Andrea’s parents have a seemingly salesy financial advisor. He tried to get them to purchase a second life insurance policy, among other potentially pushy moves. Are her parents better off without his advice?
Teresa can’t shake the feeling that the stock market is more of a gamble than an investment. Is there any advantage to holding funds for the long-run if the market drops and you lose your gains?
June is curious about the best college planning strategies for families who are working toward, or close to, financial independence. How can you help your children while securing your financial future?
Big Sister’s little sister rents a mobile home in an area she loves. The owner wants to sell, but her little sister might not obtain financing. Should Big Sister buy the property and sell it to her via seller financing?
Managing for Mom in Massachusetts has an investment strategy that he wants to run by us. Does it make sense to shift a 50/50 stocks and bonds portfolio to 100 percent stocks, and shift back to a 50/50 split after the market returns to pre-pandemic numbers?
My friend and former financial planner Joe Saul-Sehy joins me to answer these questions. Enjoy!
Andrea asks (at 3:30 minutes):
I’m from southwestern Ontario, near the border of Michigan. My parents have a “financial advisor” (he seems like more of a salesperson) that they’ve had a friendly relationship with for years. However, he tried to sell me – a young, single individual – on life insurance, and he put my money in actively managed mutual funds. When I wanted to switch to index funds, he refused, so I stopped working with him and started managing my own money.
My parents are in a good financial situation. Their home is paid off, my mom is retired, and my dad still runs his construction company because he wants to. A year ago, they started another successful business, and their financial advisor almost sold them on a life insurance policy for my mom. His reason? An investment for their excess cash.
My mom wasn’t sure how a second life insurance policy counted as an investment, but their financial advisor scheduled a health check for her anyway. I convinced my parents not to purchase this insurance policy. Instead, I told them to invest their cash in a home renovation – something they’ve wanted to do for years.
The next time they met with their financial advisor, he told them to borrow against their home to get cash for the renovation. He wanted them to invest their excess cash with him and he promised to beat the current mortgage rates. Can you please comment on his advice and whether it’s worth following?
Managing for Mom in Massachusetts asks (at 26:00 minutes):
I started managing my mom’s stock portfolio a few years ago, after my dad passed away. Coming into the pandemic, her portfolio was evenly split 50/50 between Vanguard Total Bond Market and Total Stock Market index funds. The funds are held within a Traditional IRA, and since my mom is almost 80, she has mandatory distributions. My mom doesn’t need the money as she has a teaching pension, but I know we’ll need this money for long-term care and I want to make these returns as good as possible.
When the market crashed in March, I realized she was sitting on a lot of money in the bond market. It had gone down a little, but nothing like what VTSAX experienced. I started selling bond market index shares in chunks to cost average it, and I bought shares in stock market index funds instead.
My plan is to hold this new 100 percent stock portfolio, much of which I bought at the lowest points, until the DOW returns to its pre-pandemic numbers – around 29,500. At that point, I’ll sell off half of the stock index funds and buy back the bond funds, wait until the next crash, and repeat.
I started investing during the 2008 crash, so I’m not worried about reacting emotionally in these situations. Does this strategy make sense? Are there tax implications with selling and buying?
Teresa asks (at 39:43 minutes):
I have a question about the stock market. Let’s say I buy $10,000 in index funds, and in five years, they’re worth $15,000. Great! But in 10 years, the market drops, and they’re worth $10,000 again. Am I back to where I started? If a friend buys $10,000 at that time, do we now have the same value in index funds? Do I get any advantage for having held them for 10 years?
If not, then it seems like the stock market is more of a gamble than an investment. I’ve heard that contributions are important, but they’re still subject to a downmarket. Aren’t you just gambling with more money at that point?
“Big sister” asks (at 51:10 minutes):
My little sister rents a mobile home in an area that she loves. The owner plans to sell next year and my sister has the right of first refusal to buy. She wants to purchase the home, but she might struggle to secure competitive financing because of her modest income and credit score.
I want to provide an affordable path to home ownership for her. My financial situation is solid. I own my home, and my children’s college expenses and my retirement are covered. I’m not looking at this as an investment, but as a way to help a family member.
I can purchase the $80,000 property, remove the mobile home, and build a modular home – all with cash. The estimated cost of building the foundation and structure is $120,000. The plan is to place an apartment within the home that my sister can rent out to generate additional income.
I want to use seller financing to sell the property to my sister. The estimated mortgage payments are consistent with her current rent payments. The rental income would more than offset new expenses, such as property taxes.
How should I handle seller financing? If I charged zero percent interest, would that trigger the gift tax?
June asks (at 59:15 minutes):
How can parents who are pursuing financial independence plan for college? Most of us know the basics, but I’d like to do a deep dive because up to 47 percent of our assets can be taken away, which threatens our retirement. (Editor’s note: this 47 percent figure is in reference to the expected family contribution.)
You recently told a caller to buy a rental property, pay it off in full, and then sell it when their kids go off to college. However, several experts in the field have said the opposite: that the depreciation can bring down your income for the year. Can you help me understand this strategy?
Resources Mentioned:
- Everything You Never Wanted to Know About Life Insurance, with Joe Saul-Sehy | BiggerPockets Podcast
- How to Talk To Your Parents About Retirement and Beyond, with Cameron Huddleston | Podcast Interview
- The Art of Decision-Making, with Annie Duke | Podcast Interview
- Ask Paula – I’d Like to Airbnb a Yurt. Should I? – at the 37:05 minute mark | Podcast Episode
- Ask Paula & Joe – How Can I Send My Four Children to College? | Podcast Episode
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