Putting Context Around Recent Stock Market Volatility

Stock market volatility is rising this year after a relatively calm 2021. Financial markets are experiencing bigger moves up and down as investors navigate a long list of events, including Federal Reserve interest rate hikes, heightened geopolitical risk, and 40-year high inflation readings. This month’s chart provides historical context around stock market volatility and discusses how to think about your portfolio during periods of increased volatility.

Figure 1 charts the S&P 500 Index’s daily price return since 1970 and overlays the top 30 and bottom 30 days. There are two important takeaways. First, the best and worst trading days historically occur in clusters. Second, timing the market is almost impossible due to the close proximity of good and bad days. As an example, earlier this month the S&P 500 registered its 15^th biggest daily return since 1970 after the latest inflation data suggested price pressures may be easing. The +5.5% S&P 500 return on November 10^th followed volatile trading during September and October and demonstrates how market volatility occurs in groups.

What can you do to improve the chances of achieving your long-term goals? As always, our team recommends staying balanced and diversified. Different asset classes react to market conditions in different ways. Diversification spreads your investments around so your exposure to, and the potential impact from, any one type of asset is limited. More importantly, focus on the long-term rather than day-to-day price swings. History indicates lengthening your time horizon increases the odds in your favor. Should you have any concerns around market volatility, don’t hesitate to reach out to our team.

Important Notices & Disclaimer

The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.

The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results. Investing involves risk, including the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.

No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.

READERS SHOULD VERIFY ALL CLAIMS AND COMPLETE THEIR OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS.

PFG Private Wealth Management, LLC is a registered investment advisor.

Providing Context on Recent Market Volatility

Monthly Market Summary

The S&P 500 Index returned -4.1% during August, underperforming the Russell 2000 Index (-2.0%) for a second consecutive month.
Energy (+2.7%) was the top-performing S&P 500 sector during August despite oil prices falling -9.7%. Utilities (+0.5%) was the only other sector to produce a positive return. Technology (-6.2%) was the worst performing sector as interest rates rose, followed closely by Health Care (-5.8%) and Real Estate (-5.6%).
Corporate investment grade bonds generated a -4.4% total return, slightly underperforming corporate high yield bonds’ -4.3% total return.
The MSCI EAFE Index of global developed market stocks returned -6.1% during August, underperforming the MSCI Emerging Market Index’s -1.3% return.

Stock & Bond Markets Endure a Bumpy August After July’s Gains

The S&P 500 produced a -4.1% return during August, but the headline number doesn’t tell the full story. Equity markets initially rallied during the first half of the month, with the S&P 500 gaining +4.2% through August 16^th as July’s market rally continued. However, the second half of August marked a sharp reversal as the S&P 500’s gave back all its gains plus more. Credit markets also experienced a reversal during August as interest rates reversed higher and bonds produced negative returns. The increased volatility across stock and bond markets is being attributed to a wide range of investor views creating a tug of war effect in markets, as well as uncertainty regarding how long the Federal Reserve will continue to raise interest rates.

Federal Reserve Chair Pushes Back Against Hopes for Policy Pivot

The Federal Reserve held its annual August Jackson Hole meeting, and Chair Powell used his speech to forcefully push back against the notion the Fed will pivot and cut interest rates if economic data starts to weaken. Powell emphasized the central bank’s “overarching focus right now is to bring inflation back down to our 2 percent goal” and cautioned, “Reducing inflation is likely to require a sustained period of below-trend growth … [and] will also bring some pain to households and businesses.”

Investor hopes for a Fed pivot were one of the primary catalysts that propelled the stock market higher during July and August. Chair Powell’s speech dashed those hopes and sent the S&P 500 down more than -3% on the day of his speech. Why? Two lines from Chair Powell’s speech underscore the Fed’s goal, “There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job.” This focus on lowering demand for goods and services may increase portfolio volatility during the months ahead as investors debate how long it will take the Fed to achieve its goal and the impact tighter policy will have on the economy.

Important Notices & Disclaimer

PFG Private Wealth Management, LLC is a registered investment advisor.

Required Minimum Distributions – Not Required This Year But Should You Take It?

We recently saw a humorous quote stating that they “missed precedented times.” 😊 That is so true as we come near the end of 2020. There will be plenty of reflection that occurs for years to come. Hopefully, many good things can be remembered.

November is an excellent time to think about pre-planning. It’s a great time to look at strategies for reducing taxes before December 31st. Every year at this time we start talking with clients about their required minimum distributions (RMD). By definition, this is the amount of money that must be withdrawn from a traditional, SEP, or Simple IRA account and qualified plan participants of retirement age. The original starting age was 70 ½ and has now been changed to age 72. Earlier this year, Congress waived the required minimum distributions.

Even though participants do not have to take it, here are a few reasons some may consider it:
• Low income and low tax bracket – If your income for 2020 is in a low tax bracket, it may be wise to consult with your accountant and see how much money can be withdrawn from your tax deferred account with little or no taxes at all. If the funds are not needed for spending, then they can be transferred into a brokerage account and managed. If every year for your tax return you pay no taxes at all, then this might be something to investigate.
• Converting funds to a Roth – There are times where taking funds from the IRA and converting them to a Roth is extremely beneficial and this year may be the best time. When funds get converted, they show as income but stay in a retirement account and grow tax free. In traditional years, a Roth conversion is not allowed for RMD. In addition, those funds can then be withdrawn tax free if the Roth has been opened for 5 years or more.
• A known increase in taxes next year – If there is a known increase in income such as a sale of a business, an expected pay increase, or the potential of rental income from a property for 2021 and it will influence the tax bracket, then taking the RMD this year may be best.
• A higher RMD next year – If it is expected that the RMD is going to be much higher next year because none was taken this year, this is another reason. As a reminder, the RMD for each year is based off the December 31st value from the previous year and then it is calculated.

These are only a few reasons why taking the RMD could be considered. As always, we encourage you to consult with your accountant and your advisor to collaborate and come up with your best tax option for 2020.

At PFG Private Wealth Management, we thank you for your trust in us and encourage you to be safe.

PFG Private Wealth Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. This material and information are not intended to provide tax or legal advice. Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Ep 24: Importance Of Risk Management & Asset Protection

On This Episode

When it comes to retirement planning, many people focus on filling in an income gap, or making sure they will have enough money to get them through retirement. While this is fundamental to the plan, it’s important to make sure your assets are protected. John and Nick will explain what investment vehicles have some sort of protection and will also give a hypothetical example.

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Disclaimer:

PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

Speaker 1: Hey, everybody. Welcome in to Retirement Planning – Redefined with John and Nick of PFG Private Wealth, serving the Tampa Bay area. Thanks for tuning into the podcast. As we talk investing, finance and retirement, and we’re going to jump in and get started with the conversation. Guys, I hope you’re doing well. We were kind of laughing right before we started the session recording here that John’s been doing some swim lessons with his kids and it’s been going really well. And I wanted to make the joke that Nick, you finally learned how to swim.

Nick: Yeah, no, all joking aside, I can swim and swim well, but besides that-

John: You’re welcome, Nick. We’ve been doing some Zoom swim lessons [crosstalk 00:00:41].

Speaker 1: Zoom tutorials on swimming.

Nick: Yeah. I get in the bathtub with goggles and see what happens. But no, I’ve been doing well. Things are starting to slowly get back to normal from the standpoint of, I want to say last week I went out to dinner for the first time at a restaurant outside in a few months, so that was pretty cool. So things are slowly starting to get back to normal, although it’s going to be interesting is some of the numbers seem to spike here, how things will adapt over time, but no complaints, no complaints here.

Speaker 1: Yeah, it will be interesting to see as this cluster bang of a year continues to wobble on. So we’re about halfway through 2020 at this point. So we’ve still got a lot to go, so we’ll see how it shakes out. But that’s good. Glad to hear that there’s some good positive spots here and there. So let’s jump into our topic. So let’s review the importance of risk management and asset protection. Let’s just start with a basic overview, Nick.

Nick: Yeah. So for those that are listening that have been through our class that we hold at the local colleges, this will sound a little bit familiar, but we’ve had a couple of things pop up with clients and questions from friends and things like that. So we thought it would be a good topic to re-review where oftentimes people get focused on the fun or more exciting aspects of planning, which may be investments or talking about retirement and those sorts of things, but really risk management is a super important part of overall planning because really the objective is to increase your probability for success by reducing your risk. And then ultimately, overall the goal by doing that is to do it while keeping your costs down. So when we go through the planning process with clients, we do review their property and casualty insurance. We’re looking for how their accounts are titled. We’re looking and analyzing things from the standpoint of, “Are we making sure that things are protected?”

Nick: So we always like to make sure that people do realize, because it isn’t necessarily something that is top of mind and oftentimes, when you talk to people, the reality is that when they’re shopping out their homeowners insurance, their car insurance, they end up having been with the company for a long period of time. Usually it’s price dependent. So we’ve seen where people made a change to cut costs, six, seven, eight, nine, 10 years ago and now they’re in a completely different financial situation and they haven’t made adjustments to correlate to that from a risk management standpoint. So we just kind of want to walk some people through that.

Nick: So one of the first things that we review and talk about and help people to understand are that, there are certain assets that are creditor or protected in the state of Florida. This is something, again, we’re not attorneys, we’re not property and casualty agents, but these are topics that we review. And this is one of the perfect examples of something there where we can provide feedback, give you help, provide you with questions to ask and then help connect you with or you connect with an existing relationship that you have with a property and casualty agent, with an attorney if there are legal documents that need to be involved, that sort of thing. But in the state of Florida, it’s important and many people know that you can declare your primary residence as your homestead.

Nick: And there are a lot of protections built into declaring your home a homestead. So many people just focus on the tax benefits and that’s one thing, but really it provides a creditor protection and asset protection for your home. So that’s a big deal. If you own non-qualified annuities and/or have life insurance that has a cash value component to it, those are protected in the state of Florida. Qualified accounts, so in other words, 401k, IRA accounts, those accounts are protected in the state of Florida. One kind of caveat to that where we’ll have some people say, “Well, hey, I’m 60, 70 years old and I’ve got these accounts and my home, why do I need any sort of additional protection?” And one of the things that we like to remind people are that those qualified accounts, you do have to start taking money out at a certain point. And at the time that they go from qualified to non-qualified that becomes something that could be available.

Nick: From the aspect of different types of trusts, there are certain types of trusts that can be set up to provide protection for assets that’s absolutely 100% in the realm of working with an attorney. John’s going to talk about one of the misconceptions that a lot of people have when it comes to trusts. And just a basic thing that is important for people to consider, let’s say you own a business and you are not structured as an LLC, you could be putting yourself a little bit of risk from that standpoint.

Speaker 1: Yeah. Certainly there’s a lot of pieces in there. So again, homestead, annuities, qualified accounts, LLC, certain trusts, some of these things are the protected assets or at least in Florida. John, what are some of the non protected?

John: Yeah. So some of the non-protected assets would be cash accounts or your bank accounts, things like that, CDs, non-qualified investment accounts. Someone might have a brokerage account that they’re just putting money into monthly, or just maybe just put a lump sum in there. Just understand that just because your retirement accounts are invested and you have investments there and they’re [inaudible 00:06:27] protected. If it’s in a nonqualified account with investments, it’s not protected.

John: One other thing with the qualified accounts is to understand that there are limits to what is actually protected. So actually an ERISA plan, which is a 401k, 403(b) type plan, it’s typically fully protected, no matter what the amount is and IRA, and this does go up, it used to be a million, and I believe right now it’s about 1.3 million if an IRA is actually credit protected.

John: And then a recent rule change in the past few years, inherited IRAs are no longer credit are protected. So it’s important to understand that if you inherit an IRA from somebody, it is not credit protected at all. Something that will come up, Nick mentioned with the homestead where your primary home is credit protected, any secondary home you have is not. So that’s a misconception we see sometimes if you have a rental property, or let’s say your, like a second vacation home, it’s not credit protected. And then with the businesses, if you’re a sole proprietor and you never develop any type of LLC, so example I have a [inaudible 00:07:32], but I’m not LLC, that is not creditor protected. So that’s why it’s important to, if you’re working with an attorney, you want to ask these questions, “Hey, should I create an LLC with the business?” And you definitely want to have them help you draft the documents so they’re done correctly.

John: One of the biggest questions we get when we’re doing planning and part of the planning is we look at the estate side of it. We don’t draft any documents, but we are knowledgeable enough to have people ask the right questions and point them in the right direction. But it’s with trusts. A lot of people feel like, “Hey, if I set up a trust, does that protect my assets?” And if it’s a revocable trust, the answer’s no. So a revocable trust basically just get to the meat of it. You still have control of that trust. So you either are owner of it, or you make decisions of it. And basically with that, it’s still considered part of your estate [crosstalk 00:08:22] and for that reason it’s not credit protected.

Nick: Yeah. And just for further emphasis on those protections kind of tend to kick in after you pass and the trust stays, but while you’re alive, it’s includable in your estate and it doesn’t provide those protections. And one other caveat or thing to consider think about are for those non-qualified accounts, non-qualified investment accounts or non IRA, if you hold them jointly in the state of Florida using Tenancy by the entirety for those types of accounts, if you hold it with a spouse, so it has to be with a spouse to use that, that does provide some additional level of protection. Although it’s not the same as like a retirement account per se.

John: Definitely, as you can tell, it gets confusing. So you definitely want to ask the right questions if you’re wanting to know what is and what isn’t and just asks the right people and adviser will know enough, and attorney would definitely be the best resource.

Speaker 1: Yeah. I’m definitely say if you’re working with an advisor, obviously bring the conversation up with them, have them bring the attorney in and so on and so forth. And of course, John and Nick can help you in that arena as well. Now you mentioned property and casualty, so let’s do a quick review of that as well. What are some things to consider?

Nick: Sure. So the main types of property and casualty policies that people are going to have are going to be their car insurance, homeowners insurance, and maybe an umbrella policy. So one of the examples that we tend to give from the perspective of a car insurance policy is, really just walking you through a scenario. So when you look at your car insurance policy, you’re going to see that there are limits that are provided, that are referred to liability, and then you will see a designation for what’s called uninsured motorist or UIM.

Nick: So the example that we usually use is, let’s say John and I are both driving down the highway and we get into an accident. So we’re both in our late 30s, business owners, our incomes continue to go up. John has a family, I don’t, but if something happens to me, I do have assets going to parents and brother and that sort of thing. So let’s say we’re driving and we get into an accident and because John likes to multitask a lot, he was texting and it’s his fault. So we’re going to blame him. So I have the-

John: Wait, wait, wait, full disclosure, I never text and drive. I do multitask, but I do not do that.

Speaker 1: Good [inaudible 00:10:57].

Nick: That’s good. That’s good. So we get into an accident. I have damages, fairly serious damages and I’m going to go ahead and I’m going to sue him. There’s kind of a negative connotation oftentimes with the whole aspect of suing somebody, which the reason that we use this example is because, here we are, we’re friends, we’re colleagues, in many ways business partners, that sort of thing. But the reality is, is that if there’s damages and mistakes happen and mistakes are made, ultimately my responsibility for me and family is to try to become whole again, from a financial standpoint. So I go ahead, I sue him. The first thing that’s going to be reviewed and looked at are going to be his liability limits. So the liability limits protect him from lawsuit, from somebody else when he is at fault, essentially.

Nick: So let’s say he has one of the most common levels of coverage that we see is what’s called like 100/300. So what that means is 100,000 per person in the accident, a total of 300,000 in the vehicle. So in this instance, in this situation, I’m the only person in the vehicle, so the maximum amount of his car insurance company is going to pay out that they’re going to send their lawyers to deal with this lawsuit, the maximum amount that they’re going to pay out is 100,000. If I happen to have other people in the vehicle, that’s where that 300,000 limit would come into play. But let’s say my damages are 250,000 and the most his insurance company is going to pay out as the 100. So, now what? So at that point, what’s going to happen, there’s going to be kind of a different phases. So I’m going to have an attorney. And my attorney is going to look at, “Hey, does John have additional assets that are not protected, like we talked about earlier that are available through suit?”

Nick: So that’s something that he’s going to request, some sort of inventory, financial inventory, asset balance sheet via the lawsuit. The other thing that they’re going to look at is, “Hey, Nick, do you have uninsured motorist coverage?” And luckily because I do this sort of thing I have planned ahead and I have uninsured motorist coverage. So what uninsured motorist coverage does is it protects me in the case of having damages that are above and beyond what the person who inflicted the damage has. So in this case, my limits for uninsured motorist, let’s just say there are 250,000, I can essentially sue my own insurance company to fill in that gap, to get me up to that 250,000, so that coverage has protected me.

Nick: So the liability limits protect the person at fault against the person having damages and not having enough coverage. So, because we do see people oftentimes outright reject uninsured motorist coverage, and knowing that, especially in the state of Florida, people are often underinsured or uninsured, having uninsured motorist coverage is something that we think is important to have a level of protection.

Nick: So the same scenario, I was injured and John had coverage and I had substantially much more significant damages. Let’s say that I was permanently disabled and I wasn’t going to be able to work anymore, so the amount that the amount of protection and coverage that I’m looking for is going to be substantially more than the 100,000 that John has, or even the 250,000 that I have in the uninsured motorists. And that’s where something like an umbrella policy could come into play. So what an umbrella policy will do is, it’s a type of coverage that essentially goes above what you have for the auto coverage.

Nick: So an umbrella policy can be both liability and uninsured. So in this example, what we’ll use for the example is we’ll say, “Hey, Nick has an umbrella policy. And because my damages were a million dollars and John’s insurance company has paid out 100,000, my insurance company has paid out 250,000, there’s still a gap of 650,000. Essentially, I can go ahead and sue my insurance company from the standpoint of the umbrella to try to fill in that additional gap. So if John had had an umbrella policy, they would have tried to use that for protection. But in this scenario, me having an umbrella policy and being the one that had the damages really comes to the point of being able to protect me in my assets.

Speaker 1: Yeah. And certainly it’s important to review your risk management, your asset protection, because something like an accident can certainly derail retirement plans, it can really wreak a lot of havoc and other things that you had going on as well. There’s countless stories out there along situations like that. So if you’ve got some questions or concerns about this week’s topic, and you need some help, reach out to John and Nick, and of course they can help point you in the right directions for some of the things they don’t do as mentioned earlier. It’s always important to review and have these conversations about all these little assets. It’s not just about income, which obviously that’s super important in retirement, but there’s all these other little facets. So this week we focused on some risk management and asset protection when it comes to some of the things that are protected in Florida, not protected and a bit about the property and casualty as well.

Speaker 1: So reach out to them if you’ve got questions on these topics at 813-286-7776, to have a conversation about your own situation, 813-286-7776, or share the information with a friend who might benefit from that well and go to pfgprivatewealth.com to learn more about John and Nick and their practice, pfgprivatewealth.com, a lot of good tools, tips, and resources. You can also click on the podcast page, you’ll see that right at the top. And you can subscribe to us on whatever platform you like to listen to. And we would certainly appreciate it. Guys, thanks so much for your time this week. As always, I appreciate all that you do to help us out here and continue to do a good job with those swimming lessons there John.

John: Thanks.

Speaker 1: And Nick, maybe one day, you can take the floaties off, you’ll be good.

Nick: Hopefully.

Speaker 1: All right, guys, have a great week. We’ll talk to you soon. Stay safe, stay sane, and we’ll see you next time here on Retirement Planning – Redefined.

Ep 23 : Should You Be Thinking About Refinancing?

On This Episode

With rates being at historic lows, a lot of clients have been asking questions about refinancing. So this week we answer the biggest questions people have.

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Here is a transcript of today’s episode:

Marc: Hey everybody. Welcome in to this edition of Retirement Planning Redefined with John and Nick from PFG Private Wealth. And we’re here today to talk about investing, finance, and retirement. And we’re going to talk about refinancing actually a little bit here on this first podcast. Guys, what’s going on? Nick, how are you, buddy?

Nick: Doing pretty good. We’re staying busy. Today we’re in the little bit of a midst of a market pullback, so today’s been an interesting day. But besides that pretty good.

Marc: Good, good. Yeah, it’s been a little all over the map the last week or so the market has been for sure. So John, how are you, my friend?

John: I’m good. I’m good, I’m actually just started coming back in the office this week. So it’s been nice to say the least, although I miss seeing my kids 24/7, it’s nice to have a little break from screaming madness. It’s a good change.

Marc: Yeah. A little mental break from time to time is certainly a good thing. Well, I mentioned we were going to talk about refinancing. So a lot of people have been sending questions in that they are thinking about it with the rates being what they are. So let’s dive in and talk about it. Why refinance?

John: Yeah. So over the last month, Nick and I have got a lot of requests of just really helping clients as far as just analyze, “Hey, you know, the rates are dropping, and is it now a good time to refinance?” And, full disclosure, we’re not mortgage brokers. We’re not in that industry, but we’re familiar with our clients’ situations. So we’re able to at least help them navigate and ask the right questions in this situation. So we’ve definitely seen an uptick over the last month. So we figured this would be a good time to kind of discuss it.

John: So just understanding really initially what a refinance is. And it’s basically, you’re taking your current mortgage and you’re paying it off with a new one. Some reasons why you might want to refinance is obviously the biggest one is lower interest rate environment, which we’re seeing currently. And when interest rate’s lower, and Nick correct me if I’m wrong, typically rule of thumb, a 1% drop, you may want to look into it. It could really reduce your monthly payments, and over time it could really help you build equity in the house as well, if you’re going to be in there longterm.

John: So, just a quick example. A 30 year mortgage at 5.7%, let’s say 300,000 mortgage balance. The payment on that’s about $1700 per month. Let’s say the interest rate’s dropped to 4%. That same 30 year mortgage payment’s going to be about $1432, roughly $271 per month saving. You’re looking at about $3,250 per year, which is a pretty big number. And then especially if you’re looking at, if you still have 20 years left in the mortgage, that can really add up. So, that’s one thing you want to consider.

Nick: Yeah, I would say one of the other times where it can make a lot of sense is, let’s say for example, you took out a home equity line a couple of years ago and use the home equity line either to make improvements on the home, purchase a second home, use it for a down payment on a second home, or whatever the reason may be. A lot of times those equity lines had a really, really good rate in the first year or two. And then they start to kind of jump up. So the consolidation of the two together, and while reducing the payment and also potentially reducing the term of the loan can be a really useful scenario, situation for people.

John: Yeah. And I’ll say one thing, when we do a lot of planning with clients, one of the biggest goals we see is, “Hey, I want to make sure my mortgage is paid off when I go to retire.” So now could be a good time to analyze and say, “Hey, I’m 10, 15 years out from retirement. Do I want to adjust to a 10 to 15 year mortgage?” And we’ve been finding in this environment, we’ve seen clients keep the payment the same as they’re currently doing, but they’re shortening the terms. So again, it’s really just a matter of your situation and what works for you.

Marc: Well, are there any right moves? I mean, how can we determine is it the right move to make, is there some things, some bullet points we can kind of consider? Obviously talking with the qualified professionals, the right people, goes a long way, but is there some things we could go through on our own checklist ahead of time?

John: Yeah, I mean, the main thing really is how much are you going to be saving monthly? So you kind of start there and evaluate that. And then you kind of look at it longterm. One of the biggest negatives with refinancing is the closing cost, which can range from application fees, to recording fees, and whatever else. And we’ve seen them range from 1% to almost 4% sometimes.

John: So you want to evaluate, “Hey, is it worth refinancing, incurring those costs into my mortgage?” And that’s where it’s important to work with someone to help you analyze and crunch those numbers. And one of the biggest things that we’ve seen, it depends how long you going to live in the home. So you want to ask for an amortization schedule whenever you’re looking at it to say, “Hey, if I’m going to only be in the home for 10 more years, does it even make sense to refinance this?” And that’s one of the biggest things I think people don’t take a look at, is just figuring out, “Hey, how long am I going to be in this house and does it make sense.”

Nick: Yeah. That term, that length of being in the home is probably the biggest reason that it may make sense for somebody not to refinance. Because the reality is that the monthly payment, if it’s staying the same or reducing, if it’s very small, because there are costs associated with refinancing, it may not make a whole lot of sense unless you have kind of a strategy and a longterm plan. So we have seen those scenarios where people have said, “Hey, we don’t plan on being here any longer than a couple of years, does it make sense for us to spend this, to do that?” And we recommended no, dependent upon the situation. So that’s absolutely something to keep in mind.

Nick: I will say as well, that there are companies out there that will kind of advertise “no closing costs” or “we pay your closing costs,” that sort of thing. And while that may be true, and they still may be offering good rates, one other thing to make sure you do is we always recommend get three offers from three different companies, banks or lenders, because we’ve seen, “Hey, we’ll pay your closing costs, but you’re going to pay more on the rate.” You know, they make it one way or another. But we’ve had clients recently getting quotes at anywhere from 2.5, to 3, 3.25, dependent upon the length of the term, dependent upon if it’s their primary residence versus a rental property, those sorts of things. So, all things to consider, keep in mind.

Marc: Well, if you are refinancing, some might say you’re resetting the clock. You’re adding years. I mean, obviously you’ve got to have these conversations. You might get a lower rate, but you might be tacking on more years.

Nick: Yeah. And I would say that it’s rare that we’re going to recommend anybody tack on any extra years. The one thing that I will kind of comment on is, their other habits have a big impact on whether or not something like that could make sense. So for example, if somebody is, by default, a very good saver, and let’s say a 30 year mortgage will add on five years. But let’s say it’s going to free up $500 a month. And the reality is that they’re not going to be in that home for more than another 10 years. And they’re really good at recapturing that money. So in other words, instead of paying that $500 a month, they’ve proven over time that they’re a good saver and they’re going to actually save that $500 or even set up a schedule to save that money right away. And maybe they’re very comfortable in the market and investing and their thought process is, “Hey, I’d rather have control of this extra $500 a month than have the lender or the bank have control of the money.”

Nick: That’s a scenario that we may consider saying, “Okay, that’s something that could make sense for you.” But I would say that it’s pretty rare where we’re going to really kind of give our okay or green light on somebody extending the term of their loan. Usually it’s keeping it the same, reducing it a few years, and if we can reduce it four to five, six years and keep the payment the same, that’s oftentimes a win for the client. Conversely, if the reality is that having that mortgage payment a little bit higher for them is a forced, quote unquote, savings by reducing their liabilities, that’s something that we take into consideration and that’s the important part of us understanding and knowing our clients, knowing their tendencies and helping to put them in a position to succeed.

Marc: Well, if you’re thinking about refinancing, again, you need to go through of these questions. Why do you want to do it? Is it the right move? Have the right conversations with the correct people. John, anything in the summary that you want to add as we kind of wrap up this podcast about this?

John: Really, just if you’re thinking about it, just make sure it aligns with your overall financial plan and your goals. It’s just important. You don’t want to do it just because the rate has dropped. You really want to make sure it makes sense for you. And we highly recommend working with people that understand your situation versus just someone random that’s just trying to go ahead and “Hey, let’s just do it” just to do it. So definitely want to do due diligence and make sure that aligns with what you’re trying to accomplish.

Marc: Yeah, because I’m sure a lot of people keep getting things in the mail, right. “Our rates are so low.” I mean, I think I get something probably almost every other week to contact whomever about refinancing. So, that’s a great point. You want to make sure that it works in conjunction with what you’re trying to accomplish and not just doing it for the sake of, because we keep getting hit with these things that are like, “Oh, let’s look at this rate.” So on and so forth, right. Have a conversation, make sure the whole scenario plays out correctly in the way that you want it to. And we talk about that often on the show anyway, is make sure whatever steps you’re taking, whatever you’re doing, it’s part of your overall plan and an overall strategy to get us to and through retirement.

Marc: So that’s going to do it this week for the show, Retirement Planning Redefined. If you’ve got questions again about today’s topic, make sure you reach out to them and let them know you’d like to have a conversation. We’ve already had quite a few people bring this up, which is why we talked about it today. So give them a call at (813) 286-7776. If you’ve got questions before you take any action, (813) 286-7776. You can also go to PFGprivatewealth.com. That’s PFGprivatewealth.com. Don’t forget to subscribe to the podcast by hitting the subscribe button on Apple, Google, Spotify, whatever application you like to use. But check the guys out there at the website. And with that, gents, I’m going to let you go this week. Thanks for your time, as always. I hope you stay safe and sane, and we’ll see you soon.

John: Thanks.

Nick: Thanks.