Smoking is bad for your wealth: Quit today!

Today, everyone can repeat the Surgeon General’s warning that smoking is terrible for your health.  Given the high costs in terms of everyday spending, insurance rates, quality of life, and other effects, smoking is also extremely harmful to your wealth.

Direct costs of smoking – the high price of cigarettes

According to a 2002 study, the average smoker smokes 13 cigarettes per day.  If we assume that a pack is 20 cigarettes, and the average pack costs $5, that’s $3.25 per day (= 13/20 * $5) or $1,187 per year.  Obviously, the more you smoke, the more it’s costing you.  With the federal tax per pack having been raised to over $1 combined with many state taxes at $2 (including Washington’s), the cost of cigarettes seems to only be going up ($6.33 per pack in Washington state as of this writing.)

For reference, a person in the 15% tax bracket could quit smoking their 13 cigarettes per day and contribute nearly $1,400 per year (pre-tax) to a 401k.  If this person quit smoking at age 30 and retired at age 65, their 35 years’ worth of cigarette savings would’ve grown to $206,000 (in real dollars) given historical stock market returns of 7%.

Indirect monetary costs of smoking – insurance, job prospects, resale values

In an article on the high costs of smoking, MSN Money “pulled some online quotes on 20-year term life insurance (a $500,000 policy) for a healthy 44-year-old male … The lowest quote for a nonsmoker was $1,140 in premiums per year; for someone smoking a pack a day, the lowest price more than doubled to $2,571 per year.

[…] According to eHealthInsurance.com, the monthly premium for a policy from Regence Blue Shield with a $1,500 deductible for a 44-year-old male nonsmoker is $552 more a year [for smokers].

A few state governments also charge their employees extra for health insurance if they smoke, and others are gradually joining the trend.”

Additionally, home owner’s typically receive a 10% discount for being non-smokers, tacking on about $85 per year for smokers, given average home insurance premiums of $850.

“Numerous studies find that smokers earn anywhere from 4% to 11% less than nonsmokers. It’s not just a loss of productivity* to smoke breaks and poorer health that takes a financial toll, researchers theorize; smokers are perceived to be less attractive and successful as well.”

Add on higher dry cleaning bills, lower resale values of homes and cars (or money shelled out to clean them), and perhaps the occasional teeth whitening service, and you’re looking at a few to several thousand a year to smoke.

[* – I should note that in fairness to smokers, I’ve read assertions that other than early death, there are no appreciable losses in job productivity attributed to smokers.  However, if employers believe there are anyway, smokers will still receive lower salaries, everything else being equal.]

Indirect non-monetary costs of smoking

Besides bad breath, yellow teeth and smelly personal effects, smoking seriously reduces one’s quality (and length) of life.  The average smoker dies 7-8 years sooner than a non-smoker.  In addition, they are way more likely to live an unhealthy (and therefore uncomfortable) old age, suffering higher incidences of various cancers, heart diseases and strokes:

“The number of people under the age of 70 who die from smoking-related diseases exceeds the total figure for deaths caused by breast cancer, AIDS, traffic accidents and drug addiction.”

There are other side effects as well due to reduced blood flow: “For men in their 30s and 40s, smoking increases the risk of erectile dysfunction (ED) by about 50 per cent.”  For both men and women, smokers’ skin develops more wrinkles and looks paler.

The sooner you quit, the better

The benefits of quitting become immediately apparent (including more cash in your pocket):

From Wikipedia: “The immediate effects of smoking cessation include:

  • Within 20 minutes blood pressure returns to its normal level
  • After 8 hours oxygen levels return to normal
  • After 24 hours carbon monoxide levels in the lungs return to those of a non-smoker and the mucus begins to clear
  • After 48 hours nicotine leaves the body and taste buds are improved
  • After 72 hours breathing becomes easier
  • After 2–12 weeks, circulation improves

Longer-term effects include:

  • After 5 years, the risk of heart attack falls to about half that of a smoker
  • After 10 years, the risk of lung cancer is almost the same as a non-smoker.”

While quitting is difficult due to the addictiveness of nicotine, there are several methods that greatly increase your chances of succeeding.  Try to surround yourself with those who have quit smoking, or are non-smokers:  “A study found … that smoking cessation by any given individual reduced the chances of others around them lighting up by the following amounts: a spouse by 67%, a sibling by 25%, a friend by 36%, and a coworker by 34%.”  So if your significant other, friends or coworkers smoke, try to get them to quit too.  You’ll both help each other succeed.

The best approach using pharmacological aids seems to be use of “[t]he Nicotine Patch plus [as needed] use of gum or spray” which “increased quit rates to 36.5%, the largest quit rate reported.”  In addition, joining a social ‘support’ group seems to help.  “Programs involving 8 or more treatment sessions can double success rates.”  Use support lines like 1-800-QUIT-NOW (1-800-784-8669), to talk to an expert and increase your likelihood of success even further (live IM chat is available too.)

Despite all these methods, it often takes people more than one attempt to quit, so keep at it if it doesn’t work out the first time.  Set a date to quit, then use the above resources to stick to it.  You can get started by tossing your cigarettes & buying some nicotine patches and gum.  Then, check out this free quitting guide at smokefree.gov.

Good luck, your bank account and body will thank you!

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It’s official: Green Lake Financial Partners is open for business!

Just wanted to let everybody know that as of today, Friday April 9th, 2010, Green Lake Financial Partners, my investment advisory firm, is a Registered Investment Advisor with the state of Washington.

Green Lake Financial Partners is a fee-only financial planning & investment management firm.  ‘Fee-only’ means we do NOT benefit from any commissions from expensive mutual fund companies, insurance companies, or brokers trading in our client’s accounts.  I firmly believe that this is the best way of avoiding conflicts of interest that are so prevalent in the wealth management & financial planning industry.

If you, a family member, or someone else you know is interested in determining if I can help, send me an email today at Ward.Williams@GreenLakePartners.com.   We can schedule a free 30 minute consultation (it can be in person, over the phone, or even over email, although the first two options work much better.)  Please note that I’m only taking on a limited number of clients right now.  To be fair to everyone it will be ‘first come, first served.’

If you’re eager to begin, you can jump-start the process by filling out this questionnaire and sending it to me at the above email address.  I also have a (limited) website at GreenLakePartners.com.  It has my contact info and some required disclosure and will be updated in the coming months to include more information about my practice.

Currently, we offer two types of services, both of which are aimed at helping you achieve your financial and life goals by enabling you to hang on to more of your money, protect yourself & family, retire, increase your expected investment returns, and live a richer life.

These two types of services are Financial Planning, for a fixed or hourly fee, and Investment Management, for a percentage of client assets under management (AUM.)

Under the financial planning ‘umbrella’, we give our clients a comprehensive recommendation package covering major like:

1) cash flow (looking at cash in versus cash out)

2) retirement planning (IRAs, 401ks, when to take social security, how to retire early)

3) insurance analysis (how to protect yourself, how much coverage you need, where can you find and save on insurance or cut what you don’t need)

4) investing (recommending asset allocations and appropriate investment choices give a person’s time horizon and risk tolerance)

5) banking, savings, and debt management (how to get the most out of banks, lowering ‘bad’ debt levels and interest rates, whether to pay off a debt or invest)

6) Education funding (investing for college, 529 plans, pre-paid tuition, Coverdell Education Savings Accounts)

7) Income tax planning (ways to pay less taxes through tax-advantaged accounts and investments)

8 ) Estate planning (Wills, Living Wills (medical power of attorney), trusts)

For a specified percentage of assets under management, Green Lake Financial Partners actively manages your investment portfolio, picking mutual funds and ETFs that may include stocks, bonds, cash, and REITs that suit your investment goals, risk tolerance and time horizon.  We keep your costs low and your assets diversified by finding what we believe are the best & most reliable funds and ETFs.  We also monitor your portfolio and make periodic changes (like retirement portfolio rebalancing) corresponding to your age, changing cirumstances, finances, goals, and our assessment of potential investment options.

Required web disclosure:

Green Lake Financial Partners is currently registered solely in Washington State.  As a result, investment advisory services can only be provided to Washington State residents at this time.

(With a limited exception: Green Lake Financial Partners can serve up to 5 clients from each non-Washington state.  If you are not a Washington state resident, please inquire to see if we can serve you.)

Reverse Mortgages: Tap your home as a last resort for retirement

Ideally, a person would finance their retirement through a combination of fixed income (social security or pensions), individual retirement accounts (401k, IRA) and, if necessary, supplementary income from working, or even family support.  However, as many retirees saw in the recent stock market downturn of 2008 & 2009, things don’t always work out this way.  Fortunately, other options exist that provide retirees with ways to close the income gap (other than ‘starving’, an unpopular method.)

Home, sweet home

Most Americans have at least 50% of their wealth in their primary residences.  Wouldn’t it be nice if, after working hard to pay down that mortgage, there was a way to use the value of your home as income? The simplest way is to ‘down-size’ by selling your home and moving to a less-expensive one, investing the difference to pad your retirement funds.  While this may be great for a purely financial point of view, the obvious downside is the hassle and the emotional or practical undesirability of moving.

Home equity lines of credit (HELOC) are a way to use your home equity without selling your home.  A private bank will loan you the money as an interest-bearing loan taken from your home’s equity (the difference between the house’s worth and the mortgage principal you owe.)  You can then use that money for pretty much whatever you want, paying back the loan according to its terms.  One drawback is that you can unwittingly take out too much, then have to either pay it back at an inconvenient time, go without income, or lose your home if you default on the HELOC.  Additionally, your lender could freeze or reduce your line of credit if your home value declines.  For the financially savvy (you!) there’s another way to get at that home equity in a less-risky fashion.

Enter the reverse mortgage

If you’re at least 62 years old, reverse mortgages, called Home Equity Conversion Mortgages (HECM) when sponsored by the Federal Housing Authority (FHA), allow you take either a lump sum, a line of credit, or fixed payments for a specified term or for as long as you live in your house.  This last payment option, called ‘tenure’, seems the safest and most attractive from a retirement income perspective since your payments come monthly, keeping you from spending the lump sum too fast.  However, all the HECM options keep you from losing your house as long as you stay in it.  The loan is also ‘non-recourse’ which means the bank can only collect what is received from the sale of the home, and not any other parts of your estate, even if the loan is more than the value of your house when it’s sold.

From the FHA HECM site:

A borrower cannot be forced to sell the home to pay off the mortgage, even if the mortgage balance grows to exceed the value of the property. A HECM loan need not be repaid until the borrower moves, sells, or dies. When the loan must be paid, if it exceeds the value of the property, the borrower (or the heirs) will owe no more than the value of the property, if they sell the property to repay the loan.”

Wait as long as you can, and take note of high fees

The positive from the fixed payment reverse mortgage option is that you receive constant income for life that can supplement social security and your (cracked?) retirement nest egg.  The more equity you have built up in your home, and the older you are, the higher this reverse mortgage income will be.  This is one reason why you should wait as long as possible before taking out such a reverse mortgage.  Another is that you want to be sure you actually need to take out the loan.  Reverse mortgages come with very expensive upfront fees, about 6-12% of the value of the loan.

Also, the amount you’ll receive will be much less than the total equity you’ve built up.  This amount is usually a little more than half of your home equity.  (The limit for FHA reverse mortgage loans is $625,000, even if your home is appraised much higher.)  Using this calculator, a 75-year-old Seattle couple who owns their $400,000 house free and clear (no mortgage debt), could take out a lump sum of $202,424, or receive a fixed payment of $1,467 per month.  They would also pay over $16,000 in fees (not to mention the interest that’s factored into the loan amount.)  Remember: a reverse mortgage should only be used after other retirement options fail.

Note that the above numbers are based on current interest rates, and will vary over time.  But, when a person actually initiates the fixed payment option in a reverse mortgage, that monthly dollar amount IS fixed over time, just like the payments you make on a regular fixed mortgage.  Keep in mind, though, that the payments are NOT adjusted for inflation, hence the real value of your received payments will likely decline by about 3% per year on average due to rising costs of living.

The FHA HECM site on fees:

Two mortgage insurance premiums are collected to pay for HECM: an upfront premium (2 percent of the home’s value), and a monthly premium (which equals 0.5 percent per year of the mortgage balance).

A lender can charge an origination fee up to $2,500 if the home’s appraised value is less than $125,000. If the home is valued at more than $125,000, lenders can charge 2% of the first $200,000 of the home’s value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000.”

Another negative is that your heirs will receive less due to the decrease in your home equity.  If your kids are already set up independently by the time of your death, this may not be a big concern.

A reverse mortgage can keep your retirement moving forwards

The bottom line is that if you end up struggling in retirement, a reverse mortgage might be the best unconventional alternative to meeting your income needs.  Fixed ‘tenure’ payments (or any combination of the other payment options) can be made to you for life without risking foreclosure on your home.  Wait until you really need the costly loan before taking it.  That allows you to build up equity (pay off your mortgage before reversing it for best results) and get older, both of which increase your monthly payments.

Of course, the best retirement solution is to avoid taking out expensive loans for your retirement.  Instead, invest as much as you can for retirement before you get to it, defer retirement a few years if needed, find other (or increase) income sources, and live beneath your means.

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In addition to the FHA site linked above, here’s another handy reverse mortgage FAQ if you want to learn more.

Personal Finance for Women

Ladies – Here’s a good overview article on personal finance for the fairer sex.  For better and for worse (just like a marriage), women are often polled as being less confident in their ability to manage money.  (Men can often be generalized as being overconfident, leading to riskier investment choices and other forms of blockheadedness.)

Don’t be one of those women who take a back seat to their personal finances and let someone else handle their finances, or worse yet, do absolutely nothing about them.  Read the linked article and get involved with your finances:

http://www.nolo.com/legal-encyclopedia/article-29620.html

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