The Jacobs Financial Group

Does It Pay to Pay Off Your Mortgage?

Most financial experts agree that reducing debt whenever and wherever possible is a good thing. But paying off your mortgage as you grow older may not always be in your best interest.
The idea of no monthly mortgage payment and outright ownership of your home is indeed an appealing prospect, especially if you’re depending on Social Security or a fixed pension for income. But does it make financial sense?

Factors to Consider
To answer this question, you need to consider two factors: opportunity cost and flexibility. The opportunity cost is what else you could be doing with the money you use to pay off your mortgage. If, for example, you’re looking to pay off a $100,000 mortgage, you should first consider where you could invest that money instead — and what rate of return you could get. In general, if the rate you could earn is higher than your mortgage rate, you may be better off keeping the mortgage. For example, if you have a conventional 30-year fixed-rate mortgage with a 4.5% annual percentage rate (APR), but you could earn 5% on a fixed-rate bond, you’d might be better off investing the money in the bond.

This general rule applies even after tax is factored in. The interest portion of your mortgage payment is tax deductible, which reduces the effective interest rate on the mortgage and adds incentive to investing your money elsewhere. But income derived from any alternative investment is taxable, reducing its effective yield, so it’s basically a wash.

The other factor to consider is flexibility. Money tied up in real estate is not liquid. If you want to tap into that money, you will either need to take out a mortgage or sell the property. Money held in a traded investment, however, is much more liquid. In the case of stocks or mutual funds, you can convert it to cash within days. And, should you need to draw down this money to pay for living expenses, it’s fairly easy to do so if it’s held in liquid investments.

Is Refinancing a Better Option?
Given today’s historically low mortgage rates, you might want to consider refinancing rather than paying down the principal, especially if you currently have a mortgage with an APR of 6% or higher. If you are thinking of refinancing, be sure to compare rates and estimated closing costs. Also, keep in mind that although current bond yields may be low, long-term returns on more stable investments such as long-term U.S. government bonds have averaged 10.1% for the 30 years ended December 31, 2010.

So if you’re thinking of paying off that mortgage, make sure you first check out the alternatives and consider what kind of cash cushion you may need in the years ahead.

March 2012 — This column is produced and is provided by The Jacobs Financial Group. (11-11)

In Volatile Markets, Investors May Find Comfort in Dividends

As uncertainty at home and abroad roils the financial markets, income-minded investors seeking protection from the bumpy road ahead may find dividend-paying stocks offer an attractive mix of features and warrant a place in their equity portfolios.

The appeal is simple: Dividend-paying stocks can provide investors with tangible returns on a regular basis regardless of market conditions.

The Benefits of Dividend-Paying Stocks
If you own stock in a company that has announced it will be issuing a dividend, or if you are proactively considering adding an allocation to dividend-paying stocks, history provides compelling evidence of the long-term benefits of dividends and their reinvestment.

• A sign of corporate financial health. Dividend payouts are often seen as a sign of a company’s financial health and management’s confidence in future cash flow. Dividends also communicate a positive message to investors who perceive a long-term dividend as a sign of corporate maturity and strength.

• A key driver of total return. There are several factors that may contribute to the superior total return of dividend-paying stocks over the long term. One of them is dividend reinvestment. The longer the period in which dividends are reinvested, the greater the spread between price return and dividend reinvested total return.

• Potentially stronger returns, lower volatility. Dividends may help to mitigate portfolio losses when stock prices decline, and over long time horizons, stocks with a history of increasing their dividend each year have also produced higher returns with considerably less risk than non-dividend-paying stocks. For instance, since 1990, the S&P 500 Dividend Aristocrats — those stocks within the S&P 500 that have increased their dividends each year for the past 25 years — produced annualized returns of 11.04% vs. 8.23% for the S&P 500 overall, with less volatility (14.14% vs. 15.22%, respectively).1

The Growth of Dividend-Paying Stocks, 1950-20112

If you are considering adding dividend-paying stocks to your investment mix, keep the following thoughts in mind. Dividend-paying stocks may help diversify an income-generating portfolio. Income-oriented investors may want to diversify potential sources of income within their portfolios. Given current realities present in the bond market, stocks with above-average dividend yields may compare favorably with bonds and may act as a buffer should conditions turn negative within the bond market.
Dividends benefit from continued favorable tax treatment. The extension of the Bush-era tax cuts helps to reinforce the current case for dividend stocks. The tax bill that passed in late 2010 extended the 15% tax on qualifying dividends and other forms of investment income through December 31, 2012.

Note that dividends can be increased, decreased, and/or eliminated at any time without prior notice.

1Volatility is measured by standard deviation. Past performance is no guarantee of future results.
2Source: Standard & Poor’s. Stocks are represented by the S&P 500, an unmanaged index considered representative of the broad U.S. stock market. For the period January 1, 1950, through December 31, 2011. Past performance is not indicative of future results. Investors cannot invest directly in any index.

March 2012 — This column is produced and is provided by The Jacobs Financial Group. (02-12)

Taking Required Distributions From Your Retirement Plan


Getting your money out of a retirement account is not as easy as putting it in. During retirement, when it should be easy to spend your retirement savings, it can be complicated, as you consider tax issues, required annual withdrawals, and a beneficiary’s ability to access your plan.
The IRS requires that you start distributions from non-Roth retirement plans by April 1 following the year you turn 70 1/2. These are called required minimum distributions — or RMDs.

For example:

• If your 70th birthday is between January 1 and June 30, you will reach age 70 1/2 that year, and you must take a distribution by April 1 of the following year. This is called your required beginning date (RBD).

• If you were born between July 1 and December 31, you won’t reach age 70 1/2 until the next year, and you must take the first withdrawal in the following year. For subsequent years, you must take your distribution by December 31.

Computing Your Required Minimum Distribution
While you may always withdraw larger amounts, the IRS computes a required minimum withdrawal figure using either your life expectancy number or the joint life expectancy of you and your beneficiary. The withdrawal factor is applied to your retirement plans as valued on December 31 of the year prior to the distribution.

Your Life Expectancy
If your beneficiary is anyone other than a spouse who is more than 10 years younger than you, you will use the IRS Uniform Withdrawal Factor Table, which can be found on the IRS website (www.irs.gov), to compute your required distribution. Find the applicable divisor for your age and divide your account balance by this number to compute your required distribution.
If your beneficiary is a spouse who is more than 10 years younger, you may use the IRS Joint Life and Last Survivor Expectancy Table, also on the IRS website. Find your age and your spouse’s age on your birthdays in the distribution year, and use the factor where the column and row intersect. Then divide your account balance by that factor.

More Than One Retirement Account
If you have more than one retirement account, start by computing the required distribution for each (the factor may differ if you have different beneficiaries). For employer plans, you must take the required amount out of each plan. However for IRAs, you may add up the required distributions for several IRAs and take the total out of whichever account you choose, as long as you take at least the required total. You may also aggregate required distributions from tax-deferred annuities (TDAs) in the same way, but you cannot mix IRAs and TDAs, nor may you aggregate inherited IRAs or TDAs with your own IRAs and TDAs.

Penalties for Noncompliance
You will not receive any notification of your required beginning date or your required minimum distribution. It is up to you to know the rules and comply. If you do not comply, Uncle Sam will penalize you 50% of the amount you should have removed plus any income taxes that would have been due on the required withdrawal. Because the distribution rules are complex, you may want to consult a financial advisor who can help you understand the details.
Rules regarding retirement plans are subject to change and it’s important to pay attention to changes in the law as they occur. In many cases, mailings that arrive with your IRA or employer plan statements will give you good explanations of any changes in retirement plan laws and how they may affect you.

March 2012 — This column is produced and is provided by The Jacobs Financial Group. (07-11)

As Stocks Continue to Roil, Alternative Investments Gain Appeal

Prolonged stock market volatility has caused many investors to question how much of their portfolios should be allocated to equities. If the stock market is making you nervous, it’s important to understand that there are alternatives, which, when used along with stocks, may increase diversification and potentially lessen volatility. However, it’s just as important to understand that alternative investments also come with risks.

Alternative Investments Defined

Alternative investments take many forms. Here is a look at several common investment types.

• Real Estate Investment Trusts (REITs) – REITs invest in groups of professionally managed properties such as office buildings, apartments, warehouses, or health care facilities. To qualify as a REIT, a company must invest at least 75% of its total assets in real estate, must derive at least 75% of gross income from rents or mortgage interest, and must pay at least 90% of its taxable income in the form of shareholder dividends. REITs trade on major exchanges and can be bought or sold as you would trade a stock.

• Commodities – These investments include metals such as gold or silver, oil, and agricultural products. In the case of gold or silver, there are dealers who trade these precious metals. If you take physical possession of gold or silver, you will need to arrange for storage and insurance. Because many investors do not want to make these arrangements, exchange-traded funds (ETFs) have become a popular way to access commodities.

• Private Equity – Major categories of private equity include venture capital, leveraged buyouts, and mezzanine financing. Investors participate in private markets through collective vehicles such as partnerships that actively manage the investment assets on the investors’ behalf. Successful investing in this area requires the ability to assess complex financial structures, assume outsized risk in pursuit of superior reward, and tolerate extended periods of illiquidity. Private equity firms frequently require investors to make commitments ranging from $5 million to $10 million or more.

• Hedge Funds – The term hedge fund is a catch-all phrase describing funds that follow aggressive investment strategies such as intensive use of derivatives and proprietary computerized trading. Hedge funds typically are engineered to seek a more favorable risk-adjusted return than their investors might obtain from a fund that follows a standard market benchmark. These funds are typically offered to investors whose portfolios include more than $1 million in financial assets.

All investing involves risk, including loss of principal; and alternative investments by themselves can be highly volatile. But when used in combination with stocks or other assets, they may help to smooth out long-term returns and provide an alternative when stock returns are choppy. Be sure to consult with your financial professional before investing.
March 2012 — This column is produced and is provided by The Jacobs Financial Group. (01-11)