Q: What advice can you give about the importance of having a lifetime financial plan and working with a financial planner on that? I don't know enough to do one myself. Is this important, or is this hype?
C.S., via e-mail
A: If you really don't know enough to handle your personal finances, but want a financial guide to life, it certainly makes sense to hire someone who specializes in this sort of thing. After all, we're talking about tax strategies, retirement and estate planning, investment management, and insurance, to name just a few disciplines that come into play in crafting a financial plan. It's hard for ordinary people to be expert in all these fields.
Gary Diffendaffer, executive vice president of the Certified Financial Planner Board of Standards Inc., isn't exactly a disinterested party in this discussion. But he correctly notes that "you can't get to where you're going until you know your destination." A competent planner, he says, can develop a blueprint to help you set and attain life goals through the financial-planning process. And a good planner will stay on top of your situation and let you know when changes to the market or your lifestyle warrant changes to your finances.
Q: For a hypothetical case of a $350,000 mortgage at 6 percent for 30 years, how much of a tax break does a person get on a salary of $75,000? Assume there's a husband, wife, and two children. What effect would this tax break have on a higher (or lower) mortgage and a family with a higher or lower income?
- E.B., North andover, mass.
A: This is a more complicated exercise than you might think. Denver-based certified financial planner A. Raymond Benton says that the impact of the itemized deduction for mortgage interest is blunted by the $9,500 standard deduction (which otherwise would be used to determine taxable income). The interest deduction may also bring into play other deductions, like property taxes, that can offset income only if they can be itemized.
If you ignore these factors, which Mr. Benton did for a moment to answer your question, he figures the tax savings in the first year would be $1,802. If the mortgage interest turned out to be fully deductible for a taxpayer in the highest bracket (35 percent in 2003), the federal tax savings might amount to $7,308. Over the life of the loan, the reduction in taxes might range from $20,000 to $141,902, depending on the overall situation of the taxpayer.