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Saturday, September 13, 2014

Arbitrage and self-directed retirement accounts could lead to retirement success

As a Certified Mortgage Planner and a former Series 7 licensee, I pay special attention to the asset portion of the mortgage loan application of my clients.  Over my 19 years I've notices that only a very small percentage of people are on track (or even close) for a successful retirement.  Most of my clients have enough for a down payment and a little bit in reserves after the transaction closes and there is a bigger percentage of clients who are buying move-up homes that have enough for 20% down and a fair chunk left over after that but not much in the way of liquid investments such as a 401(k), IRA (traditional or Roth) or any other investment account.

Arbitrage:  If you watch the Granthem Investment video series, you will hear Bryan say that he recommends that you do what the banks do, don't do what the banks tell you to do.  The main way that banks make their money is by arbitrage which is to say that banks borrow money from people who deposit their money in money market and savings accounts as well as CDs.  They pay a paltry fee for this - check the yield on your savings account - then they turn around and loan money out for credit cards, car loans, mortgages and such at much higher interest rates and make huge profits.  If you have money sitting idly in a home in the form of equity, you may be able to access it and get it working for you by investing it in any number of things - I prefer very safe investments if you are going to pull money out of your house (or in the case of purchasing a new home, you can choose to put less money down and keep more money for investing - I have a great example on the Granthem Investment videos).  Money in your home in the form of equity is illiquid and isn't providing you with a return on investment.  Pulling that money out gives you the opportunity to diversify and get more assets to work for you.  In such a case, I recommend investing in private money mortgages or indexed universal life policies.

Diversification is great because it spreads the risk.  However, it's important that you diversify with investments that all have the potential to provide a good return AND you want to account for the likelihood of higher taxes down the road as much as possible.  There's a wide variety of traditional investment accounts such as brokerage accounts for trading stocks, bonds, mutual funds, options and such.  Additionally, there are retirement versions of brokerage accounts such as your company's 401(k) as well as individual retirement accounts (IRAs) including the traditional and the Roth - I prefer the Roth because while there is no tax deduction for the contribution you make now, your investments grow tax free and when you start taking money out, there's also no tax on it.  One thing to note about IRAs is that the earliest you can withdraw money from them without a 10% penalty is when you turn 59.5; you have to begin withdrawals on the April 1st after you turn 70.5 - I recommend leaving the money in to let it grow as long as possible - if you have it invested in something decent (see my video series with Bryan Granthem about a safe investment with a solid return - - this is episode 2), you could double your money or more with that extra 11 years that you leave the money in your IRAs.

Some ideas for diversification:  There is a wide variety of investment choices and it's important to become as knowledgeable as possible on the various choices.  Some of the more traditional investment options include individual stocks, bonds, mutual funds and options - options are tied to stocks and are a more risky investment so it's extra important to do lots of homework about the various options and their strategies.  Real estate is a great option because there are a few good strategies to choose from including fix and flip (it's important to have a great Realtor and contractor) as well as investment properties which can provide monthly income, appreciation and tax benefits.  Traditional retirement accounts allow you to invest in stocks, bonds, mutual funds and options (depending on the type of account) and they have some tax benefits in that the investments grow tax deferred; hence, if you have 100 shares of Apple and sell it for a huge profit after quarterly earnings far exceeded expectations thanks to the iPhone 6+, you don't have to pay capital gains tax on this profit in an IRA (traditional or Roth).  Self-directed IRAs are also a great thing because you can invest in real estate as well as do things like fund private mortgages - see the Granthem Investment series of videos on YouTube.  If you don't know about the Solo 401k, you need to learn about this - it's amazing.  The final investment type I will cover here is live insurance / annuities.  There are some great options that allow you to have access to your money anytime without penalty AND your investments grow tax-deferred and you get to access your money tax free.  The investment vehicle that I use for this is the Universal Indexed Live policy.

Side note on asset protection:  It's very important to protect your assets; even if you don't have much wealth currently, it's important to have a trust.  If you own investment properties, you should have an LLC (in Nevada, you should have a Series LLC).  There's a lot of reasons why you should have a trust and possibly an LLC and strategies on how to use them but that is for another post - I work with some great estate planning attorneys and I'm happy to make a recommendation.

I can recommend any of the professionals that I have talked about above - I have worked with a great contract who I would highly recommend as well as a number of great Realtors.  I also have a great life insurance agent who can help with those types of investments and Bryan Granthem can help you set up self-directed retirement accounts and help you with private mortgage investments.  The key is to take action and get started and I'm happy to review your personal situation and discuss your options and pair you with the right professionals.  Here's episode 1 of the Granthem Investment Series:

I would also recommend that you watch episode three of How to Avoid the Most Common and Costly Mortgage Mistakes:
Please feel free to leave comments and questions and share this with your friends.  Don't forget to subscribe to my blog and my YouTube channel so that you will get notified when new posts and videos are up.

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