Brian Michaud
The Michaud Letter Your Home and Social Security
What IF… what you thought you knew about money, turned out NOT to be true? When would you want to know?
The purpose of this conversation is to go through conventional (traditional) financial strategies and QUESTION the actual implications those strategies will have on your financial future.
Because each client’s specific situation is unique, I will provide a 100,000 foot overview, when covering a couple topics.
I encourage you to grab a pen or highlighter and highlight parts of this booklet that pique your interest. When you are finished contact me to schedule a time to meet and review what you’ve highlighted. You may have MANY “AHA Moments” when you read this book (and that’s a good thing). I encourage you to write them down so you can reference them when we meet.
Brian Michaud
CEO and Founder of Encompass
Paying off your house
Let’s talk about access to your collateral (equity) in your home. I would rather have a million dollars in a non-traditional strategy than a million dollars of equity in my personal residence. Here is why:
It may be hard to get real money from equity in a home while you live in it. If you sell your house for a price above what you owe, you will receive that equity (balance) in cash. There is a chance, you may be able to get a bank (or lender) to loan you their money, which will be collateralized by the equity position in your home.
To receive an equity loan, against your primary home, you will need to do the following:
- Be in an equity position.
- Have a satisfactory credit score.
- Have a complete appraisal on your property for more than you’re asking for.
- Wait for 30-60 days.
- Obtain approximately 30 signatures on various forms.
- Have to make timely payments or your credit score is affected.
- Have a strong history of stable employment.
Question about a home mortgage.
Q: Is there an advantage to having a mortgage on your home?
A: Yes. The I.R.S. allows for every tax payer to deduct the interest paid on your mortgage.
You believe that taxes are going to go up (meaning you will be in a higher tax bracket). However, when you pay off your home, you would have lost one of the last tax deductions you could have had.
There is absolutely nothing wrong with paying off your home (or is there???). A few things that could possibly hinder the access to the cash (equity) may be limited by things beyond your control.
- If you have just retired, you may have little proof (to a financial institution) of satisfactory income to repay the loan amount.
- Perhaps you have credit score issues, that would prohibit the availability of accessing your own collateral.
- It could be that real estate conditions affecting the value of real estate, as in the recession of ’07-’08, may decrease the value of your home.
Social Security Taxed
Something people don’t think about is the impact of creating taxable income, from retirement savings. They are chasing rates of returns, in accounts, where the distributions are subject to taxes. They may also be losing money because of the rules on entitlements, offered by the government. Social Security is not (being labeled) a federal benefit. The amount of social security you may be able to keep is solely determined by the amount of taxable income on your tax return.
When you retire, you can expect little in the way of tax deductions. If you are relying on established taxable distributions, then you have lost control of how much you get to spend because Congress can change the rules on how much you owe them, each year.
Social Security Taxed
Is the income tax you will be paying on your social security, factored in your rate of return calculation?
If a couple filing a joint tax return retires at age 62, and each receive $2000 a month from Social Security. In a 28% tax bracket, they would receive almost $250,000 less in Social Security over their lifetime.
Calculation
28% Tax Bracket
$ 48,000 Social Security Benefit
$ 40,000 subject to tax
$ 11,424 tax due
With a life expectancy of 86 years, one can expect 24 years in retirement. That is almost $275,000 paid in taxes to the government, during their retirement.
Another way of looking at it is that it’s $275,000 they thought was going into their retirement but did not because of where their money was.