Never Make a Major Real Estate Decision on Vacation

You may later regret what seemed like a good idea at the time.

You’re on vacation, having a great time. You’re relaxed, enjoying the warm weather, great views and terrific food. You casually say to your spouse, “Wouldn’t it be great to live like this more often?” You agree it would, so you buy a home in the area. No more hotels! No more packing and unpacking! It’s yours — a home away from home!

Will you live to regret this real estate decision? Many do, for these reasons:

  • You realize you can’t visit the property as often as you’d hoped.
  • You soon get bored traveling to the same place every vacation.
  • You underestimated the cost of furnishing a second home — everything from furniture to televisions to kitchen utensils.
  • You didn’t anticipate the time needed for repairs and maintenance. When you do go to the house, you spend most of your time fixing leaking faucets, not relaxing at the pool or ski lodge.
  • There’s no room service. You have to cook all your meals — and that means going to the grocery store instead of the beach. This vacation trap is quite common. Lost in the fantasyland of vacation, it’s easy to be struck by inspiration — and then make a decision you’d never make at home, where you can think more logically.

Making a major real estate decision while on vacation is a terrible idea. If you’re really thinking about buying a second home, take your time. Consider the long-term consequences and keep the following in mind:

  • It’s a vacation home, not an investment property. You can’t have it both ways: The property will be a place for you to enjoy — or a rental to produce income. Few owners of second homes succeed in doing both. Why? Because you won’t decorate the same if you rent it out — and that means you won’t enjoy the house as much when you are there. And tenants will want to rent the property at the best times — exactly when you want to be there.
  • Be realistic about how often you will use the property. Think long and hard about how often you’ll be able to visit. Understand that owning a vacation home might prevent you from visiting other destinations. Is that a tradeoff you’re willing to make?
  • Add 20% to the costs you’re expecting. From the mortgage and property taxes to maintenance and furnishings, you are going to spend more on your vacation home than you anticipate — just as you have done with your primary residence.
  • Will the house fit your future lifestyle? That vacation spot might fit your family’s lifestyle perfectly. But if your kids are all grade schoolers, will they want to spend the entire summer at that house as teenagers?
  • Are you assuming the property will grow in value? Remember: Real estate values don’t always rise.

This doesn’t mean you shouldn’t buy a vacation home. Just be sure to consider all aspects of any real estate decision, so you can avoid buyer’s remorse. If you’re thinking about buying a vacation home, you might want to talk with your financial planner before you talk to a real estate agent.

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Flood Insurance – Don’t Put This Type of Coverage Off Any Longer

If you wait until the next storm is coming, it will be too late.

Remember Hurricane Irene? After it struck the East Coast in 2011, we wrote in this newsletter that flood insurance is essential for homeowners, and we encouraged you to talk with your insurance agent about coverage. Hurricane Sandy hit the following year, and some of our clients are still trying to recover from it. All told, the storm caused $50 billion in property losses. More recently, Hurricane Michael swallowed homes and businesses along the Gulf Coast, from Alabama to the Florida Panhandle. Some fear hard-hit areas will take years to fully recover.

Talk to your insurance agent if you haven’t already done so. Many people assume that homeowner’s insurance policies cover damage caused by floods. Unfortunately, most policies don’t. If your home could conceivably be flooded, get flood insurance. Only 20% of the homes at risk for floods are covered, according to the National Flood Insurance Program — even though floods are responsible for more damage than any other natural cause.

Here are some important facts about flood insurance:

  • You don’t need to live in a high-risk area to need flood insurance.
  • Flood insurance is underwritten only by the federal government, through the NFIP. You buy it from your insurance company. Visit www.floodsmart.gov for details and to find a local agent.
  • The average flood insurance policy costs about $700 annually, but you might pay as much as $7,000 if your home is in a flood-prone area such as a seacoast or riverbank.
  • The insurance protects your house and its contents. If you rent, you need to buy a policy to protect your belongings; such policies cost as little as $100 a year.
  • You must buy flood insurance if your home is in a floodplain. You can see if this applies to you by visiting FEMA’s Map Service at https://msc.fema.gov or by viewing the flood map of your city’s planning department.

Flood insurance doesn’t go into effect for 30 days. That’s why you need to buy it now — before a forecast calls for the next storm to arrive.

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8 Warning Signs Your Timeshare Agent is a Crook

Timeshare resales are often fertile ground for scammers and con artists.

Do you own a timeshare property you’d like to sell? There are legitimate real estate brokers who can help you, but timeshare resales are also fertile ground for scam artists, so you need to be careful.

Timeshare resale fraud became popular in the aftermath of the 2008 credit crisis. After people lost their jobs and maybe their homes and saw their investments fall 50% or more in value, they realized they couldn’t afford to keep paying maintenance fees and taxes for their timeshares — and they weren’t about to vacation there anyway. So they tried to sell them, often turning to sales agents for help. It turns out that many of those agents are crooks.

Complaints to the Federal Trade Commission went from 819 in 2009 to 2,182 in 2010 to 6,041 in 2011 — causing the FTC to launch a crackdown on timeshare resale fraud. The FTC and law enforcement agencies have taken 191 actions against fraudulent resales and travel prizes in 28 states; nearly 200 individuals face criminal prosecution. In Florida alone, 69 people were accused this year of scamming timeshare owners out of more than $14 million, including many victims who are elderly or in financial distress, the FTC said.

Here’s how most of the scams work: Once people find out that you’re trying to sell a timeshare (perhaps you post it on a website), an agent contacts you, saying he has an interested buyer — but that you must pay a fee upfront to secure the deal. After you pay, you never hear from the agent again and no buyer materializes. The upfront fees typically range from $300 to $3,400, says the FTC.

Has a crook contacted you? There are lots of warning signs. Watch out if the agent:

  • Asks you to pay money before he provides any services.
  • Asks you to pay only by cash, wire transfer, money order, certified check or cashier’s check.
  • Refuses to meet in person or provide you with a business address that you can visit.
  • Says you don’t need to read lengthy agreements because “it’s just a bunch of legalese.”
  • Claims there is a strong demand for timeshares in your area, enticing you to sell (and pay upfront fees).
  • Asks you to give your personal financial information (such as bank account or credit card numbers) over the phone or Internet.
  • Says you can walk away from your timeshare simply by transferring it to a third party.
  • Says you needn’t talk with your family, attorney, accountant or financial advisor.

If you want to sell a timeshare, the FTC offers this advice:

  • Get everything in writing: Never agree to anything over the telephone or online.
  • Investigate: Contact the state attorney general’s office and consumer protection agency in the state where the seller does business.
  • Ask whether any complaints have been filed against the company, and search online for complaints.
  • Check for appropriate licensing: Ask whether the reseller’s agents are licensed to sell real estate where your timeshare is located. If they are, double-check their claim with that state’s real estate commission.
  • Deal only with properly licensed real estate brokers and agents, and ask for references from clients.
  • Pay only after your unit is sold: Deal only with a firm that collects a fee after the sale is concluded and the transaction closed through a bank or title company.

To file a complaint with the FTC, visit ftc.gov/complaint and click on the Complaint Assistant icon or call 877-FTC-HELP (877-382-4357).

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10 Ways to Cut Your Auto Insurance Costs

A step-by-step guide for saving money on auto insurance.

Chances are, you’ve had the same automobile insurance coverage for a long time. If so, this may be a good time to review it for savings. Here are some tips to help you reduce your auto insurance costs.

1. Raise your deductible.
Instead of forcing the insurer to pay claims in excess of $500, change your policy so that you pay the first $1,000. This will reduce your collision and comprehensive premiums significantly. By not filing small claims, you also avoid the risk of being charged higher premiums or even having your policy canceled.

2. Drop collision and comprehensive coverage on older cars.
If your car is worth less than $1,000, the cost for collision coverage could be more than what you’d recover if the car were in a crash. Use a site like Kelley Blue Book to determine your car’s value. But make sure that you keep your auto liability coverage.

3. Ask about discounts.
Many carriers reduce their prices if you buy coverage for two or more cars or if you buy homeowners coverage from them as well. You can also get discounts if your car has anti-lock brakes, air bags, automatic seat belts, alarms or anti-theft devices, or if you complete a driver education course. Some discounts are also available if you are a member of certain professional, business or alumni associations, so ask your association and also check with your insurer to see if they can help lower your auto insurance costs.

4. Manage the cost of insuring teen drivers.
It costs more to insure young drivers, but some insurers reduce their rates for good students, students who go to school more than 100 miles away from home and don’t take a car with them, or teenagers who have completed defensive driver classes. You may also save money by “re-garaging” a car if your child takes his or her car to school in a town where car insurance rates are lower.

5. Pay your bill once per year.
Insurance companies let you pay in monthly or quarterly installments, but you’ll pay more than if you pay the entire bill once each year.

6. Don’t duplicate coverage.
If your credit card or association membership offers towing and roadside assistance, don’t pay your insurance company to provide these benefits.

7. Drive less.
The fewer miles you drive each year, the lower your premium. And if you don’t drive to work, your auto insurance costs will be even less. Make sure that your insurer knows how many miles you drive and prices your policy accordingly.

8. Park in a garage.
Cars stored in protected environments are less likely to be stolen or hit by other cars. Tell your insurer if you park in a garage and see if you can get a price break as a result.

9. Maintain good credit.
Insurance companies believe that people who are responsible with their money are more likely to be responsible drivers. A good credit record can translate into lower premiums.

10. Other people’s driving records affect your rate.
Believe it or not, other drivers’ past behavior influences your insurance rate. That’s because insurers track the average insurance claim for every car make and model, and they use the data to help determine their rates. If drivers of a specific vehicle tend to have more accidents, incur more frequent or higher claims, or have their cars stolen more often, insurance companies will charge higher rates for everyone who drives the same type of car.

So if you’re in the market for a new car and serious about keeping your auto insurance costs low, check out the Highway Loss Data Institute’s data. Or simply ask your insurer for a price quote before you decide which model to buy.

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Second Marriages: A Financial To-Do List

There are many financial issues specific to a second marriage.

More than 40% of weddings involve a bride or groom who has been married before. Yet while most of these couples pay close attention to their wedding day budget, many fail to take the time to discuss financial issues that will have a greater impact on their relationship — such as who owns assets accumulated before the marriage, or whether both spouses will support children from a prior marriage. The subject might not be romantic, but addressing these issues before you tie the knot could be the best thing you do for your relationship – and your second marriage.

Without a doubt, marriage is more complicated than ever. A new bride is likely to gain more than just a husband; if he’s been married before, she might find herself married to his alimony and child support payments as well. A groom suddenly might be a father if his new bride has children from a prior relationship. For these reasons and more, you need to approach a second marriage like you would any other financial agreement: Very carefully.

Full Disclosure When Entering into a Second Marriage
Before you get married, you and your fiancé should discuss all aspects of your financial situations with one another. On a piece of paper, write down your:

  • Credit History. Have you ever been late on payments, or had any judgments against you? Have you ever declared bankruptcy?
  • Debts. How much do you owe to credit cards? What other debts do you owe?
  • Assets. Include your annual earnings, the value of your home, cars, investments, and retirement plan funds.
  • Obligations under a previous divorce decree. Make sure your intended is aware of any child support or alimony payments you are required to make (including how much), as well as any disability, life, health or long-term care insurance that your settlement says you must keep in effect. You should also let your partner know if your ex-spouse has rights to any of your future retirement plan earnings.

When you’re done, exchange papers with your fiancé. Expect your answers to trigger discussion about who is responsible for debts incurred before the marriage, whether you will share assets earned by one of you, and how you will meet financial obligations from a previous marriage.

Your next step is to consider drafting a prenuptial agreement. A “prenup” is especially important if you 1) are bringing significant assets into the second marriage, 2) expect to inherit a business or other assets in the future, or 3) have children from a previous marriage.

Protecting Your Assets
Typically, those who remarry are older and wealthier than the first time they married. As such, you often have more interest in protecting assets you bring to the marriage. Many high-earners also are interested in protecting assets they’ll earn during the marriage. A prenuptial agreement will ensure that your assets will remain separate from your spouse’s, and that the spouse cannot claim a portion of your assets if you divorce.

Protect Your Children
Prenuptial agreements also can be useful if you have children from a prior marriage and want to ensure that your assets pass to them when you die. Generally, unless your spouse specifically waives his or her right to the assets in a valid agreement, he or she may claim a portion of your estate when you die.

Take John, for instance. A successful internist, he was 45 years old when he embarked on a second marriage with Melanie. To protect his two children from a previous marriage, John established a trust and named the children as beneficiaries. That way, the $2 million in assets he’d earned before his second marriage would go to the children when he died and not to Melanie.

But John’s plan may be sabotaged if Melanie decides to sue for a share of the money when he dies. Virtually every state has a law that entitles a surviving spouse to a portion of the estate — even if your will or a trust says otherwise. If Melanie does not expressly waive her right to the money in a prenuptial agreement, John’s children could lose a third of their inheritance should she demand part of the money.

If you’re like most, however, you want to do both: to provide for your spouse and preserve assets for the kids. To do this, consider a Qualified Terminal Interest Property, or QTIP, Trust. This trust lets your surviving spouse enjoy access to the assets during his or her lifetime, but enables those assets to pass to your children upon the surviving spouse’s death.

Inheritances and Other Assets
Most states consider inheritances the property of the heir. Just be sure you keep the money in a separate account, or it might be considered community property if you divorce. Generally, any income or other property acquired during the marriage will be deemed community property also.

After the Wedding
Now that the wedding’s over, it is particularly important that you revisit your financial plan. You should review:

  • Insurance. Do you have enough? Now that a new family is counting on your income, you may need to increase your life and disability insurance. If you are in your 50s or older, you should also purchase long-term care insurance, because odds are high that you or your spouse may need such care in the future.
  • Beneficiaries. Have your beneficiaries changed? Too many newlyweds fail to update the beneficiaries of their life insurance policies, trusts, company retirement plans, and IRAs. If you’re not careful, you’ll leave money to your ex-spouse instead of your current spouse!
  • Wills. A new marriage virtually requires a new will.
  • Assets. Do you need a post-nuptial agreement? Do you need to add a waiver to your prenuptial agreement? Talk with a lawyer to find out.

No doubt, marriage can be one of the most emotionally rewarding choices you can make in your life. But don’t ignore the financial implications of your impending union. Proper planning can be key to your continued happiness and a successful second marriage.

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Is There a Financial Leak in the Love Boat?

It can sink your relationship if it isn’t fixed.

February is a time to celebrate love and commitment. But many couples face a hidden challenge that could harm their relationships. It’s financial infidelity.

Two in five Americans who have commingled their finances in a current or past relationship admit to committing financial infidelity against their partner, according to a 2016 Harris Poll conducted on behalf of the National Endowment for Financial Education. And remember, that’s just the percentage who admit it.

Financial Cheating is Increasing
The problem is growing: It is 42 percent today, up from 33 percent of U.S. adults two years ago. It’s not a trivial issue, because the survey found that when financial deceptions occur, 75 percent of couples say it harms the relationship.

“Financial infidelity hurts regardless of its scale,” says Ted Beck, president and CEO of NEFE. “Hiding or lying about small amounts of money can damage a relationship just as effectively as high-dollar deceit. … It causes arguments, erosion of trust, separation or even divorce.”

Of those surveyed, 39 percent admit to hiding a purchase, bank account, bill or cash from their spouse or partner. And 16 percent say they have been guilty of bigger deceptions, such as lying about the amount of their debts or how much they earn.

Common Signs of Financial Deception
What are the signs that your partner might have engaged in some form of financial deception? Here are three common ones:

  • You come across a bill or receipt for a purchase you don’t recognize.
  • You no longer see copies of every bill each month as you did before.
  • Your partner or spouse becomes defensive or withdrawn when the topic of money is raised.

Before confronting your partner with a deception issue, accept that it likely will be stressful. Decide what you want out of the conversation before starting it and choose the time and setting carefully. It’s best to talk when you’re both relaxed but be careful not to sabotage your partner by arranging a special dinner or date night and then hitting him or her with the subject by surprise.

Be Honest to Rebuild Trust
If you’re the guilty party, rebuilding trust starts by admitting you’ve done some spending your partner doesn’t know about, sincerely apologizing and asking your partner to work with you to create some common goals you’ll both stick to. Then accept that rebuilding trust will require a sustained period of transparency in all your financial dealings, along with improved communication.

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8 Signs You Might Be a Victim of Financial Bullying

Financial bullying in a relationship can be a serious problem.

We hear a lot about bullying these days, but are you familiar with financial bullying? It’s more prevalent than you might think, according to a study by Harris Interactive. It found that one in 10 Americans considers his or her spouse or partner to be a financial bully. The percentage is highest among those aged 22 to 34. Among that group, 22% said the bullying is serious enough that they would consider divorce if money were no object.

Here are eight behaviors that could indicate bullying in your relationship. It could be if your spouse or partner:

  • Chides you severely for going a few dollars over an agreed-upon budget.
  • Divvies up extra cash unfairly. Beware if a higher-earning spouse or partner takes or uses more money solely because he or she earns more than you.
  • Controls the credit cards. Partners should agree on credit card use, and both should have equal access to them.
  • Imposes an allowance on you. Sometimes a partner who earns more money or got money through an inheritance might put the other on an allowance. Allowances are fine, provided you both agree to the amounts — and you’re both subject to them.
  • Makes you show receipts for all your purchases, even small ones.
  • Belittles you for the size of your salary or — conversely — tries to curtail your earning power by discouraging you from taking a better job or going to school to qualify for one.
  • Simply takes control of the family finances and commandeers your paycheck.
  • Threatens to leave, knowing you’d be in a precarious financial situation.

If you feel you might be getting bullied, what can you do? If the two of you are willing to talk about whether you can afford a major purchase or whether you’re spending too much at the expense of saving for your future, a financial planner can help. But if one of you is not willing to talk about these issues, it might be best to talk with a family member, close friend, clergy or counselor.

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Q&A: Buying Real Estate With Retirement Money

Does real estate belong in an IRA?

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

Question: A relative who’s a real estate lawyer in another state suggested that I open a self-directed IRA and then purchase a rental income property inside it. But I’ve been unable to find a financial analyst or a tax person to help. Nobody in my area seems to have much knowledge about this strategy. What are your thoughts?

Ric: We don’t recommend investing in real estate through a self-directed IRA for lots of reasons. First, you cannot get a loan when purchasing property inside an IRA. You must pay cash, says the IRS. Once you make the purchase, you have to use the IRA’s assets strictly. You must pay for all maintenance, repairs and property taxes from the IRA. You are not allowed to pay any bills with money from outside the IRA. And because it’s an IRA, you must begin to make annual withdrawals starting at age 70½. But wait — a house isn’t a liquid asset. You can’t sell the living room to raise cash. So how will you generate the cash you need to make the required distribution? This burden would not exist if you bought the property outside the IRA.

If and when you finally do find a custodian willing to manage the account — they do exist — you’ll typically be charged 1.5 percent per year. That’s a fee you could avoid by not purchasing inside the IRA. When you finally do generate profits — if the house grows in value and you earn rental income — those profits will be taxed as ordinary income because they’re inside an IRA. You lose the tax benefits of real estate ownership that are otherwise available to taxpayers, including depreciation and amortization, as well as capital gains treatment on your profits.

So tell me, why do you want to buy the property inside an IRA? It makes no sense — and that’s the reason you’ve found it difficult to find anyone to help you. I’m not saying you shouldn’t buy real estate. I’m saying not to buy real estate inside an IRA. Sorry if this isn’t the answer you wanted to hear.

This material was prepared for informational and/or educational purposes only. Neither Financial Engines Advisors L.L.C (also referred to as Edelman Financial Engines) nor its affiliates offer tax or legal advice. Be sure to consult with a qualified tax or legal professional regarding the best options for your particular circumstances.

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Thankful for Long-Term Care Insurance

It can help you when you most need it.

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

Radio Show Listener: I want to share my story with you. I have been diagnosed with amyotrophic lateral sclerosis (ALS), also known as Lou Gehrig’s Disease. I began having some difficulty with climbing stairs during the spring of 2012. There is no known cure and only one drug, which extends life only two to four months (and I do not tolerate it well). My neurologist says the average life expectancy after diagnosis is four to five years.

I am mostly positive about my condition. After all, we all eventually die; I just have more information than most about what I’ll die from. We are coping with the issues that come up. I expect that I will need more help in the future, but I have a great family and wonderful friends who are ready to help.

I am very thankful that I have long-term care insurance, which I always thought was a waste of money. After all, I figured I was going to die quickly from a heart attack like my father. Who knew?

Ric: Thank goodness you have the LTC policy. ALS is a terrible disease — and an expensive one. Having to cope with the financial challenge only makes the situation worse, so the policy will help you and your family avoid a significant cause of stress (and distress). Your point is an eloquent one: You bought it even though you were sure you didn’t need it. I wish everyone acted as you have.

You and your family have my best wishes, and I thank you for sharing your story with us.
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Q&A: Should I Buy a Hybrid Long-Term Care Insurance Policy?

Understanding long-term care and why it is important

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

Question: I followed your advice and bought long-term care insurance last year when I was 49. I got a good price for a modest policy with a company I trust. But then you began recommending a hybrid plan combining life insurance with long-term care insurance. So I’ve been looking into that as a replacement for my current plan, but with all the pros and cons, I’m having a hard time deciding which one to get or whether to make the switch at all. Can you help?

Ric: First, let me explain to others what you’re talking about. Historically, we have said that you need to own long-term care insurance because the rising cost of health care is the primary cause of poverty among affluent and middle-class Americans in retirement. One in two Americans over the age of 65 will incur long-term care at some point in their life. If you had to spend $80,000 to $100,000 a year that you weren’t counting on, you might go broke. The least painful way of solving that problem is through insurance.

My book, The Truth About Money, first published in the 1990s, details how to shop for a policy, what features and benefits to look for and how to pay for the policy. But my new book, The Truth About Your Future, explains that far fewer Americans will need long-term care because of medical advances through technology. The younger you are, the less likely you’ll need it.

You’re only 50 now, so by the time you’re 80, science may have eliminated most, if not all, of the issues that currently send people into nursing homes. Also, the insurance industry has been severely challenged to sell long-term care policies profitably. Many carriers have quit the business, while others have sharply raised premiums or scaled back product features.

These reasons are why we have modified our advice. Instead of buying a standard policy that offers no refunds if you don’t file a claim, we now suggest you consider a hybrid policy. This combines long-term care insurance and life insurance, so if you don’t use the money for care, your heirs get a death benefit — providing some cost recovery. Some of these policies also offer refunds of some or all of the premiums you paid if you cancel the policy.

This advice is aimed at people who do not own long-term care insurance. You do, but you’ve owned it for only a year. So, shifting to a hybrid policy is an option to consider. As you noted, there are pros and cons. For example, hybrid policies are more expensive than standard policies in the early years. If you’re going to make the shift, you need to make it soon. Please note that partnership plans rules can vary by state so please seek the council of a professional before purchasing.

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