surround yourself with like-minded people. If your current group of friends can’t wait until payday to go blow that paycheck at the bars, you may want to reevaluate who you spend your time with. Spending time with people who have good financial habits reduces the temptation to overspend and encourages the right financial habits. This goes for marriage, too. Finances are the number one cause of divorce, so ensure you and your spouse are on the same page. No one wants to go through a divorce, so have honest conversations and seek help from a financial planner or counselor if needed.

Remember this is not a sprint. This is a marathon; there is no rush. Set small goals, achieve those goals before moving on to the next bigger goal. It can be done, so remain positive, and take care of your health. It is hard to generate income when you are not able to work. We will leave you with this: “How do you eat an elephant?” … “One bite at a time.”

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

How Women are Different from Men, Financially Speaking

Everyone wants financial security. But women often face unique obstacles that can affect their ability to achieve it. Let’s look at some of these potential headwinds.

Women have longer life expectancies. Women, on average, live 5 years longer than men (1). A longer life expectancy presents several financial challenges for women:

  • Women will need to stretch their retirement dollars further;
  • Women are more likely to need some type of long-term care, and may have to face some of their healthcare needs alone; and
  • Married women are likely to outlive their husbands, which means they could have ultimate responsibility for the disposition of the marital estate.

Women generally earn less and have fewer savings. According to the Bureau of Labor Statistics (2), within most occupational categories, women who work full-time, year-round, earn only 81% (on average) of what men earn. This wage gap can significantly impact women’s overall savings, Social Security retirement benefits, and retirement savings.

The dilemma is that while women generally earn less than men, they need those dollars to last longer due to a longer life expectancy. With smaller financial cushions, women are more vulnerable to unexpected economic obstacles, such as a job loss, divorce, or single parenthood.

Women are more likely to be caregivers. Statistics show that the majority of caregivers are women (3). Of the more than 40 million Americans serving as caregivers to their loved ones, 60% are women and that number has increased during the global pandemic. Often times being a caregiver means having to work part-time or leave the workforce. Over time, being a caregiver can have significant financial implications, such as,

  • Loss of income, employer-provided health insurance, retirement benefits, and other employee benefits;
  • Less savings;
  • Potentially lower Social Security retirement benefits;
  • Difficulty with career advancement or reentering the workforce; and
  • Increased financial vulnerability in the event of divorce or death of a spouse.

Women are more likely to be living on their own. Whether through choice, divorce, or the death of a spouse, more women are living on their own. This means they’ll need to take sole responsibility for protecting their income and making financial decisions.

Women need to protect their assets. As women continue to earn money, become the main breadwinners for their families, and run their own businesses, it’s vital that they take steps to protect their assets, both personal and business. Without an asset protection plan, a woman’s wealth is vulnerable to taxes, lawsuits, accidents, and other financial risks that are part of everyday life. But women may be too busy handling their day-to-day responsibilities to take the time to implement an appropriate plan.

Steps women can take

Today, women have more financial responsibility for themselves and their families. So it’s critical that women know how to save, invest, and plan for the future. Here are some things women can do:

  • Take control of your money. Create a budget, manage debt and credit wisely, set and prioritize financial goals, and implement a savings and investment strategy to meet those goals.
  • Become a knowledgeable investor. Learn basic investing concepts, such as asset classes, risk tolerance, time horizon, diversification, inflation, the role of various financial vehicles like 401(k)s and IRAs, and the role of income, growth, and safety investments in a portfolio. Look for investing opportunities in the purchasing decisions you make every day.
  • Plan for retirement. Save as much as you can for retirement. Estimate how much money you’ll need in retirement, and how much you can expect from your savings, Social Security, and/or an employer retirement plan. Understand how your Social Security benefit amount will change depending on the age you retire, and how years spent out of the workforce might affect the amount you receive. At retirement, make sure you understand your retirement plan distribution options, and review your portfolio regularly. Also, factor the cost of health care (including long-term care) into your retirement planning, and understand the basic rules of Medicare.
  • Advocate for yourself in the workplace. Have confidence in your work ability and advocate for your worth in the workplace by researching salary ranges, negotiating your starting salary, seeking highly visible job assignments, networking, and asking for raises and promotions. In addition, keep an eye out for new career opportunities, entrepreneurial ventures, and/or ways to grow your business.
  • Seek help to balance work and family. If you have children and work outside the home, investigate and negotiate flexible work arrangements that may allow you to keep working, and make sure your spouse is equally invested in household and child-related responsibilities. If you stay at home to care for children, keep your skills updated to the extent possible in case you return to the workforce, and stay involved in household financial decision making. If you’re caring for aging parents, ask adult siblings or family members for help, and seek outside services and support groups that can offer you a respite and help you cope with stress.
  • Protect your assets. Identify potential risk exposure and implement strategies to reduce that exposure. For example, life and disability insurance is vital to protect your ability to earn an income and/or care for your family in the event of disability or death. In some cases, more sophisticated strategies, such as other legal entities or trusts, may be needed.
  • Create an estate plan. To ensure that your personal and financial wishes will be carried out in the event of your incapacity or death, consider executing basic estate planning documents, such as a will, trust, durable power of attorney, and health-care proxy.

It is important for women to educate themselves about finances, make financial decisions, seek professional help when needed, and implement plans to ensure that they and their families will have financially secure lives.

Sources

  1. NCHS Data Brief, Number 355, January 2020
  2. U.S. Bureau of Labor Statistics, Highlights of women’s earnings in 2018, Report 1083, November 2019
  3. AARP, The Trickle Down Effect of Caregiving on Women, November 2018

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.