Medicare – When Do I Enroll?

The time to enroll in Medicare Parts A & B is between the 3 months before and after your 65th birthday. This is called your Initial Enrollment Period (IEP). It’s important not to miss this enrollment window because there is a PERMANENT penalty that increases each year you delay enrolling.

There is, of course, an exception.

You have an 8 month Special Enrollment Period if you or your spouse is working and covered by a group health plan through the employer or union. Your Special Enroll Period starts at one of these times (whichever happens first):

  • The month after the employment ends
  • The month after group health plan insurance based on current employment ends

Once you are enrolled in Medicare Parts A & B, it’s time to start researching what kind of Medigap Plan (Medicare Supplemental Plan) and Prescription Plan (Medicare Part D) to get.

*edited*

Even though it might be another 30 years or so before any of us millennials need to enroll in Medicare, we probably have parents/aunts/uncles that will be enrolling soon. So pass this information along because 90% of people get their enrollment period wrong and end up paying a lot of extra money for unnecessary coverage or worse, ongoing penalty fees.

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Our Baby Step Update – Baby Steps 2 & 3 Complete!

Back in February, I mentioned how we would be done with Baby Step 3 by April. Turns out, I was about 3 months off.

The remodel cost more and took longer than anticipated – of course. And we didn’t secure tenants until mid-June, which means we had to cover all the overhead costs (mortgage, property tax, insurance, HOA) for a total of 7 months!

Once we got the first month’s check and security deposit from our tenants, the first thing we did was pay off my husband’s car loan. Baby Step 2 complete!

The rest of the money went to our emergency fund. Dave (and every other financial professional in the industry) says your emergency fund should be 3-6 months worth of expenses. We’re planning to save only 3 month’s worth for two reasons:

  1. We have HELOC that has an interest rate of prime + .25 percent. The prime rate is set by the Fed and it’s currently 4.25%, which means our interest rate on the HELOC is currently 4.5%. Since interest rates are likely to continue going up, we want to pay down the HELOC as fast as possible.
  2. My husband and I have pretty stable jobs that are salary based. Since the timing and amount of income we receive is fairly predictable, having extra cushion in our emergency fund takes second priority over paying down the HELOC.

We thought it would take us a few months to build up our emergency fund but now that I have my term life insurance in place, I decided to cash out a whole life insurance policy that my mom purchased for me when I was four. [Parents, please DO NOT buy life insurance for your young children. Life insurance is meant for replacing income that would be lost if something happened to the person insured and as far as I know, four year olds aren’t bringing home the bacon. And if you’re going to buy life insurance, please stay away from permanent policies (variable, universal and especially whole life)!] By cashing out my whole life insurance policy and applying the accumulated savings to our emergency fund, Baby Step 3 is now complete!

Now we’ll be tackling Baby Step 4 & 6. (We’re skipping Baby Step 5 because we don’t have any kids yet!)

Baby Step 4 is saving 15 percent of your gross income into your retirement account. We won’t be saving the full 15 percent because we still want to pay down that HELOC as soon as possible. But that could take a couple of years and I don’t want us to miss out completely on all that compounding interest in the meantime.

Once the HELOC is paid off, saving the full 15 percent into retirement accounts will then take priority over paying extra principal on our three mortgages, which is Baby Step 6.

Estate Planning Documents – The Most Important Ones to Have

The most important estate planning documents that everyone should have are:

Here’s a little description of what each one is:

Will – A document with written instructions directing how certain portions of your assets will be disposed at death.

Durable Power of Attorney (for financial matters) – A power of attorney is a written document that authorizes another person to act on your behalf. So if my husband is my power of attorney, he can make decisions on my behalf like invest my assets or pay for my expenses. However, if I become incapacitated, he no longer has that power. But with a durable power of attorney, he can still make decisions on my behalf even after incapacity.

Durable Power of Attorney (for health care/medical proxy) – A medical proxy is document authorizing another person to make health care decisions on your behalf when you are no longer able to understand or communicate your own desires regarding medical care.

Living Will – A living will is a document that allows you to state in advance what life-sustaining medical measures related to hydration, respiration, and nutrition should be taken by a health care provider if you are incapable of consenting to treatment.

This year, my husband and I focused on getting our life insurance in place. Now that that’s almost done, the next item on our financial to-do list is estate planning. We probably won’t tackle estate planning this year for two reasons:

  1. It can be pretty expensive – Getting your estate planning done can cost several thousand dollars. We spent a lot of money this year on the home remodel and we’re just starting to build up our emergency fund again so we’re not ready for another large expense yet.
  2. We’re hoping to have kids in the next few years and having kids is one of the triggers for updating your estate plan. It would be kind of a waste to pay a couple thousand dollars now to get it done and then have to redo it in a year or two once our first kid is born.

Getting Term Life Insurance – Step by Step

Once we found renters for our condo, the next item on our list of financial to-dos was getting life insurance.

Here are the steps we went through:

  1. Contacted a life insurance broker and told him what kind of policy we wanted to buy (30 year term with death benefits that were 10 to 12 times our income). We chose 30 years instead of 20 because we don’t have any kids yet but plan to within the next few years and we wanted the insurance to last until our kids were all out of college and all the mortgages were paid off.
  2. Our broker sent us some estimates from different insurance companies and we picked the company with the lowest annual premium.
  3. Once we made our decision, our broker sent us a series of questions to answer (full names, home address, Social Security numbers, etc.)
  4. He then prepared an application for us to sign with some additional questions for us to answer. We signed and returned the application back to him.
  5. Shortly after, a medical examiner called us to schedule an appointment for our medical exams. Your medical exam determines your health class and your health class determines your annual premium. The better your health class, the lower your premium. We scheduled the medical exam for a Saturday morning.
  6. About 10 days after the medical exam, our broker let us know that my application was approved and what health rating I was in. My husband’s application is still pending because they’re waiting on medical records from his doctors.
  7. After I was approved, our broker sent me the official policy to sign. I returned the signed documents along with a check for the first premium payment.
  8. The check was deposited and my life insurance policy is now active.

 

Buying a Condo in Los Angeles for Under Market Value

We bought our condo in Los Angeles for under market value thanks to preparation and luck.

By the time I stumbled upon the listing on Redfin, a buyer was already in escrow but the seller was taking back-up offers. We submitted a back-up offer but was quickly outbid. We pretty much gave up on this property right away. But a month later, my mom saw that it was relisted because the first and second buyer both fell out of escrow. We immediately contacted the seller’s agent to find out why and it was because the previous buyers had issues with the property during inspection. We were willing to accept those issues as long as we could get it for a good price. We submitted a really low offer and at first, the seller was hesitant to even negotiate with us. But because it had been on the market for several months and she already had 2 buyers back out, we ended up agreeing on a price about halfway between our offer and the listing price.

Below is a timeline of how everything played out. Feel free to skip to the end for some final thoughts.

August 16, 2016 (my birthday!) – Saw the property on Redfin.

August 29, 2016 – Found out that the seller had already received an offer but is accepting back-up offers. We submitted an offer a little higher than listing price but was outbid.

September 29, 2016 – My mom informs me that the property has been relisted.

October 2, 2016 – Found out why it was relisted. First and second buyer changed their minds for different reasons but they both offered way above listing price. The first buyer offered $54,000 above listing price. The Second buyer offered $26,000 above listing price.

October 3, 2016 – Submitted our first offer ($39,000 under listing price).

October 6, 2016 – Received the seller’s first counter offer ($6,000 under listing price); sent our counter offer ($19,000 under listing price).

October 7, 2016 – Accepted the seller’s second counter offer ($12,500 under listing price).

October 10, 2016 – Opened 45 day escrow.

October 31, 2016 – After the inspection, the seller decided to lower the purchase price even more instead of paying for the repairs. So the final purchase price ended up being $25,000 under listing price.

November 22, 2016 – Closed escrow.

Final thoughts:

The listing price was already under market value because the seller was betting on a bidding war. Today, the property is worth about $84,000 more than what we purchased it for. But this estimate is without taking into consideration the complete remodel that we’ve done.

We got lucky because my mom happened to see that the property was relisted and told us right away. Preparation was important because we had all our paperwork ready to go and were able to move quickly. Even if we got lucky with the timing, if we weren’t prepared to move forward right away, the seller probably would’ve moved on to another buyer. But because we had everything ready, the seller could see that we were serious buyers and there was a very good chance this escrow would go through.

So if you’re in Los Angeles (or any major city) and buying a house for “a good deal” seems pretty much impossible, I just want to encourage you to be patient. Keep looking and stay on top of all the listings, even the ones in escrow. Have all your paperwork ready and make sure your real estate agent and lender are also ready to go at a moment’s notice. In the meantime, pile on the savings. You can never have too much savings. There’s probably going to be repairs needed, closing costs, remodeling costs, etc. so it helps to have a bunch of cash ready to go. And if you happen to buy a move-in ready home, you could use that cash for a bigger down payment or maybe even to buy your property completely debt free :)!

Reverse Mortgages

I’m not that familiar with the intricacies of reverse mortgages but one of my clients recently asked if it was a good idea for him to do one so I did some research. Here’s what I’ve learned about them so far:

When you have a traditional mortgage, you take out a loan and pay the lender payments so that after a period of time (30 years, usually) you own 100% of the home. With a reverse mortgage, you start off with a house that you own 100% and then borrow against it and the lender pays you. Now why would that be a bad thing? Because you’ve traded having no debt on your home for increasing debt on your home and when you pass away or decide to sell your home, you have to repay the loan and could end up with nothing (i.e. no home) depending on how much you owe and how much your home is worth at that time. Not to mention there are a bunch of fees involved and you’re still responsible for all the carrying costs – property taxes, HOA dues, insurance, etc.

You have to be over 62 to even qualify for a reverse mortgage so this obviously doesn’t apply to us millennials right now. However, this could apply to our parents. Most of our parents are over the age of 62 (or will be within the next decade) and they’ll likely have a paid off house. If they’re in retirement and running out of money, someone might tell them to do a reverse mortgage. And now that you know that it’s not a good idea, you can advise against it and try to convince them to consider other options instead like downsizing or selling their home and renting.

Dave Ramsey’s 7 Baby Steps

I was first introduced to Dave Ramsey in 2009, when I was still in college. My roommate at the time let me borrow her copy of The Total Money Makeover. Even though I had always been an avid saver and didn’t have any credit card debt, I wanted to learn more about money.

I didn’t retain a lot of the information I read at the time, but I remember agreeing with most of Dave’s principles. The book also helped me realize the importance of giving, which I had never thought much about before.

After reading that book, I didn’t think about Dave Ramsey or his 7 Baby Steps again until very recently.

At the end of the last year, my husband and I bought our third rental property. And when I finally filled out a net worth statement and realized just how much debt we had once we combined all three mortgages (plus a HELOC), it was a rude awakening to say the least.

Even though our net worth is still very much positive thanks to increasing home values, we don’t like having so much debt, or any debt, to be honest.

So shortly after we opened escrow, we started listening to The Dave Ramsey Show every day. Listening to all the Debt Free Screams has inspired us to finally take his 7 Baby Steps seriously and make a plan.

We are technically in Baby Step 2 because we have small car loan. But we should be able to jump to Baby Step 4 & 6 within the next 2 months (we’re skipping Baby Step 5 because don’t have kids yet) and here’s why:

Even though we have the cash to pay off the car, we are in the middle of a major home remodel for the new rental property we just bought. And since home remodels often come with expensive surprises (like suddenly all the pipes need to be replaced!), we want to have enough cash on hand to cover any of those surprises, rather than resort to borrowing more money.

Once the home remodel is compete, we should have enough cash remaining to pay off the car (Baby Step 2) and have a 3-6 month emergency fund in place (Baby Step 3).

My husband and I are currently saving about 10% of our gross income into our 401(k)s but as soon as the home remodel is done, we will bump it up to 15% (Baby Step 4). We will also be redoing our budget to make sure we can pay extra principle on our mortgages & HELOC to get out of debt faster (Baby Step 6).

Based off our current income and expenses, we are projected to be in Baby Step 6 for over 25 years (yikes!). But by reducing our expenses immediately and increasing our incomes over time, our goal is to get out of Baby Step 6 in 15 years or less. The average family takes 5-7 years to finished Baby Step 6 but since we have 3 rental properties, 15 years might be more realistic.

If all goes well, we should be financially independent the same time we pay off our last mortgage.

I know things won’t work out this way exactly because, you know, life happens. But that’s our plan and if we’re delayed by a few years, we would still be out of debt a heck of a lot sooner than if we had no plan at all.