By Sarah Kaelberer
Many of you know, Darvin and I are re-building
our cabin in Backus, Minnesota. Anyone who has
embarked on this knows it is quite a process! And
in that process, often comes the common questions
of cash flow and financing. In addition, on a
regular basis I am asked by clients and 401(k)
participants “if I have extra money should I invest
it or pay down my mortgage?” Since this is such a
common question, we thought we would highlight
a few thoughts for this edition of The Adviser.
AVOID FORMAL MORTGAGE ACCELERATOR
PROGRAMS: Folks often receive mailers about
such programs. Under this program the mortgage
company will accept payments on a bi-weekly
basis rather than monthly. While that may seem to
be the same, there are actually 26 2-week periods
in a year. So in this program, on top of timing of
payment, there is also one half of an additional
payment made per year. This can help cut 5 – 7
years of a mortgage (depending on your terms) and
save quite a bit of interest. Sounds like a great idea,
right? Well, it is, except, that to “enroll” in their
formal program, there is often a cost of $150 -
$400! You can accelerate your mortgage without
their costly program. If the mortgage company is
not willing to help you through the details on how,
we will! But is accelerating that payment the best
use of your additional cash flow?
REDUCE OTHER DEBT FIRST: In my opinion, one
of the surest ways to financial freedom is to not
owe anyone. If you don’t owe anyone, income is
only required to support your current lifestyle. And
if you do have to have debt, have it for things that
acquire something (i.e. real estate, vehicles,
property, schooling, etc.). Debt for consumables
(i.e. eating out, vacations, etc.) is debt for which you
have nothing physical to show. If you have
consumer debt (credit cards) those should be your
first debt reduction strategy. And your goals should
be to first eliminate those with the highest interest
Sarah and her daughter Miranda helped to pack school supplies for Interfaith Outreach & Community Partners in Wayzata.
INVEST IN 401(K): Okay, so everything is in order
and you have no consumer debt, just a mortgage.
Now what should you do? Of course we have to
start with some general assumptions. You are
young, which is 40 or under. (Funny how each year
my definition of “young” continues to be right
around my age.) Let’s assume (1) you have an
additional gross income of $500 per month to spare;
(2) you have a 35% combined (state and federal) tax
bracket; (3) you are 7 years into a mortgage with a balance of $200,000 fixed at a 7% rate; (4) to
make things equal, your investment returns in your
401(k) is level at 7% per year. These assumptions
are for illustration purposes only and do not
represent any specific investment.
Now, in order to get money in your pocket to
make an additional payment against your
mortgage, it must go through the tax system. So
your gross $500 after 35% tax ends up being only
$325. In your 401(k), let’s assume you use
Traditional 401(k), which provides for savings
before tax calculation, rather than Roth 401(k),
which is after tax savings. Now how does it look?
Had you taken the mortgage route and put the
extra cash toward it, your mortgage would be fully
paid by your age 57. You would have saved
$126,800 in interest! Wow! But to keep all things
equal, let’s say at 57 you now take that extra $500
per month and save it all in the 401(k). You would
have almost an additional $62,000 in your 401(k).
Of this amount about $15,400 is earnings on your
additional deposits. So, from interest savings and
earnings you are $142,200 ahead!
Had you taken the 401(k) route, at age 65 you
would still have a mortgage balance of less than
$60,000. You would have saved nothing in
interest payments as no additional mortgage
payments were made. Your 401(k) account
however would have an additional $410,000. Of
this $410,000, $150,000 is your additional
deposits but $260,000 is additional earnings. So
here, you are $260,000 ahead!
Given these circumstances, you can see the
savings far exceed the mortgage repayment. The
Roth 401(k) still comes out ahead too, it is just not
as dramatic of a difference. And of course,
everyone’s circumstances are unique. So if you
find yourself in a position where you are
wondering where to put your additional money to
give you the best bang for your situation, feel free
to give us a call!
By E. Dennis Zahrbock, CFP
I took son-in-laws Todd, Steve and Greg on a
Canadian Fishing Trip in late June. We caught lots
of fish and had to shoot a bear…..my “wilderness
son-in-laws” then prepared “bear shish ka bobs”
Black dirt is something hard to come by in
Northwest Wisconsin. In Western Minnesota, where
I grew up, when they said “black dirt” they meant
“black dirt”. I inquired about trucking some in but
in the end purchased 600 - 40# bags of black dirt
from the local farm store. My goal was to have a
better garden then ever…my goal hasn’t worked as
the “insects” are now my problem. After ten years
of trying to grow sweet corn in the shade, irrigation
systems, cultivating equipment, fences to keep dear
out and bagged black dirt I’m pleased to state that
my yields have increased. I’m guessing rather than
$100 an ear for corn I’ve reduced the price to $90!
But it was good…even made my first dill pickles.
Darvin, Sarah and family along with friends spent 10
days at the cabin over July. Many long weekends
were enjoyed there this summer before it was torn
down just after Labor Day. The new basement is in
and the structure should be up by the end of October.
We look forward to seeing a finished place
sometime late spring!
The Z-Family trip to Vermont this summer was a
wonderful experience. When they call it the “Green
Mountain State” they are right. What a beautiful
place to spend a week and get the added treat of
visiting the Ben and Jerry Ice Cream factory!
A Delaney Golf outing and sibling reunion outside
of Detroit, MI started October for Sarah. It was the
first time in 9 years that all siblings had been
together. Her brother Mike was even back from
Germany for the event.
Sue and I along with Steve and Lori and Sarah
enjoyed a week during May in Quebec City, Quebec,
Canada at the ValMark annual meeting.
Sue was elected Vice President of the NW Synod of the
ELCA Church. This is the highest non-clergy position
in the Synod. She’s already been to Chicago for a
convention and will be going to Malawi, Africa next
spring as part of her duties.
Who can forget Grandparents Camp II held at our
Silver Lake home in August. All five grandkids,
Addison (8), Sabrina (6), Parker (5), Quentin (4)
and Kallahan (3) attended. I even got the
“grandchildren’s cabin” (3/4 size) furnished with ¾
size log furniture. Grampa and the kids slept there
Duck hunting in the Delta Marsh started in
September….opening week was a success we
bagged eight different species of ducks. See
pictures at www.decoyinn.com. Our group has
acquired a new 6 wheel amphibious vehicle that
will transport our weary bodies from parking lot to
the water’s edge.
BULLETIN BOARD OF
Dennis and Sue traveled to Seattle to visit with friends. While there they spent four days in the San Juan Islands on a private tug boat with good friends Roger and Rhonda Groves.
Steve and Sarah attended sessions for the Strategic Coach program. It continues to give them strength in developing what we do.
E. Dennis and Sue visited Washington, D.C. where E. Dennis spoke to the National Association of Insurance and Financial Advisers
E. Dennis and Sarah go to Phoenix for the annual Top of the Table meeting (top 1000 financial
professionals in America). E. Dennis is scheduled to address all attendees from the main platform.
Sarah, Steve and Dennis will travel to Orlando, FL to attend ValMark’s School of Life.
E. Dennis joins several friends for a Pheasant Hunt in South Dakota. This is the first event of the
ValMarksman Hunt and Fish Club.
Sarah will speak on the Nuts and Bolts of 401(k)s at the Central NAIFA meeting in St. Cloud, MN.
Sarah and Darvin head to South Dakota for their annual Deadwood R & R. You just might seem them playing poker on television one of these days!
Steve and Sarah attend their next Strategic Coach session in Chicago.
Sadly no one from Business & Estate is able to attend the annual ValMark Mission Jamaica Project. We wish them all the best.
E. Dennis, Sue and all the kids are scheduled to celebrate Christmas a week late at Lutsen Mountain on the North Shore of Lake Superior. Later in the month, the Rice Lake travel group’s “Lutsen Ski Weekend III” will take place.
Top Of Page
Meet our Advisory Board Members
WAYZATA ADVISORY BOARD
Q. How did you first become acquainted with Business & Estate Advisers? I met Dennis in the spring of 1974, while at Hamline University in St. Paul, and bought a 10,000 “College Master” whole life plan from him. That was the start of a long and close friendship between my wife Mary and I and Dennis and Sue. That friendship even survived a brief stint where I worked for Dennis spring semester of his senior year. Since then, we have vacationed and traveled extensively together and remain in close and frequent contact. My wife and I have been BE&A clients since its inception.
RICE LAKE ADVISORY BOARD
Q. How did you first become acquainted with Business & Estate Advisers? Denny gave a presentation to the Men’s Club of which I’m a
Q. What, in your opinion, makes Business & Estate Advisers different from other financial services firms? Their advisory board is unique to a financial services firm and I’m impressed with their numerous charitable contributions to the community.