Virtuoso Capital Management
Ray Russo has been a successful wealth advisor for 30 years. Ray is a licensed agent for securities, life, health, and disability. He is also a licensed Investment Advisor Representative and former Real Estate Broker. In his tenure as an advisor, he was responsible for training and development of over 3,500 agents, preparing them for a career in financial services. First and foremost, Ray feels most at home in his role as a consultant/trainer/teacher. He is the CEO of Virtuoso Capital Management, a Registered Investment Advisor (RIA).
Ray is a solutions oriented financial planner and Fox Business News Online contributor who is one of the few in the industry that has not only financial services experience, but business and real estate experience as well. Ray has been an entrepreneur since he was 22 which give him a unique perspective when dealing with clients, especially those that are self-employed. His primary purpose when working with individuals, couples or businesses, is to be certain they understand all that is involved in the planning process, and how to use their assets (both tangible and non-tangible) to support their ultimate goals.
At the end of the day, that results in plans that are more thoughtful, comprehensive and in true alignment with carefully thought out objectives. Generally, Ray is always attempting to look for inefficiencies in each unique situation, be they tax, expense, income, investment or insurance inefficiencies, always with an eye toward protecting assets from an increasingly intrusive government and litigious society.
Of course there is! While it is true there are some snobby practitioners in the industry, there are many that will give you their time. There have been more than enough times when I've worked with clients with meager means, but with the right mentality and desire went on to be millionaires. So it will be with you if you keep up being a good saver/investor.
Allow me to give you a bit of advice regarding your 401(k). Most people in my industry like qualified plans (401(k)s, IRAs, 403(b)s and the like) because they represent the low hanging fruit and are easy to close sales. They are not, however, the best investments for the long term. Here is why:
1) They have typically been among the most expensive ways to invest. New rules have finally made expenses more transparent, but not necessarily less expensive.
2) While there are some good 401(k) platforms, most have a very limited range of investment options. That gives you little room to reallocate to what is going on in the market.
3) If you ever leave your job and one day want to move your 401(k), there is always the remote possibility that you could catch the old plan in the middle of a provider change, whereby your money will be stuck for as much as 90 days until the audit is done before the change is implemented. This may or may not be an issue, unless it actually happens and you need your money now, as in, you bought a first time home and you need your money to close escrow.
4) There is often not enough of a match to justify the investment. Allow me to put a perspective on this. Let's say you are a farmer with 1000 acres of land with which you want to plant and grow corn. So you go to the supply store for corn seed, and on the counter are two boxes of seed. One says free corn seed and the other has a price. So you say to the person on the other side of the counter, what's with the different corn seeds? Why is one free and the other I have to pay for? The clerk then says, well, the free one really isn't free. You can have your seed for free (the front end tax deduction), but we will charge you on the full harvest of the corn and at a price we alone will dictate in the future. Or, you can choose the other seed, the price for which will be known in advance as it is right now, and you will never have to pay for it again. Which would you choose? You see, that is the carrot and stick approach of our government. They give you a tax deduction on the front end (the carrot), only to tax you on the fully compounded and inflated dollars in an unknown tax bracket (the stick) in the future. I ask this question of all my clients, are taxes going up or down in the future? Everyone says up! Even with Donald Trump who is talking about lowering taxes, you are only 23 years old and by the time you retire, I would be willing to bet you won't be so lucky. There are other ways to invest your dollars where you get more freedom and flexibility, as well as tax free distribution with returns that rival the markets. After all, the S&P index has only averaged about 3% since the year 2000. Not very good when you consider the risk you are taking.
5) A 401(k) cannot be stretched. This, while not a very important item for you now, can have dramatic impact on your legacy. This is an important topic to discuss, but not enough room here to do it.
6) Other than investment options, there is no flexibility in these plans. You must wait till you are 59 1/2 to get at the money without penalties. What if you want to buy a piece of real estate for investment purposes? In your plan, you have to take out $2 to use $1. The other goes to taxes and penalties. There are exceptions for first time home buyers and for hardship situations, none of which is being addressed here. In general, just know that anytime you get in bed with the government, there are always tons of red tape, i.e. rules and regulations. There are consultancy firms that specialize in qualified plans for the simple fact that all the rules associated with them are so convoluted and voluminous, that most in the industry do not know all the rules and often provide erroneous advice regarding them.
For now, here is what I recommend:
1) If your company has a plan with enough investment selections, by which I mean a couple hundred at least, then perhaps you can petition your company for a better plan. There is a federal regulation called 404C, which requires employers who provide plans to provide an adeqaute education. If that isn't being done, the employer is subject to liability, often leading to litigation. This is reason enough to provide adequate options for the plan, by the employer.
2) If that doesn't work, and even if it does, check the plan document or call HR and ask if "In Service" distributions are allowable. This means that you do not have to terminate employment to self direct any part of your plan balance into a self directed account with better options and/or safeguards. It, along with better and more plentiful investment options, help mitigate the risk to the employer. More and more companies are doing these sorts of things for that very reason.
3) If you plan to stay with the plan, limit your contributions to the company match. The reasoning is that if you get a dollar for dollar match of say 100% of the first 3%, then limit your contribution to 3%. This way, it's your employer contributions paying the taxes, not yours. If it is not a dollar for dollar match, you will just have to come up with an approximate formula that addresses the basis of what I just said. Then, look for other ways to invest the money you were putting into your 401(k) when and if you were over doing it.
4) Again, if you are planning to stay in the 401(k), utilize the loan feature that may exist in your plan, when and as needed. Check with your HR department to be sure if loans were made available when the plan was set up. This is a little known, little understood and under utilized part of a 401(k). The money in your plan has never been taxed, so taking the money out in the form of a loan to buy a car, for example, is a much better way to finance a car. For one, it is like getting a discount on the purchase price by the amount of your tax bracket. The payments you make, including interest, is simply paying yourself back to enhance your retirement, and since it's a loan, the money you receive is not taxed. It beats paying a finance company interest which once gone, is gone forever. Keep in mind that any loan outstanding, if and when you might transfer that money to a new employer 401(k) or self directed investment, either requires that loan to be paid off first, or may be able to be transferred to a new plan, depending on a number of factors. Most often, the loan will get paid off before transfer and thus a tax and penalty will have to be paid. The only way to know for sure is to check with the new carrier or investment company. Generally, you can borrow up to 50% of the amount in the plan and is payable on a 5 years basis. The money can be used for any purpose at all.
The thing about planning is, that there is always more to the story. Each person has a unique set of circumstances, and as such, the advice people like me provide are going to be different for each client. This is an ever changing industry with respect to taxes, and product innovations and design. Seek help from someone competent, or call me at 818-300-4446. I will be happy to assist. That is the least I can do for a fellow New Yorker.
Great question and an interesting study. I took this question because I am in a similar situation, and I have a strong background in real estate and lending. At first blush, without really know everything going on in your economy, taking equity from your rental to get cash out does a couple of things:
- It reduces your taxable cash flow on the rental and increases the deductions.
- It insulates you from a down turn in the economy because you will have taken most of your equity out already. When the mortgage meltdown happened in 2008, those with high mortgages were in a better negotiating position than those with lots of equity. I was one of them, and I mitigated my mortgage from $385,000 to about $160,000 through a series of modifications. There is no way to know for sure if banks will be that friendly ever again, but at the same time, they never want a bad debt on their books. My point is, getting the most of your money out via a refinance is better than watching your home depreciate the way it did in 2008, and I expect it to happen again soon, either this year or next, and it will be far worse than it was in 2008.
- Here is where it gets interesting. I would not recommend buying another home at this time. Why not rent for awhile, get familiar with the local real estate market, and see if you like your new city before purchasing? In this way, if I am right, you will be able to get a much better price on the home. I recommend reading a book by James Rickards called The Road to Ruin. It explains in great detail why the worst economic downturn in history is about to take place. Whether or not you believe that, it helps to be informed. I found it to be eye opening and very credible. The thing you want to make sure of is that the money you got from a refinance is placed somewhere safe. Hint, not the banks and not the stock market, no matter what the Trump affect is suggesting.
I hope that helps!
Many questions, all good ones, so let's cover each one:
- My financial planner is suggesting I replace the fixed income portion of my portfolio (about 20%) with an annuity with a guaranteed rate of 5%. She says she is concerned about the future of the bond market and interest rates. She also says that I can lock in a 5% return as well as invest in more aggressive investments with my $180K. Several thoughts come to mind. First, if you can get a 5% guaranteed return for the life of the policy, that's great, I just don't think that is possible. These rates are generally declared each year and depend on a number of factors we don't need to get into here. You may want to consider Equity Indexed Annuities which have higher interest rate potential over time. Which way you go will depend more on what gives you most comfort. When interest rates go up, principal on bonds go down, which is why she is making the case for change. Rates are going up, albeit not rapidly. What you are moving from may also be part of the equation. If you are in short term bond investments now, there will almost certainly be no affect to your portfolio, since managers just hold the bonds to maturity, thereby sidestepping losses that would occur when selling an unmatured bond in the open market. The bigger concern I have has to do with the $180,000 into more aggressive investments. I am wrestling with this myself. I am concerned that we are in for a serious downturn over the next two years, even with Trump in office. Not just my opinion. Check out James Rickards new book called, The Road to Ruin. This is quite the eye opener from a very credible source. Tough to read, but worth it. It is best at this time, even if you go more aggressively, to have a strategy that takes advantage of these down turns and be ready to implement quickly if you see it happening, and certainly own some gold no matter what. Just be ready to move quickly, and in so doing, realize that if there is even a one day significant down turn, you will likely lose money. The answer to not losing money, is an Equity Indexed Annuity. The S and P has only returned about 2.75% since 2000. Annuities have fared far better as they guarantee against loss, so there are no losses to have to come back from. Some have been historically north of 7%. Past performance is no guarantee of future results, for any investment other than those that are specifically guaranteed.
- This investment will also be made with my IRA funds. Can you suggest what questions to ask? I am well aware of the high commissions and fees at the beginning of the annuity term. But I would like some independent verification if this new strategy is, in fact, viable. I am a 62 widowed woman, still working full time at a good job. If you are considering moving your IRA to an EIA, be sure and get one that allows for tertiary beneficiary designations. This is a big deal and forgotten by the majority of the industry. Not all fund or annuity custodians/products allow for this, so be sure you get it. It doesn't help you, but it will help your beneficiaries greatly. With respect to fees early on with an annuity, please allow me to clarify. There are no fees in any fixed annuity going in. Since there are no sales charges going in, if you hold onto the annuity through to the end of the CDSC (contingent deferred sales charge) period, you will never pay any fees. Commissions are paid by the insurance company and are actuarially calculated. The only exception to this are optional fees you may pay for riders that are available, yet some companies are now providing these riders at no cost. There is much more to this, but for the sake of brevity, just suggest you get complete explanations of available products that best suit you. The misnomer over annuity fees come from false and misleading ads from people like Ken Fisher who regularly advertise on FOX News. Interestingly, when the research is done on Mr. Fisher, you find the major thing he sells . . annuities. It is a bait and switch operation.
My one piece of advice would be, never substitute financial security for emotional security! Chew on that for awhile. In the course of my almost 30 years in the business, I have seen more people ruined by their emotional and mental attitudes towards money than anything else. The amount it takes to retire comfortably is enormous enough, let alone someone with lofty aspirations. Make sure you understand the goal in terms of the money needed by the time you would like to retire. In other words, if you want $100,000 a year in todays dollars, know that the need for that money doubles about every 12 years assuming a 6% inflation figure. If you run that out, it means you will need $800,000 a year if you retire at 58, which is rather young for the majority of the population. That is a big number to hit, however, if you are serious about your goals, you will find out what will be required of you each month to hit the mark. If you need help, feel free to reach out to me at 818-300-4446.
P.S - Remember something called "Opportunity Cost", which means that what you spend on anything, especially stuff that really in unnecessary, it is not just what you spend that represents the true cost of a thing, but what you lost in terms of opportunity had you invested the money instead. In other words, spend your money wisely and begin with the end in mind.
Keep up the good work.
My goodness, why would you do that when you are so close to retirement, and at a time with so much systemic risk in the system? You may not need the money now, but you will soon, and typically, aggressive funds, index or not, are far too risky for someone in retirment. Ask yourself this question, can I afford a loss of between 20% to 50% or more if the market implodes? If you cannot, you are in the wrong place. Secondly, there is no such thing as the words aggressive and safe in the same sentence to describe what you are considering. Aggressive funds by their nature are not "safe". They may be diversified, but that won't save you if there is an aggressive move to the downside. In fact, it could make matters worse. There are ways to give you a decent rate of return with no risk at all, which are far better options than playing the markets at this level, with the US $20 Trillion in debt, with the entire globe in debt, and with the political instability we are seeing globally and even right here in the US. Please, please, please, do not make your decisions based on the current Trump affect. It will not last, especially if he has problems getting his initiatives passed, which appears likely. If and when it does, the market will reverse and you will be down nicely, which is not good. There is more I would need to know about your situation, especially what your expectations are for returns before I could reccomend anything, but I can tell you categorically, I would not recommend what you are planning, even if you were independently wealthy and don't need the money at all. At worst, put only part of your money there, but not all. The rule is that if you subtract your age from 100, the remaining number represents the percentage of assets you should have in the "Risky" category. The rest should be in something guaranteed, which historically over time will yield somewhere in the 7% range. So if you are age 65, only 35% of your assets should be in the market, and I would say less under current circumstances.