Are People Getting “Rich” From Natural Gas?

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Robert J. Brown, CFP®

Partner/Investment Manager

Stone House Investment Management, LLC

210 Maple Street, Montrose, Pa 18801

570-278-6926

rbrown@stonehousemail.com

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Remember when you used to drive on the road and rubberneck at the newest drilling rig with mixed emotions going through your mind?  You feared the unknown risks yet felt optimistic about what this could mean to our area.  What a difference a couple of years make!   On my way back and forth between Montrose, Tunkhannock, Wyalusing, etc… I see the rigs and pads along the way but honestly pay them no mind, much like the hundreds of telephone poles that I pass on that same trip.

Yet there is still a cause for concern about the environmental risks and whether the powers-that-be will do what is necessary to mitigate the dangers as they should.  Each company is unique in how it prepares and moves through the drilling process and each well pad seems to hold its own story as to how this will play out.  Oddly enough, the same can be said for the financial side of the equation.  Each well unit has its own story and each individual landowner has his/her own experiences.  As an owner and financial planner of a premier firm in NEPA, I can honestly say that there is absolutely no consistency with what people are doing with their newfound ‘wealth’.

I am asked all the time, “What’s everyone doing with their money?”

My answer:  “Everything… and nothing at all”.

What?  I’m not trying to be cryptic, just honest.  Let me elaborate by pointing out that many things in life move in cycles.  Look at nat gas since it hopped onto the scene over 6 years ago.  It was priced through the roof; then plummeted to basement low prices for some time and now it’s showing signs of life again.  Look at the volumes of our wells; remember six years ago when those vertical wells were putting out impressive volumes?  Now you cross your fingers that they don’t even drill vertical wells on your land; now you want horizontal or nothing!  Everyone knows how the volume/royalties were higher in the early months of production compared to the current months.  With all of these moving parts, what does that do to the spending habits of royalty owners?  Again, let’s focus on the cycles that take place.

Much like any demographic in history, royalty owners go through their own growth cycle.  For those who have not had ‘extra’ or disposable income before, there is a sense of discomfort, excitement and nervousness.  They do their best to make wise decisions but we’re all human and sometimes we spend with our eyes instead of our minds (we all do it).  It’s usually when the monthly amounts begin to taper to less than half of where they started that there is a shift in mindset.  Wait a minute!  What if this money runs out?  Here comes a whole shift to the spending… until the next cycle.

This is normal.  Most have heard the statistic that many winners of the lottery turn out to be worse off financially than before they won their millions.  But hold on… royalty owners have an advantage here… the checks typically keep coming.  Even if mistakes are made, you might get a “do over”.  In fact, you may get several of them.  Great news!  So what should you do with it this time?  Well, here is what some people are doing:

• Paying down their debts
• Helping children do the same
• Gifting to children and grandchildren
• Buying new homes, additions, remodeling and landscaping
• Picking up a few toys here and there… car/truck/tractor/skid steer
• Building storage for their new toys
• Investing into their own business/farm in ways they could not before
• Turning their hobbies into actual business models
• Buying more real estate to attempt to compound the nat gas effect
• Investing into a variety of portfolios (ie: stocks, bonds, mutual funds, annuities)
• Tucking it under the mattress (CDs, Savings, Checking, Money Markets, etc…)
• Lending it out to others (serving as a personal bank)

Now, each of these above items can be a wonderful strategy, or they can prove to be a recipe for disaster.  The trick is to know which to use and when.  Ultimately the best idea is almost always balance.  Several of these items happening at once can mean better diversification of risk and a better stance for whatever tomorrow throws at you.

As a financial planner, my job is often to help sort through these options and weigh the pros/cons with the clients to find that balance.  I will say that I’ve noticed a difference with the newest generation of royalty owners in that they seem to have heard some good and bad stories from earlier landowners and now seem to be approaching this wealth building opportunity pragmatically and with a purpose.  This is an amazing time to be doing what I’m doing and it’s exciting when clients come into our offices looking for that second opinion and hoping to establish a comfort level with us so they have a place to come back to when they need that advice.

Hey Royalty Owners… Lower Your Taxes!

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Robert J. Brown, CFP®

Partner/Investment Manager

Stone House Investment Management, LLC

210 Maple Street, Montrose, Pa 18801

570-278-6926

rbrown@stonehousemail.com

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We are often asked if there are ways to contribute royalty income to IRA’s or retirement plans. The answer is no, but there is a work around you may want to consider. Think about increasing your contributions to a retirement plan at work.

Who does this work for?  Anyone receiving royalties AND who is employed somewhere that offers a retirement plan or is self-employed.

What you need to do?  Dial up your contribution amounts from your paycheck and into your retirement plan.  It’s that simple.

Why does it work?  It works because you are only allowed to contribute EARNED income to a retirement plan/account. Royalties do not qualify, but you can spend your royalties for your daily expenses and instead contribute your earned income from work to your retirement plan or IRA.

Here’s an example:  Let’s say you’re making $60,000/yr at your current job.  You were putting 3% ($1,800/yr) into your retirement plan at XYZ Company because the company would match it.  However, NOW you’re seeing royalty checks of $2,000/month! You can spend that $2000/month of royalties  on living expenses such as groceries, your mortgage payment, your car payment, etc (after you set aside enough for taxes).  Then you can instruct your employer to hold out much more from your paycheck to put into your retirement account at work.  How much you can contribute depends on your company’s plan.  Some plans allow for more than $20,000 per year!

What if you’re self-employed and don’t currently have a retirement plan in place?  Now might be the perfect time to set one up.  There are many types of plans to choose from depending on the size of your business and what type of contributions you want to make to your own retirement and the retirement of your employees.

For many people, this will give you a great chance to save more for the future and pay less in taxes today.  That’s a win-win in most investors’ minds!