FAQs

One of the benefits of investing in real estate is using other people’s money, AKA leveraging. It is advisable to use appropriate leverage in your financial portfolio so that you can build your wealth faster.

As long as your mortgage is a good debt, you should keep it. If you generate a higher return than the interest rate that you borrow, then this is good debt. Also, the other benefit is that the interest you pay on your primary residence is tax-deductible. In such instances,you should keep the debt. If the interest rate you are paying is higher than the return you are generating, then that is bad debt. You should pay it off.

Other considerations will depend on the stability of your income or other goals. If your income is not stable, it is recommended that you keep the mortgage since you need to have stable income to reapply for a mortgage and it is difficult to take equities out of the house.

There are quite a few rules of thumbs” about how much you need to retire. To simplify, I would use the number that is twenty times your pre-retirement income. For example, if your pre-retirement income is $100,000, you may want to have about $2,000,000 in your retirement funds.

However, I believe a better question to ask is “When do you want to retire and how much will you want to spend when you are retired?”. The specific amount of retirement funds you will need depends on when you retire, your lifestyle, life expectancy, health condition, legacy goals, etc.

Most underestimate their spending before and after retirement, as well as the impact of inflation. It is important to create a budget and factor in realistic inflation rates in different areas, such as housing, medical, and extended-care expenses. In the budget, it is advisable to separate essential and discretionary expenses. It is ideal to have guaranteed fixed income, such as pension funds, annuities, or rental income, to cover all or most of your essential expenses while having an investment portfolio to cover discretionary expenses. When you know you have a consistent income stream to cover essential expenses and an investment portfolio that can allow you to take out more money when the market is good, you will not be stressed about day-to-day expenses. You can use our Budget Worksheet to create your budget.

It is highly recommended to have a written financial plan in which you can run projections and different scenarios, including the worst case ones. When you see in the projections that you are ok to retire by a certain age even in the worst case scenarios, you will feel free and confident to retire.

It is suggested that you save about 10% to 15% of your annual income before age 50. You should consider increasing to 20% or more when you are approaching retirement. Creating a budget gives you a clear idea about how much you can put away. If you have specific short-term goals, you do not need to stretch yourself to put funds in the retirement account since you will be subject to rules and penalties if you take money out.

It is important to plan carefully before you exit the business. If you wait until after you sell your business, it will be too late to save on any taxes.

In California’s Silicon Valley, it is common for entrepreneurs and small business owners to exit their businesses with significant capital gains. If your business has qualified small business stocks, also referred to as Section 1202 stocks, you are exempt for up to 100% of federal taxes. Your company must be a C corporation in the US and has less than $50 million gross assets before or after the issuance of the stock. There are other restrictions regarding the qualifications. Please check out https://www.sba.gov/blog/qualified-small-business-stock-what-it-how-use-it and also consult your tax advisor for more accurate information.

To save income taxes this year, you can either defer your income or accelerate your deductions and expenses. To defer more income, you can participate in a deferred compensation plan if your employer offers it and you qualify.

To accelerate deductions, you can consider accelerating the payments of mortgage interests and property taxes. Also, consider setting up a Donor-Advised Fund (DAF) If you are charitable inclined. You can deposit one lump sum for future contributions in the DAF and get the immediate income tax deduction this year. You can invest the funds and decide how and when to donate later. The funds in the DAF grow tax-deferred and distributions are tax-free for qualified charitable donations.

Another strategy for getting tax deductions is to maximize your Health Savings Account (HSA) if you have a high deductible health insurance plan. You can accumulate and invest the funds in your HSA and do not need to spend it all during the year you contributed, which is unlike the contributions you make to your Flexible Spending Account (FSA).

Also, avoid income generating investments which will add on your taxable income, such as CDs and taxable bonds, and avoid selling investments with gains within a year.

You can also consider shifting or transferring income to those in a lower income tax bracket. You can start gifting to your children or other beneficiaries. Even if you do not get tax deductions now, you can avoid paying taxes on the income and gains in the future.

Please note that the current tax rates are temporary and set to expire in 2025. The income tax rate may go up in the future. Therefore, if most of your income is taxable when you retire, you may still be subject to a high income tax rate. It is advisable to diversify your taxation in your portfolio meaning building both taxable income and tax-exempt income at the same time. You can consider strategies such as using Roth IRA and life insurance policies to get tax-free income in the future even if the contributions and premiums are not tax-deductible now.

I believe we need to make our money work for us at all times and the rate of return needs to fight against inflation at the very least. We need to balance the risks of losing money and the risks of not making money.

It is suggested that you keep about six months of your expenses in cash or cash equivalents for emergency funds. Then, you can place the rest in short-term, intermediate-term and long-term Investments, according to your goals, objectives and risk tolerance level. If you need the funds within two years, then I would not invest this money in the stock market. Instead, consider some money market funds or build a CD ladder according to your cash flow schedule.

To lower the risks, stay diversified, not just with stocks and bonds, but also in domestic and emerging markets. Consider using dollar-cost averaging (DAC) strategies by setting up an automatic investment plan instead of investing a lump sum of funds.

When you have clear and long-term goals in mind and you choose the asset allocation that fits you, you will not be bothered by the short-term volatility in the stock market. You are welcome to fill out our Risk Profile Questionnaire and we will let you know our recommended asset allocation for you.

Before you invest in anything, you need to answer three questions: is it a good investment? Is it a good investment for me? And is it a good time to invest?

Investing in real estate properties is good if you can generate positive net annual operating income (NOI), cash flow, and an internal rate of return (IRR) for the holding period. The NOI and IRR should be comparable or better than those of similar investments. Other factors that can make real estate a good investment are leveraging (use other people’s money) and enjoying certain tax benefits, such as tax deductions and a tax-free exchange.

Historically, a residential real estate investment can hedge against inflation and the return is inflation plus one percentage nationwide. The return on real estate in the San Francisco Bay Area is about 6%. Like other fixed income investments, the annual income is the main source of return and price appreciation is the second.

Recently, property prices have gone up significantly, most likely the NOI could be low or negative in the San Francisco Bay Area, and the cash flow can also be negative. It is not a good time to invest in properties with negative cash flow unless the projected IRR is huge. Be realistic about projecting the future market value when calculating the IRR. I would use the average return for the past 30 years instead of the past 10 years. Also, set your expectations because real estate is supposed to be a long-term investment, meaning over 10 years or more.

Even if the interest rate is low, this does not automatically make a real estate property a good investment. Other expenses may be high, such as property taxes and repair costs. You need to conduct thorough after-tax NOI and cash flow and IRR analysis. Always compare other investments with similar risks to determine what the best investment is at that time.

Determining whether real estate is a good investment for you will depend on your age and passion for managing properties. It takes time and energy to oversee properties and tenants especially if you are managing the properties yourself. It is important to understand the risks as well as any restricted tenant protection policies and legal liabilities. If you do not want to deal with these issues, then real estate may not be right for you.

The best savings plan depends on your goals, how much control over your assets you want to retain, and the ages of your children. Parents usually use a 529 plan, Coverdell Education Savings Account (ESA), or a custodian Uniform Transfers to Minors Act (UTMA) account to save for their children’s education funding. Each strategy has its pros and cons.

A 529 plan is more popular since you can place more funds into it than the Coverdell ESA and there are no income limitations. You can put in up to $150,000 per beneficiary at one time for a 5-year gift tax averaging from a married couple. You can invest the funds and they grow tax-deferred. The gains are tax-free if the beneficiaries go to K12, 4-year college, and higher. However, in most states, including California, the contributions are not tax-deductible. If none of the beneficiaries go to college, there will be a 10% penalty and the gains are subject to income taxes.

If you are confident that all of your children are going to college and they are young, using a 529 plan can be a good idea. You want to have at least 10 years in the plan before withdrawal to benefit from the tax-deferred growth. If your children are older than 12 and you are not sure they will go to college, I would not recommend funding a 529 plan for them.

A UTMA account can allow you to save not only for minors’ education expenses, but also for other expenses, such as saving for the down payment of your children’s houses, or paying for their wedding. However there are no tax benefits in the account and kiddie taxes may be incurred. Also, parents will lose control of the account when the minors turn 18 in California.

If you want the flexibility to use the funds for any purposes while enjoying tax benefits, consider using life insurance policies with cash value and minor Roth IRAs to achieve these goals. Even premiums to life insurance policies and contributions to minor Roth IRAs are not tax-deductible, they both offer tax-deferred growth and potential tax-free withdrawals. Unlike minor Roth IRAs, there are no limitations on income and contribution amounts for the premiums of life insurance policies.

You want to cover both income replacement needs and cash needs. Income replacement needs is the cash flows to support your surviving spouse till your children finish college. Your cash needs are your major liabilities, such as mortgages, college expenses, and medical expenses. Other considerations are providing a legacy for your loved ones and any charities of your choices. This coverage can be personal.

Choosing the right type of policy can be overwhelming since there are so many policies offered by different life insurance carriers. It is advisable to spend a great deal of research and time and hire a reputable Certified Financial Planner CFP ® to customize a policy to fit your situation for at least the next 10 years or so. Investing in a life insurance policy is a long-term commitment. Also if you change a policy or cancel it a few years after its issuance, you may incur surrender charges and a higher cost of insurance if you reapply when you are older.

Factors affecting which type of policy best fits you include your goals, budget, age, life expectancy, any medical condition, etc. There are two main types of life insurance policies: term life insurance and permanent life insurance. If you have large liabilities and a limited budget, a term policy may be a good fit. If you want tax-deferred cash value accumulation, and potential tax-free withdrawals with estate planning in mind, permanent policies are worth considering. Consult your financial advisor and CFP® for your specific situation.

As your life situation changes, so will your life insurance needs. You need to review the policy periodically to see if it still serves your purposes and aligns with your current financial and health situation. Also, the cost of insurance has gone down in the past decade because competition has been fierce and people are living longer. You may be able to lower your premiums.

If you do not want the policy anymore, you don’t have to keep paying the premium. You can either let it lapse or take the cash value minus any surrender charges and cancel the policy. If the policy does not fit your current situation, and there is cash value in your existing policy, you can do a tax-free exchange to a new policy that fits you now.

We can help you review your existing life insurance policy so that you can decide whether to keep it, cancel it, or do a tax-free exchange to a new policy. Simply click here to answer five questions and we will send you our recommendations.

I believe the best way to do this is to achieve your legacy goals while strategizing in a tax-efficient way. Also, you may want to know how much control you want to retain when passing the assets to your children. Most parents like to keep control of the assets especially when your kids are minors. Instead of gifting outright, you can start gifting by using strategies such as setting up Uniform Transfers to Minors Act (UTMA) accounts in the name of your children. You can also use life insurance policies with cash value to fund your children’s education, wedding, a down payment, etc. If your goal is for your kids’ education, consider using a 529 plan and refer to the Education Planning FAQs.

Other strategies depend on the complexity of your financial situation. If your financial situation is rather simple, you can set up a living trust which is revocable and name your children as beneficiaries. You can include a spendthrift provision in the trust if you are concerned about their spending behavior. Wait to transfer your assets after your passing instead of gifting during your lifetime so that your kids can enjoy the step-up in basis to save capital gains taxes.

If your financial situation is more complex, consider setting up irrevocable trusts such as a Grantor Retained Annuity Trust (GRAT) or an Intentionally Defective Grantor Trust (IDGT). Since they are irrevocable, careful planning is highly recommended. Please consult your estate planning attorney or family law attorney for more information.

A: You can consider using a Charitable Remainder Trust (CRT), which allows you to secure your retirement income and save immediate income tax now before donating the rest of your assets to your church upon your passing. This is assuming that your church is a qualified charitable organization.

You can fund a CRT with highly appreciated assets like stocks or real estate properties and convert the assets into lifetime income for yourself. This reduces your income taxes now and your estate taxes when you die. You pay no capital gains tax when the assets are sold in the CRT. You can keep investing in the CRT. When the assets grow in the trust, you build a larger legacy. When you die, the remaining trust assets, which go to your church or other charities of your choice, are not subject to taxes.

The CRT is irrevocable. This means that once you transfer assets in and they are out of your estate, you cannot take them back for your own use. Therefore thorough planning before setting this up with your CFP® and CPA is highly recommended.

Another option to save income taxes is to take qualified charitable distributions (QCD) if you have an IRA and are over age 70 ½. You can directly transfer the distributions of up to $100,000 from your IRA to your church. The QCD is excluded from your taxable income. However, you will need to carefully plan for the donation amount as this strategy will not provide lifetime income for you.

The above information is for reference only. We would be happy to answer your questions about your unique situation. Please tell us about you so that we can start our conversation.