# Dave Ramsey



## dumbydee (Apr 5, 2014)

Anyone on here doing or have done the Dave Ramsey plan to get out of debt.  DH and I started January 1st and are doing fairly well with it so far.  

If anyone else is doing the plan and would like to post their progress in this thread I would love to hear about it.


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## rickandcindy23 (Apr 5, 2014)

The only debt we have is real estate and timeshare maintenance fees.  I read his book and am tripling our principle for our house.  We paid our rental property off with our house.  

I love credit cards and hold a dozen or so with great benefits, but we pay them off each month.  We are older, so wiser now, and I think Dave Ramsey is doing a great job helping the younger generations to understand what having a new car every three years, or having a 20% interest credit card is doing to their lives.  His book is eye-opening reading material.


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## laurac260 (Apr 5, 2014)

We selected a financial planner from his website, and have been VERY happy with her, and her advice.  I wish I had known Dave when I was a broke college student!


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## b2bailey (Apr 5, 2014)

A young married couple that we know attended a workshop and have seen amazing results in their overall financial picture.


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## Dandc3 (Apr 5, 2014)

rickandcindy23 said:


> The only debt we have is real estate and timeshare maintenance fees.  I read his book and am tripling our principle for our house.  We paid our rental property off with our house.
> 
> I love credit cards and a dozen or so with great benefits, but we pay them off each month.  We are older, so wiser now, and I think Dave Ramsey is doing a great job helping the younger generations to understand what having a new car every three years, or having a 20% interest credit card is doing to their lives.  His book is eye-opening reading material.



Sorry, but his advice is nothing new or earth shattering. Good to know if you never heard it before, that is if he is reaching a new audience. But it is all common sense and baby boomers have had access to this info for decades.


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## billymach4 (Apr 6, 2014)

Dave Ramsey....


Sorry....
Don't need his advice to get out of debt. I have done just fine with my own financial management! 

Debt is against my religion.


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## Jennie (Apr 6, 2014)

I do think a lot of younger people can benefit from Dave's program, especially if they are in debt or have no savings despite having decent salaries. Like so many other "improvement" programs, it helps them face reality, receive a road map to follow, and receive encouragement and support throughout the "journey".


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## Patri (Apr 6, 2014)

And some young people won't listen to their parents' advice, or the parents themselves live in debt, so hearing advice from a neutral party is a good thing.


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## laurac260 (Apr 6, 2014)

Dandc3 said:


> Sorry, but his advice is nothing new or earth shattering. Good to know if you never heard it before, that is if he is reaching a new audience. But it is all common sense and baby boomers have had access to this info for decades.



Well no, I don't think it's all "common sense".  If it was, a lot less folks would be in debt.  I happen to agree with him that the whole "credit score" business is a scam, but most folks live and die by that.  Our gubmt could use some "common sense", or a bit of Dave Ramsey once in awhile.


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## dioxide45 (Apr 6, 2014)

It apparently isn't common sense. The problem is that financial skills are not taught in elementary school, secondary school or even college. These skills should be taught at an early age.

Many people also learn from their parents spending habits. Some of it is also just plain hard wired in to ones mind IMO.


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## 1950bing (Apr 6, 2014)

Here is what I do.
Live below my means,
Give some away,
Put some away, retirement
Put some away, rainy day
Pay all CC on time in full,
Never buy a new car, keep up on maintenance, have a car replacement fund,
When I had real estate costs, always pay interest ahead,
Stay on top of tax changes and allow for such, take full advantage of deductions,
Be happy and tell family, "I love you"
Own a cat


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## Dandc3 (Apr 6, 2014)

+1 Own a Cat!


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## ace2000 (Apr 6, 2014)

+1 on Ramsey.  I haven't sat through the course that takes several weeks, but I've seen a few of his seminars and occasionally on TV.  I have really enjoyed listening to him.


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## rickandcindy23 (Apr 6, 2014)

Dandc3 said:


> Sorry, but his advice is nothing new or earth shattering. Good to know if you never heard it before, that is if he is reaching a new audience. But it is all common sense and baby boomers have had access to this info for decades.



It's nothing new to me, but I think younger folks could really benefit from reading his book.  Common sense is not something all folks are born with.  And I agree with the poster who said his advice is great because younger generations tend to dismiss the advice of older generations.  It's perpetual.


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## bogey21 (Apr 6, 2014)

dioxide45 said:


> It apparently isn't common sense. The problem is that financial skills are not taught in elementary school, secondary school or even college.



I agree.  Our Public School System should incorporate classes in money management, real estate, taxes, etc. in maybe 8th grade and then again in either 11th or 12th grades.  8th grade to create awareness and later in HS to get down to the nitty gritty.

George


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## theo (Apr 6, 2014)

*Who???*



ace2000 said:


> +1 on Ramsey.



I don't live in a bubble or under a rock, but I've never even heard the name Dave Ramsey before, let alone any programs or seminars bearing his name. So, now I'm curious, is he maybe somewhere out west of the Rockies? Is he just another "talking head" on some TV program or channel? Something else entirely?

I am certainly not seeking either Mr. Ramsey's alleged financial wisdom or his "expert" advice --- I'm merely curious who he is in the first place, what his supposed credentials might be and in what geographic area or media venue he actually operates, since it appears that he has more than a few followers.


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## Big Matt (Apr 6, 2014)

My one big issue that I have with his stuff is that you can't owe anyone money.  I have a friend who does this program and he's brain washed.  I'm happy he's getting out of debt, but when I told him that it is okay to buy a car with zero percent interest he tried telling me how you can't be beholden to anyone or you become their slave.  

Stuff like that makes me wonder a little bit.  The program puts a lot of money in Ramsey's pocket too.  Don't forget that about him, Suzie Orman, or any of these folks that travel the country doing seminars.  

Make more than you spend
Save as much as you can....not just for retirement
Have an emergency fund
Never borrow money for things that you can't use all the time
Never have a credit card balance
Use a credit card that pays you something significant for using it


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## Elan (Apr 6, 2014)

I'd lump Dave Ramsey in with Suze Orman:  Over-simplified Financial Advice for Dummies.  If you don't know what they're teaching by age 25, chances are you never will.


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## dioxide45 (Apr 6, 2014)

theo said:


> I don't live in a bubble or under a rock, but I've never even heard the name Dave Ramsey before, let alone any programs or seminars bearing his name. So, now I'm curious, is he maybe somewhere out west of the Rockies?
> 
> Not looking for either his wisdom or his advice, just wondering who / where he is located or based...



Before the launch of the Fox Business channel, I am willing to bet there were a lot more people who had also never heard of him. Though I think he has had a radio show for many years. We don't get Fox Business anymore, but still get CNBC and I watch Suze Orman weekly. She is going in to her 13th year on TV I believe.


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## short (Apr 6, 2014)

*Using it at 70+*



Elan said:


> I'd lump Dave Ramsey in with Suze Orman:  Over-simplified Financial Advice for Dummies.  If you don't know what they're teaching by age 25, chances are you never will.



Debt and spending can be an addiction.  I have a client in their 70's who are now using this to pay off their credit card debt.  They already have done BK about 10 years ago and don't want to do that again.

They both work full time jobs to supplement their social security and luckily they are healthy enough to do so.

Short


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## e.bram (Apr 6, 2014)

Add Dr. Dean Ornish.
(look him up if not familiar, the Dave Ramsey of nutrition)


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## mjm1 (Apr 6, 2014)

Our son and his wife (just married in January, both 24 years old) are following Ramsey's plan. I agree it is good.

The lack of financial literacy is a major issue for our youth (and beyond). The firm I work with has made a five year commitment, both financially and with donating time, to helping. We provide financial literacy modules for some local schools around the country. Personally, I manage our relationship with The First Tee, which teaches life skills to youth, using golf as a venue. The combination of the programs has been outstanding and very rewarding for those who participate, both as instructors and attendees. Some of the kids even share the materials and knowledge with their parents.


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## LannyPC (Apr 6, 2014)

He has some rather "interesting" insights into timeshares:

http://www.youtube.com/results?search_query=dave+ramsey+timeshare

PS: I thought I'd add this post since this is a TS forum.


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## ace2000 (Apr 6, 2014)

If you don't know the difference between a Roth IRA and a traditional IRA and don't understand the advantages of each, then chances are you need to find someone like Ramsey to help you out.  It's more than just debt reduction.

That's just one example out of many, but many just don't understand how to figure their best retirement option(s).  And then throw in 401Ks, 403Bs, CDs, etc. into the mix and they just don't realize their best approach.  We've even seen TUG threads started on these topics.


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## dumbydee (Apr 6, 2014)

I guess what Dave teaches is common sense but he shows you much more than just how to get out of debt.

We are not "a younger" couple but have had trouble being on the same page with finances and having a budget.  

The budgeting tools on his website have helped us to make a budget and stick to it.  Working his snowball plan is different from what we had tried to do before, that did not work.  He explains why his way works and once I heard it I was able to grasp it and we are making headway on our debt.  

I was sick and could not work for a while so debt happened.  

All the post here are interesting but not everyone has the "common sense" to avoid debt.  Some of us were never taught how to manage money.  I have learned a lot from Dave Ramsey's plan and book.  I do know that he is making money off what he does but I feel like I am receiving something for what I have paid.  The cost for his stuff is minimal to what I am gaining in wisdom.  

He also offers a program for kids, which is interesting.  I agree this stuff should be taught in school but for whatever reason it is.  

Of course Dave has nothing good to say about Timeshares.  LOL.  I own three - bought second hand- and do not plan to get rid of them. We use our time and save money by not having to pay full price to rent.  Love me Timeshares.

Thanks to Dave Ramsey we have a handle on our finances and a plan to get everything paid off including our home in the near future.  Before we were just fumbling along.


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## Beaglemom3 (Apr 6, 2014)

I think that Dave offers a good framework or a structure to those who may in over their heads (or headed that way) or those who just want to be debt-free.

Frameworks are a good thing and although not in debt, I do like his common sense approach and tips.

I live below my means, but within my needs.



-


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## geekette (Apr 6, 2014)

Money management isn't taught in schools and won't be.  If you don't learn it growing up you may learn it by experience or determination to figure it out.  I picked Jane Bryant Quinn (book Making the Most of Your Money updated several times thru the years) for my no-nonsense education in my mid 20s, now there is Suze or Dave, and I'm sure others.  Many resources in the library and internet.  Just because the resources are there does not mean someone will access them.

The important thing is to know what you don't know and decide to learn and act, whomever your guru.  

I think that it's best to have a system that is easy to follow as that makes it easy to keep up with, easy to see progress, easy to feel better about the progress and keep the effort going.  Whether or not there is A Name attached to it is meaningless as the only thing that matters is a person successfully managing their finances.  Buying a system to do that is just as good as figuring it out yourself so long as the end result is Positive Net Worth and Cash Flow.


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## dumbydee (Apr 6, 2014)

geekette said:


> Money management isn't taught in schools and won't be.  If you don't learn it growing up you may learn it by experience or determination to figure it out.  I picked Jane Bryant Quinn (book Making the Most of Your Money updated several times thru the years) for my no-nonsense education in my mid 20s, now there is Suze or Dave, and I'm sure others.  Many resources in the library and internet.  Just because the resources are there does not mean someone will access them.
> 
> The important thing is to know what you don't know and decide to learn and act, whomever your guru.
> 
> I think that it's best to have a system that is easy to follow as that makes it easy to keep up with, easy to see progress, easy to feel better about the progress and keep the effort going.  Whether or not there is A Name attached to it is meaningless as the only thing that matters is a person successfully managing their finances.  Buying a system to do that is just as good as figuring it out yourself so long as the end result is Positive Net Worth and Cash Flow.



Very well said.


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## Patri (Apr 6, 2014)

Elan said:


> If you don't know what they're teaching by age 25, chances are you never will.



Why would you say that? Some people will never think about retirement options until late 20s, hopefully not beyond 30s. I think they WILL UNDERSTAND how to manage an account once they start investigating. Many don't invest for education for their kids until they have kids. Some people don't explore disability or longterm care insurance until they are middle-age. So the policy they buy costs a lot more than if they got it younger.

Same with credit cards. Some really do not get one until about their 20s.

With so many 'kids' living with their parents in their 20s, the learning curve is delayed from the old days. But I believe they still have the capability to gain wisdom and smart practices.

You are basically saying people can't learn after age 25. Is that true about everything?

You sure sell people short.


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## Elan (Apr 6, 2014)

Patri said:


> Why would you say that? Some people will never think about retirement options until late 20s, hopefully not beyond 30s. I think they WILL UNDERSTAND how to manage an account once they start investigating. Many don't invest for education for their kids until they have kids. Some people don't explore disability or longterm care insurance until they are middle-age. So the policy they buy costs a lot more than if they got it younger.
> 
> Same with credit cards. Some really do not get one until about their 20s.
> 
> ...



  I didn't say_ can't_ learn. You said that.   I said chances are they _won't_.  Presumably, I need not explain the difference.

  A very large portion of financial situations one encounters (saving, investing, mortgages, car loans, credit cards) can be understood simply by grasping compounding, time value of money, etc.  Very simple concepts most young adults can easily comprehend and almost certainly will have had the occasion to do so by age 25.  Sure, as life goes on, there are more complicated situations, but generally those are very individualized, so over-simplified "rules of thumb" are essentially useless.


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## bogey21 (Apr 6, 2014)

geekette said:


> Money management isn't taught in schools and won't be.



My point is that Money Management *should* be taught in our schools.  It would benefit all our kids.  Maybe we can make it part of the Core Curriculum!!

George


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## klpca (Apr 6, 2014)

Some people don't "get" money. (They help me stay employed). Some of those who don't "get" money do fine with a checklist. I think that Dave Ramsey is helpful for these folks. 

Others are just never going to get it. They keep other people employed .


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## Htoo0 (Apr 7, 2014)

Nothing wrong with Dave's advice but I'm another who figured all that out on my own (and perhaps observing my parents).  I too think it's just common sense. But like they say, common sense isn't all that common. Didn't learn any of that in school. I'd love to see some sort of career exploration in school as well.


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## DonM (Apr 7, 2014)

I look at debt as a tool. It can be a useful one is used appropriately- and I think Dave is black & white on this issue.


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## SMHarman (Apr 7, 2014)

DonM said:


> I look at debt as a tool. It can be a useful one is used appropriately- and I think Dave is black & white on this issue.


Exactly,

http://www.daveramsey.com/new/baby-steps/

I agree until you get to step 6, (well kinda step 4 but step 4 is in the right direction).  

Leveraged, securitized low interest, tax deductible debt is the best possible tool for the middle class to get a comfortable retirement.

I would suggest that step 4 should be maximize contributions to all 401k's and IRAs.

Saving for college educations is next but your children will thank you more for being financially solvent in retirement than having to support you because you spent money on their college that you should have been saving for retirement (and besides, the college assistance forms count mortgage payments as a deductible expense and ignore retirement balances as a contributable asset).

Only after you are maxing out IRA and 401k and putting money into a 529 College fund (why put it anywhere else, you get a federal tax break), in fact you can use it as a pass through vehicle to get a federal tax break even when your kid is in college.

Then you think about paying down the mortgage ahead of schedule.  Mortgage is borrowed funds at 3-6% in current environment.  I can then reduce my AGI by that interest paid.  If I invested that money in a stock market tracker or another property etc than I should see a return above that.  Add compounded interest and the time value of money and that is why you should defer repayment of your mortgage over maxing out your tax advantaged savings plans.  If you then take the 401k and other assets and house value, - less mortgage and other liabilities to create a personal balance sheet then you can see the bigger picture of how your wealth is growing.

There are also other good times to get debt.  Buying a new(er) car that is more reliable, needs less repairs and uses less gas vs continuing to run an unreliable gas guzzler.  The interest on the loan more than offsets the savings on the running costs of the new car.  On a micro scale, I'd also say it is financially beneficial to get a loan to buy a TiVo to replace your cable box.  The loan will cost less than the $20-30 a month that your cable company is ripping you off for DVR service.


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## geekette (Apr 7, 2014)

bogey21 said:


> My point is that Money Management *should* be taught in our schools.  It would benefit all our kids.  Maybe we can make it part of the Core Curriculum!!
> 
> George



I disagree.  Schools already have too much on their plates, and what would you jettison from the curriculum?  I believe this is another Life Skill that should begin at home.  It's the only way to convey "family values" and control the info.   

Else, you simply have to trust that the teacher feels the same way about credit and debt as you do, and that is not good to assume.  Your kids should ask YOU about money management and YOU should facilitate their education and relationship with money.  This is a life skill, not an academic study.

Flipside, of course, is that if your parents were scared away from the stock market, you may pick up that fear and never investigate the single best way to stay ahead of inflation.  If you are brought up by paycheck-to-paycheck people you may adopt that method.  But, plenty of kids understand how their parents did things and vow to do them differently.  Some of us received no info at home or school and figured it out for ourselves, others can do the same.

Waiting until a kid is out of college to convey these lessons is too late (I know some never work until out of school) but by then they can learn by experience and hopefully no or few bailouts from parents.


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## Elan (Apr 7, 2014)

geekette said:


> I disagree.  Schools already have too much on their plates, and what would you jettison from the curriculum?  I believe this is another Life Skill that should begin at home.  It's the only way to convey "family values" and control the info.
> 
> Else, you simply have to trust that the teacher feels the same way about credit and debt as you do, and that is not good to assume.  Your kids should ask YOU about money management and YOU should facilitate their education and relationship with money.  This is a life skill, not an academic study.
> 
> ...



  The consensus of opinion on this thread seems to be that Dave Ramsey's "common sense" financial advice is worthwhile because kids don't learn money skills at home (presumably because their parents have none).  If that's the case, then expecting parents to teach them at home is pointless.  I'd rather see financial basics taught in school than Shakespeare or US history.  Part of the problem with our school system, IMO, is we're not dialed into teaching life skills.  We're raising educated idiots.  Those MIT grads with the battery, wire and light bulb are a great example.  My 12 year old daughter can light the bulb.  You'd think our "brightest minds" might be similarly capable........


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## laurac260 (Apr 7, 2014)

Elan said:


> I didn't say_ can't_ learn. You said that.   I said chances are they _won't_.  Presumably, I need not explain the difference.
> 
> A very large portion of financial situations one encounters (saving, investing, mortgages, car loans, credit cards) can be understood simply by grasping compounding, time value of money, etc.  Very simple concepts most young adults can easily comprehend and almost certainly will have had the occasion to do so by age 25.  Sure, as life goes on, there are more complicated situations, but generally those are very individualized, so over-simplified "rules of thumb" are essentially useless.



I'd explain to you what "rules of thumb" means, but since you didn't "get it" and why you should not use that phrase, by age 25, I doubt you'd "get it" now.  I'd explain why you shouldn't use that phrase, though I presume I need not explain it?


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## rleigh (Apr 7, 2014)

I always marvel at people who think just because they don't have a problem with something, no one else should either.

Everyone has something that is a challenge for them, for a thousand different reasons. Money, weight, gambling, drugs, sports, driving, exercising, socializing, marriage, flying, etc etc.

I may not have a problem with gambling (or fill-in-the-blank) but I sure couldn't judge someone who does, because I may have other challenges.

Common sense is relative.


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## laurac260 (Apr 7, 2014)

I'm wondering HOW I was supposed to "know" how to manage my money.  As mentioned before, it wasn't discussed in school.  From my parents maybe?  I know my parents had debt (they had a mortgage), but beyond that, I know NOTHING about how they managed their money.  My parents never talked about money management with us, I NEVER saw either of my parents sit down and pay bills (I know they had them, but they must have waited till we were at school or asleep to pay them).   All I knew was, don't ask Dad for even a quarter, because the answer would be no.

When my mom died in February, that's when I learned about her, and how she managed her money.  She was very old school, nothing automated, but she was also very structured and organized.  Unfortunately it wasn't a skill she ever "explained" to her own kids.  

So when it came time to manage my own money, it was trial by fire.  

I also realize my kids are not getting any lessons from me about managing money.  In fact, with so many of our purchases being online, or with plastic (regardless of whether we pay them off in full or not), I'm not sure how they will even know VALUE of money.  When my dad paid for something, he pulled money out of his wallet.  My kids almost never see me pull money out of a wallet.  Do they think we have an endless supply?  Or that we can just walk up to a machine and "get" all the money we want?  Probably.


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## laurac260 (Apr 7, 2014)

rleigh said:


> i always marvel at people who think just because they don't have a problem with something, no one else should either.
> 
> Everyone has something that is a challenge for them, for a thousand different reasons. Money, weight, gambling, drugs, sports, driving, exercising, socializing, marriage, flying, etc etc.
> 
> ...



+1  +1


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## Beefnot (Apr 7, 2014)

I like Dave Ramsey's principles.  Don't necessarily subscribe to paying off the mortgage, at least not in California (our mortgages are huge), but I don't knock any of the principles.  Ultimately we got the family out of [non-mortgage] debt from something I'd heard Suze Orman say about budgetign being easier if you make more money.  My wife kicked herself into another gear (she's self employed) and thanks to TUG (and a little luck), I have a side money gig.

By summer we should have, knock on wood, 6 mos. of savings along with investing 15%, and then it's on to the 529s for the kids.  Feels good.  Knock on wood one more time for good measure.


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## SMHarman (Apr 7, 2014)

rleigh said:


> I always marvel at people who think just because they don't have a problem with something, no one else should either.
> 
> Everyone has something that is a challenge for them, for a thousand different reasons. Money, weight, gambling, drugs, sports, driving, exercising, socializing, marriage, flying, etc etc.
> 
> ...


But when the rules are overtly conservative they create new problems of their own doing.  As I indicated above, I think rules 4-6 have wrong priorities and goals and promote paying off the mortgage over saving for retirement.  Saving for retirement, reducing your AGI and getting your savings to work earlier (rather than paying off the mortgage then saving more for retirement should be the plan).

I'd then go on to say that rule 7 should partly be further up front.  You should be thinking about giving to those less fortunate to you way before you have saved every penny you need for retirement, charitable giving should be part of your budget.  

Rule 7 - Inheritence while it is nice to leave something for your children should not be an objective of your financial planning, however if there is something to give, protecting it from the IRS is an objective.



Beefnot said:


> I like Dave Ramsey's principles.  Don't necessarily subscribe to paying off the mortgage, at least not in California (our mortgages are huge), but I don't knock any of the principles.  Ultimately we got the family out of [non-mortgage] debt from something I'd heard Suze Orman say about budgetign being easier if you make more money.  My wife kicked herself into another gear (she's self employed) and thanks to TUG (and a little luck), I have a side money gig.
> 
> By summer we should have, knock on wood, 6 mos. of savings along with investing 15%, and then it's on to the 529s for the kids.  Feels good.  Knock on wood one more time for good measure.


And if you keep putting that money into the 401k then come retirement you can take some out and pay off the mortgage and it will have compounded quicker than the mortgage interest.


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## Beefnot (Apr 7, 2014)

SMHarman said:


> But when the rules are overtly conservative they *create new problems of their own doing*. As I indicated above, I think rules 4-6 have wrong priorities and goals and promote paying off the mortgage over saving for retirement. Saving for retirement, reducing your AGI and getting your savings to work earlier (rather than paying off the mortgage then saving more for retirement should be the plan).




What new problems are you referring to?  One can disagree about method and suggest that other methods may be superior, but between your two posts in this thread, I must have overlooked the problems that Dave Ramsey's principles will create for those who choose to follow them.


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## geekette (Apr 7, 2014)

Elan said:


> The consensus of opinion on this thread seems to be that Dave Ramsey's "common sense" financial advice is worthwhile because kids don't learn money skills at home (presumably because their parents have none).  If that's the case, then expecting parents to teach them at home is pointless.  I'd rather see financial basics taught in school than Shakespeare or US history.  Part of the problem with our school system, IMO, is we're not dialed into teaching life skills.  We're raising educated idiots.  Those MIT grads with the battery, wire and light bulb are a great example.  My 12 year old daughter can light the bulb.  You'd think our "brightest minds" might be similarly capable........



It's ridiculous to not expect parents to teach life skills.  Parents need to quit passing the buck on to the schools.  teachers have your kids a few hours a day and have their own agenda (curriculum) and Life Skills is not part of it and there will not be new time devoted to it.  That responsibility begins and ends at home.  Same with issues of character, respect, manners, appropriate behavior, toilet training, hygiene, ...


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## Rose Pink (Apr 7, 2014)

Interesting thread.  Unfortunately, it has become snippy.  Play nice, please.  We are a good group of people.  

FWIW, I did have some financial basics taught in high school.  That was more than four decades ago and it was in a little town called Pocatello, Idaho.
http://www.youtube.com/watch?v=W73naRLHJOo  (music doesn't start until about 30 seconds)

Anyway, we learned about interest in math class.  I also took an elective class on finances.  I don't know how much of what I now know is from those classes or others I have taken.  

I took another class in college.  I still am not comfortable with risk-taking.

As others have stated, if people find Mr. Ramsey (or others) helpful, I'm glad they have found tools to aid them.  Sometimes we know what we should do, but it takes someone else to lead us by the hand until we feel comfortable doing it on our own.


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## Rose Pink (Apr 7, 2014)

billymach4 said:


> Debt is against my religion.



Mine, too, but I have sinned in the past.


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## SMHarman (Apr 7, 2014)

A financial puzzle for everyone.  It's the math equivilant of the train on the tracks.

1) If you take out $100,000 of additional mortgage debt at 4% and invest it in a S&P500 tracker with an average long term return of 6.8%*.  You get 25% tax relief on the borrowed interest.   This is an interest only loan and you pay only the interest on the loan so the debt does not reduce.  30 years later you pay off the mortgage withdrawing funds from your S&P500 tracker fund.  How much money is left in the S&P500 tracker fund?

2) If you take out $100,000 of additional mortgage debt at 4% and invest it into S&P500 tracker with an average long term return of 6.8%*. Each year you move $5,000 in to your IRA.  You get 25% tax relief on the borrowed interest, you get a $5k reduction in your AGI from the investment in the IRA.   This is an interest only loan and you pay only the interest on the loan so the debt does not reduce.  30 years later you pay off the mortgage withdrawing funds from your S&P500 tracker fund.  How much money is left in the IRA S&P500 tracker fund?  How much additional taxes did you save?

* http://historicalreturns-sp500.blogspot.com/


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## Passepartout (Apr 7, 2014)

In a perfect world, kids should learn basic social skills- manners, finances, hygiene, sharing, etc. at home. But if the parents didn't learn those skills either, then the kids need to be taught it in school. If the principles of Dave Ramsey help, so be it. If it's Jane Bryant Quinn passing financial advice, if it's Dear Abby teaching social skills, that's OK too.

Anything but people thinking the way to settle disputes id by bullying or force. To think that 'he (or she) with the biggest gun is right' is wrong in civilized society.

I don't know how I went off on that tangent, but that's how I feel.

Parents: Teach your children well......

Thanks, Mom & Dad!

Jim


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## SMHarman (Apr 7, 2014)

Beefnot said:


> What new problems are you referring to?  One can disagree about method and suggest that other methods may be superior, but between your two posts in this thread, I must have overlooked the problems that Dave Ramsey's principles will create for those who choose to follow them.


In the current and ongoing lower interest rate environment, along with the politically charged nature of Social Security, the impact of reductions in Medicare and increase in costs for long term healthcare it is likely that the 15% is not an adequate amount to save for retirement.

As my math puzzle above indicates you are better off leveraging the mortgage funds and using the money to invest in retirement.

It's not a perfect example but you use the same math that it is best to let the mortgage run to term, have emergency savings and use the cash that you would use to accelerate paying off the mortgage to put money into other savings.


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## SMHarman (Apr 7, 2014)

http://www.daveramsey.com/new/baby-step-3/

Is another one.  Why keep this 3-6 months in a money market earning near 0 return.

Betterment offers much better advice here.

https://www.betterment.com/blog/2013/08/06/safety-net-funds-why-traditional-advice-is-wrong/

Most often the need to access your safety net funds is not correlated with a market downturn.


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## laurac260 (Apr 7, 2014)

Dave Ramsey's suggestions, of paying off the smallest credit cards first (not the ones with the highest interest rate), may seem backwards, but for instant gratification folks, it's decent advice.

I remember graduating from college with more debt than I had income.  Me and a WHOLE LOT OF FOLKS.  I set myself up to fail early on by getting those no interest for 12 mos credit cards, and proceeded to buy a few things for my new apt.  6 mos into the 12 months, my student loans kicked in.  Then the 12 mos period was over, and the interest rate started.  And before I knew it I couldn't even make the minimum payment.  The less you can pay the less the cc companies work with you, and before I knew it, I was @$$ deep and didn't know my way out.  Took a second job…  it was a rough haul.  

The ONLY thing that saved me was an Aunt and Uncle that loaned me 10k interest free, to pay off my credit cards.  Did that "fix" everything?  No, but it was a start. I didn't know how to manage money, or manage debt.  And when you are in that boat,  it's kind of like being upstream without a paddle. You see no way out of it…  

Had I known some of Dave's simplistic advice to get out of debt, it would have helped tremendously.  Operating in negative cash flow and a blighted credit  is no way to start life.


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## Beefnot (Apr 7, 2014)

SMHarman said:


> In the current and ongoing lower interest rate environment, along with the politically charged nature of Social Security, the impact of reductions in Medicare and increase in costs for long term healthcare it is likely that the 15% is not an adequate amount to save for retirement.
> 
> As my math puzzle above indicates you are better off leveraging the mortgage funds and using the money to invest in retirement.
> 
> It's not a perfect example but you use the same math that it is best to let the mortgage run to term, have emergency savings and use the cash that you would use to accelerate paying off the mortgage to put money into other savings.


 
I hear you and don't necessarily disagree.  I still do not believe that following Dave Ramsey's principles will necessarily cause "problems".  When they get to step 7, they may need to recalibrate how much wealth they really have based on the state of the world.  Also, stock market returns are uncertain, and past performance is a guide.  The return from paying off debt is mathematically certain.


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## geekette (Apr 7, 2014)

rleigh said:


> I always marvel at people who think just because they don't have a problem with something, no one else should either.
> 
> Everyone has something that is a challenge for them, for a thousand different reasons. Money, weight, gambling, drugs, sports, driving, exercising, socializing, marriage, flying, etc etc.
> 
> ...



Certainly those with any kind of "I don't do numbers well" will have difficulty in this matter.  The issue of Income vs Outgo should be explainable, tho, even using Calories In vs Calories Out as example if necessary (I don't want to be fat, but want fat bank account).  Everyone learns in their own way, in their own time.

Some kids get allowances, what a wonderful way to bring in the issue at a young age.  Kids that get everything they want never get to learn "saving up" nor delayed gratification.  Important concepts best learned young.


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## Elan (Apr 7, 2014)

geekette said:


> It's ridiculous to not expect parents to teach life skills.  Parents need to quit passing the buck on to the schools.  teachers have your kids a few hours a day and have their own agenda (curriculum) and Life Skills is not part of it and there will not be new time devoted to it.  That responsibility begins and ends at home.  Same with issues of character, respect, manners, appropriate behavior, toilet training, hygiene, ...



  I agree parents _should_ teach their kids life skills.  But, as I said, the consensus here is that isn't happening, at least for financial matters.  I'd rather my kids learn how to not go in debt than be able to recite Macbeth.  I'm not talking about schools teaching the moral aspects of money management, simply the concepts I mentioned previously (simple vs compound interest, comparison shopping, time value of money, etc).  One semester in HS is plenty to go over the basics.  Some kids will dial out and not learn anything, but that's true of any required subject.


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## SMHarman (Apr 7, 2014)

Beefnot said:


> I hear you and don't necessarily disagree.  I still do not believe that following Dave Ramsey's principles will necessarily cause "problems".  When they get to step 7, they may need to recalibrate how much wealth they really have based on the state of the world.  Also, stock market returns are uncertain, and past performance is a guide.  The return from paying off debt is mathematically certain.


The other one I find concening is 3 & 4 
http://www.daveramsey.com/new/baby-step-4/
You never get back the tax advantage of 401k and IRA contributions, use or lose.
You can take longer to get to the 3-6 months, especially if you are saving into your 401k.  These objectives should be on a parallel track - after all you can always take the money out of your 401k in an emergency.  In the mean time you have started saving for your retirement and there is more friction involved in touching that money.  It is also usually invisible saving coming out of your paycheck which is great saving for most of us (me included).

http://calcxml.com/calculators/retirement-calculator

Play with a calc like that and the number of years to retirement. saving anything each year in your 20's and 30s has an almost magical multiplier to compound to retirement.


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## Elan (Apr 7, 2014)

geekette said:


> *Kids that get everything they want never get to learn "saving up" nor delayed gratification*.  Important concepts best learned young.



  This is likely more to blame than we'd care to admit.  We dial in to the details a lot more when it's our own money we're spending.  I know I did and I know my kids certainly do.


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## ace2000 (Apr 7, 2014)

Nothing against any of the advice here, but one thing we do know is Ramsey's formula works.  All you have to do is listen to his shows and hear the testimonies of his callers and know it's real.  And you don't have to look very far to find someone, either a friend or a relative, that will vouch for his methods.  We seem to be discussing strategies - but there are several paths to wealth accumulation.  

For example, using your savings to put into retirement vs. put into your mortgage.  I don't see either one of them as a bad plan.  Some people just like the feeling of having that mortgage or car loan paid off and then some people enjoy stockpiling their retirement plans.  Who cares?  Kudos to both!


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## Rose Pink (Apr 7, 2014)

ace2000 said:


> ... Some people just like the feeling of having that mortgage or car loan paid off ....



I am one of those people.  As I mentioned above, I feel uncomfortable with risk.  What if I put money in stocks and the market tanks and I have no income from other sources to pay the mortgage?  Or what if the housing market takes another dive and I am left with an upside down mortgage?

Yes, I know that historically the market rebounds but what if it takes longer than I have?  I just feel very uncomfortable having debt.  I paid my mortgage off and it feels so good.  I know that others feel more comfortable with using their home equity for other things but for me, it is a security blanket.

I am saving up for a car for 65th birthday present to myself.  
We are saving up to replace our roof.

My problem is houzz.com.  I  need to stop drooling over all the landscape ideas that we cannot afford at this point.  It is so way down the list of priorities.


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## glypnirsgirl (Apr 7, 2014)

The calculator is interesting. 

And it shows how important it is to begin retirement savings early. According to the calculator, my 31 year old son has already saved sufficiently for retirement. As long as he doesn't withdraw any money from his account until he retires. 

Part of that is that the calculator (if none of the numbers are overridden) assumes that social security will continue to increase, that income will continue to increase, and that all he will need to replace is 75% of his income at retirement age. 

One of the things that I point out to my son is that by saving for retirement at least the amount that will maximize his employer's match, Jordan invests $4,000 per year, his employer invests $2,000 per year and he receives a tax credit of $1,000 per year. So, without interest or increase in value, he is receiving a 75% return on his investment --- for the first year. 

I am fortunate that both my son and daughter in law worked for bankruptcy attorneys so they got to learn from other people's financial mistakes. They are naturally careful as a result. 

Still, I talk to them regularly about financial strategies. And I didn't stop talking to them now that they are grown. 

I think that it is possible to self-educate about finances. But it is much easier to learn from parents. My father talked (and still talks) to me about money -- spending it, saving it, investing, etc. 

Personally, I would like to see at least 1/4 of math problems be written in terms of money instead of the speed of trains. Then we could do math and money at the same time.

elaine


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## bogey21 (Apr 7, 2014)

geekette said:


> I believe this is another Life Skill that should begin at home.



How can the many parents whose track record proves they don't have a clue regarding money management teach these skills to their kids?  

George


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## ace2000 (Apr 7, 2014)

Rose Pink said:


> I paid my mortgage off and it feels so good.



And there is no doubt that a lot of Ramsey's approach is tied to the psychological instead of the practical.  For instance, he advises people to pay off the card with the lowest balance first and not the cards with the highest interest rates.  If you looked at it from the practical side you could make a pretty simple case stating it's better to pay off the high interest card first.  However, he's looking at things from a different perspective, and his approach works.


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## PigsDad (Apr 7, 2014)

SMHarman said:


> I'd then go on to say that rule 7 should partly be further up front.  You should be thinking about giving to those less fortunate to you way before you have saved every penny you need for retirement, *charitable giving should be part of your budget.*



Actually, if you dig deeper into Dave Ramsey's program, that is exactly what he promotes: charitable giving is part of your basic budget.  Step 7 has more to do with thinking about a legacy and what additional charitable giving / activities you can do now that you are (more) financially stable or independent.  His point is being debt-free gives you more options to be more charitable, etc.

Kurt


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## Rose Pink (Apr 7, 2014)

PigsDad said:


> His point is being debt-free gives you more options to be more charitable, etc.
> 
> Kurt



Interesting.  I agree with that.  I remember once wanting to help a neighbor but couldn't because I had a Visa payment due.  Being debt-free does feel, well, free.

I don't quibble with those who are more risk-tolerant than I am, though.  If they can manage their investments without the fear of losing it, then they should.


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## geekette (Apr 7, 2014)

bogey21 said:


> How can the many parents whose track record proves they don't have a clue regarding money management teach these skills to their kids?
> 
> George



if their track record proves that they haven't a clue then they should get one.  They have children, after all!!!  How can they expect to afford a child if they have no idea where the money comes from or where it goes?  Is this how it is now, let's just have kids and figure out if we can afford them later?  Let's just scoot along paycheck to paycheck and ignore that we don't know what we're doing?  Anyone in financial trouble Knows It.  

If the adult hasn't learned the life skill, yes, the child won't have it.  Why doesn't the adult have it?  There is an age at which blaming your parents is not ok and that shows up in adulthood.  If you have a job or pay rent or mortgage or car loan or have anything to do with money in your life, then you should have some grasp of money management by the time you have kids.  

There is no shame in saying "I don't know" but it's better to follow it up with "but I will find out."   Surely there is a For Dummies book?

My parents gave me very few answers to my questions that weren't "go look it up" and so I have always done just that - go find out what you want to know.  Easier now, no one has to use a card catalog or even know what Dewey Decimal system is or even move from where they are since most have connected gadgets now.

I just don't happen to believe that learning is confined to the classroom.  If that were the case, I would have had all of my knowledge many years ago, but that is not the case, I know a lot more now than when I left college campus.  You won't find me blaming my parents for deficits I have in adulthood that *I* haven't fixed.


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## geekette (Apr 7, 2014)

Rose Pink said:


> Interesting.  I agree with that.  I remember once wanting to help a neighbor but couldn't because I had a Visa payment due.  Being debt-free does feel, well, free.
> 
> I don't quibble with those who are more risk-tolerant than I am, though.  If they can manage their investments without the fear of losing it, then they should.



It is important to know what you can handle, what you need to be able to sleep at night.  We are all different in that regard, no universal right or wrong answer.

Losing it all in the stock market is not something I worry about, but I do understand the fear and expect that you have reasons for it.  I'm more concerned about outliving my money than losing anything in the stock market.  prices go up and prices go down and it will be that way forever.


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## SMHarman (Apr 7, 2014)

SMHarman said:


> The other one I find concening is 3 & 4
> http://www.daveramsey.com/new/baby-step-4/
> You never get back the tax advantage of 401k and IRA contributions, use or lose.
> You can take longer to get to the 3-6 months, especially if you are saving into your 401k.  These objectives should be on a parallel track - after all you can always take the money out of your 401k in an emergency.  In the mean time you have started saving for your retirement and there is more friction involved in touching that money.  It is also usually invisible saving coming out of your paycheck which is great saving for most of us (me included).
> ...





glypnirsgirl said:


> The calculator is interesting.
> 
> And it shows how important it is to begin retirement savings early. According to the calculator, my 31 year old son has already saved sufficiently for retirement. As long as he doesn't withdraw any money from his account until he retires.
> 
> ...


Thank you, I knew I left a thought hanging there and it was about employer matching.

Pretty much irregardless of credit card debt (assuming you can service it), you should be paying into your 401k to get your full employer match.

Thats a 50% - 100% RISK FREE Return on Investment that you will not get again.


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## ace2000 (Apr 7, 2014)

geekette said:


> I'm more concerned about outliving my money than losing anything in the stock market.  prices go up and prices go down and it will be that way forever.



Right now, I generally feel the same as you, not sure it will go on forever though.  

But it would kind of suck to take a 50% haircut right before you needed to start taking it out though.


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## PigsDad (Apr 7, 2014)

SMHarman said:


> As my math puzzle above indicates you are better off leveraging the mortgage funds and using the money to invest in retirement.
> 
> It's not a perfect example but you use the same math that it is best to let the mortgage run to term, have emergency savings and use the cash that you would use to accelerate paying off the mortgage to put money into other savings.



I certainly don't disagree with the math of your example -- if everything went as planned, you would end up w/ more money by leveraging your home and investing those funds.

But what happens if, say a couple of years after you leverage your house and invest those funds, a major market correction happens and your portfolio takes a 40% hit.  And the real estate market takes a 30% hit turning your mortgage upside-down.  Then you get hit with having to relocate and sell your house?  If you are highly leveraged, you may end up being forced to sell your investments when the market is down, just to get out of your upside-down mortgage so you can relocate.

Listen to Dave's talk show and it is amazing at how many people got into situations like this.  While Dave's advice may not optimize personal wealth, it is a decent conservative plan that works for many people.

Kurt


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## b2bailey (Apr 7, 2014)

*Some things are NOT intuitively obvious to all...*

I worked for a man who had degrees from MIT and Stanford. One of his expressions was that certain things were 'intuitively obvious' -- and when he would use that expression, he didn't realize it would hurt or offend the person to whom it was spoken.

I had the honor of being close enough to him to point this out -- that in his mind certain things that seem simple may be difficult to another -- and he actually stopped using that expression.

The reason I mention it -- there are a few posters in this thread who seem to think that others operate on the same level as they do -- and it comes across as arrogant or hurtful to those who may not be as gifted.


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## SMHarman (Apr 7, 2014)

geekette said:


> if their track record proves that they haven't a clue then they should get one.  They have children, after all!!!  How can they expect to afford a child if they have no idea where the money comes from or where it goes?  Is this how it is now, let's just have kids and figure out if we can afford them later?  Let's just scoot along paycheck to paycheck and ignore that we don't know what we're doing?  Anyone in financial trouble Knows It.


Another great betterment article.
https://www.betterment.com/blog/2013/09/25/why-the-rich-live-paycheck-to-paycheck/
To many respects I live from paycheck to paycheck.  I don't but my checking account makes me feel like I do as it is vessel which money passes through to destinations.  Money does not sit in my checking account but passes through to pay liabilities and invest (of which much does not even hit my bank account and is forced saving) and save but at the end of the month there is zero and start again...


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## laurac260 (Apr 7, 2014)

b2bailey said:


> I worked for a man who had degrees from MIT and Stanford. One of his expressions was that certain things were 'intuitively obvious' -- and when he would use that expression, he didn't realize it would hurt or offend the person to whom it was spoken.
> 
> I had the honor of being close enough to him to point this out -- that in his mind certain things that seem simple may be difficult to another -- and he actually stopped using that expression.
> 
> The reason I mention it -- there are a few posters in this thread who seem to think that others operate on the same level as they do -- and it comes across as arrogant or hurtful to those who may not be as gifted.



Where's the like button…


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## ace2000 (Apr 7, 2014)

b2bailey said:


> I worked for a man who had degrees from MIT and Stanford. One of his expressions was that certain things were 'intuitively obvious' -- and when he would use that expression, he didn't realize it would hurt or offend the person to whom it was spoken.
> 
> I had the honor of being close enough to him to point this out -- that in his mind certain things that seem simple may be difficult to another -- and he actually stopped using that expression.



+1 ... well said.


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## geekette (Apr 7, 2014)

ace2000 said:


> Right now, I generally feel the same as you, not sure it will go on forever though.
> 
> But it would kind of suck to take a 50% haircut right before you needed to start taking it out though.



Ah, but, diversification, time value and compounding again saves my butt as there is no plausible scenario in which I pull ALL of my retirement funds in Year 1.  Further, I expect to be able to decide when Year 1 is so can prepare in advance.  One must have a plan vs selling on fear or at the moment when they need the money.  

Since I am an investor vs trader or speculator, it's unlikely that every position I own will suddenly experience 50% price drop and stay there for years.  

Even so, the long holdings of div payers makes it not such a haircut.  Presumably these accounts will have been thru other downturns and I will have still been wracking up dividends at those cheapo prices.  I just can't seem to muster up fear of total irreparable market collapse.  I am a-ok with the risks, eyes are open, I am not departing stocks before retirement and expect to always own some blue chip dividend payers.

I understand why it would cause heebie jeebies in some folks but they maybe shouldn't be much in stocks if they can't weather an early-retirement market downturn.  What goes up will go down.  And nobody knows when either will happen.


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## SMHarman (Apr 7, 2014)

PigsDad said:


> I certainly don't disagree with the math of your example -- if everything went as planned, you would end up w/ more money by leveraging your home and investing those funds.
> 
> But what happens if, say a *couple of years after *you leverage your house and invest those funds, a major market correction happens and your *portfolio takes a 40% hit*.  And the *real estate market takes a 30% hit *turning your mortgage upside-down.  Then you get hit with having to relocate and sell your house?  If you are highly leveraged, you may end up being forced to sell your investments when the market is down, just to get out of your upside-down mortgage so you can relocate.
> 
> ...


OK so a couple of yeasrs later, pre correction you are 
100,000x1.068^2=114062.40.  Then there is a 30* correction.  So now you are at $79,843.68.  I put that out to highlight that your initial reading makes it look like you are going to be sitting on $70k of the original $100k but actually it is nearer $80k.

Now if you read the safety net investment article it actually has 40% S&P500 and 60% 5 Yr Tbills.  I abbreviated to post here.






https://www.betterment.com/blog/2013/08/06/safety-net-funds-why-traditional-advice-is-wrong/
Chances are you would not be out at all after 2 years, or only slightly down (look at how few lines on the graph track below the $23,300 at year 2).

You then go on to talk about being forced to sell so you can relocate.  Buying high and selling low is always a poor investment strategy, why are you forced to sell?

You could say the $100k gives you the option to put that as a downpayment for your relocation.  Rent the first home etc.  There is an artifice to your forced to sell arguement.

Fire sale of any asset does not get best price.  

Furthermore, my more simplistic calculation had this as an interest only loan, pretty hard to come by, this is likely a capital repayment.  If you were actually repaying the capital, say over 30 years then you would have made a say $5k dent in the capital.

So pulling together some threads of math above.

If the investment had all been S&P500 you would be $20k down, if it was 40%, lets guess that is $10k down.  If you have repaid $5k of the mortgage you are now $5k down on this early repayment fire sale need to move right now thank you very much scenareo.  

That's a far more tolarable figure IMHO.  With all the other costs of this artificially generated sale requirement this $5k will be a drop in the ocean (broker fees on the sale, move costs, hotels to find a new home etc).  Oh and finally, all that would be tax deductible off your AGI as a move expense, so you can thank the IRS for sharing your burden.
http://www.irs.gov/publications/p521/ar02.html

And this forgets that $10k would have migrated to your 401k saving you $2500 in tax over those two years as well.  That could mitigate the overall loss down to $2,500.  And if your employer had matched that $2,500 that could have mitigated it to close to zero.


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## SMHarman (Apr 7, 2014)

ace2000 said:


> Right now, I generally feel the same as you, not sure it will go on forever though.
> 
> But it would kind of suck to take a 50% haircut right before you needed to start taking it out though.


Firstly the market has never ever taken a 50% haircut in a day.  If you retired on July 2007, then by July 2008, one year later the market was down 24%.  It took to Jan 2009 to hit the bottom.

Second, if you are planning to retire then the week before retirement you should not be 100% in equities.  Say you are 40% in equity and 60% in US Treasurys and have $1m (that's a pretty agressive just pre retirement portfolio).  Over the space of the year the $400k in Equity becomes $300 and the $600 in Treasury goes up to (i'm done looking up actual numbers $630.  So the portfolio is down to $930k - one year later!  Certainly not a 50% haircut in one day.

Thirdly, you are not taking it all the day you retire.  Retirement targets 4% capital withdrawal per year over your retirement.  So If over that first year you have taken 4% out now your fund is down $40k for your spending.  So your fund a year later is $890k, but then over the next 4 years the equities in the fund recover in value.

So the $400k falls to $300k you took $16k out of that leaving $284k.  That $284k in the S&P500 at July 2008 would now be (index 1166>1850) worth $450k.  More than you started with in July 2007.


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## Beefnot (Apr 7, 2014)

SMHarman said:


> Second, if you are planning to retire then the week before retirement you should not be 100% in equities.


 
Very good point.  Although I believe this wisdom also underscores an overlooked aspect to the arguments around retirement investing.  As one approaches retirement, because diversivication is likely to become less heavily weighted towards stocks, one should expect a more conservative average return on investment, when asset preservation concerns begin to increase.  Thus, it may be misleading to project that one should expect their retirement portfolio to grow at the rate of the stock market over the life of their investments.


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## PigsDad (Apr 7, 2014)

SMHarman said:


> OK so a couple of yeasrs later, pre correction you are
> 100,000x1.068^2=114062.40.  Then there is a 30* correction.  So now you are at $79,843.68.  I put that out to highlight that your initial reading makes it look like you are going to be sitting on $70k of the original $100k but actually it is nearer $80k.
> 
> ... snip ...


Again, I don't disagree with any of the math, but I would contend that many people would feel very uncomfortable taking their home equity and investing it in the market.  Dave's plan is more suited to those who want more safety (perceived or not).  

It obviously is not a plan that would be a good fit to someone who is trying to optimize their investments perfectly.  But most people would find that optimization very confusing.  The keys are that Dave's plan is simple to understand and simple to implement.  For a good portion of the population, that works.

Kurt


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## ace2000 (Apr 7, 2014)

ace2000 said:


> But it would kind of suck to take a 50% haircut right before you needed to start taking it out though.





SMHarman said:


> Firstly the market has never ever taken a 50% haircut in a day.  If you retired on July 2007, then by July 2008, one year later the market was down 24%.  It took to Jan 2009 to hit the bottom.



I have no idea why you're responding to me as if I said "in a day".  I'll include my quote above.

There have been two very recent time frames where the S&P lost very close to 40% in it's value in a relatively short time period.  If the S&P lost that much value then surely several mutual funds lost at least that much value, if not higher than 50%.

The first was was in year 2008 when the S&P lost 38.47% in value.  

The second was in 2000-2002 when the S&P lost over 46% of it's value.  

Those are two very recent time periods.  Take a look at stock performance during the Great Depression and you'll find it was even worse.  Am I an alarmist and think we're going down that road again?  No, but you never know.  But, that's what people are worried about when they are nervous about investing in equities right before their retirement years.  If either of those time frames happened right before one retired it would be catastrophic to many.  

The key is spreading the risk, as others have mentioned on this thread.


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## SMHarman (Apr 7, 2014)

beefnot said:


> very good point.  Although i believe this wisdom also underscores an overlooked aspect to the arguments around retirement investing.  As one approaches retirement, because diversivication is likely to become less heavily weighted towards stocks, one should expect a more conservative average return on investment, when asset preservation concerns begin to increase.  Thus, it may be misleading to project that one should expect their retirement portfolio to grow at the rate of the stock market over the life of their investments.





SMHarman said:


> Firstly the market has never ever taken a 50% haircut in a day.  If you retired on July 2007, then by July 2008, one year later the market was down 24%.  It took to Jan 2009 to hit the bottom.
> 
> Second, if you are planning to retire then the week before retirement you should not be 100% in equities.  Say you are 40% in equity and 60% in US Treasurys and have $1m (that's a pretty agressive just pre retirement portfolio).  Over the space of the year the $400k in Equity becomes $300 and the $600 in Treasury goes up to (i'm done looking up actual numbers $630.  So the portfolio is down to $930k - one year later!  Certainly not a 50% haircut in one day.
> 
> ...





ace2000 said:


> i have no idea why you're responding to me as if i said "in a day".  I'll include my quote above.
> 
> There have been two very recent time frames where the s&p lost very close to 40% in it's value in a relatively short time period.  If the s&p lost that much value then surely several mutual funds lost at least that much value, if not higher than 50%.
> 
> ...


Me too.  S&P is a diversified investment in US equities, but the portfolio needs more than that, cross asset class and global diversity.

You are right, I paraphrased you incorrectly.  The Math in my post still stands though and as Beefnot highlights if you have a 100% equity portfolio the week before retirement you have other problems.  Target date funds now exist to creat a glide path to retirement that reflects a safer asset allocation and most of my 401k type investments are in such funds.  I don't have enough time to monitor that as well as the rest of the stuff in my life.  My kids 529s are in target date funds that have a glide path to their 18th birthdays.

Now lets take the retiree with 100% S&P500 investments retiring in 2000 (S&P 1498) and the $1m pension pot.  Withdrawing $40k a year.

By April 2002 (S&P 815) that portfolio is looking pretty poorly as the capital has eroded to $544k-40k-40k=$464k

Now if they did nothing and left that in the S&P 500 then by now 12 years later (and this is very simple math as they are taking capital as the capital is recovering)

The 464k (S&P 815) has grown back to (S&P1865 - April 2014) = $1,061 - less 12 years at $40k = $581k (very simple math - you can destroy this and probably knock $100+k off with math that has timing impact accurately shown).  That pensioner is now 14 years into their retirement and less than half their pension pot has been used (or maybe taking finger in the air timing a little over half the pot is used).

So, if the utilization of the pension asset is properly planned, even in a risk asset like equities the pot survives.  They key is not withdrawing all the money in April 2002 and putting it in a money market account.


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## ace2000 (Apr 7, 2014)

PigsDad said:


> The keys are that Dave's plan is simple to understand and simple to implement.



Very true and you said a mouthful there.


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## dioxide45 (Apr 7, 2014)

I am starting to think there is really no such thing as common sense. There is instinct, such as eating, drinking, sleeping. But everything else is learned. If your parents and teachers didn't have "common sense" you probably wouldn't either.

I do agree though that there should be some financial management taught in our public education system. I agree with Elan that said they would rather see this taught than a student being able to recite Macbeth. Lets give them real world experience. Not only are the children being failed by their parents, they are also being failed by the public school system.


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## geekette (Apr 7, 2014)

ace2000 said:


> I have no idea why you're responding to me as if I said "in a day".  I'll include my quote above.
> 
> There have been two very recent time frames where the S&P lost very close to 40% in it's value in a relatively short time period.  If the S&P lost that much value then surely several mutual funds lost at least that much value, if not higher than 50%.
> 
> ...



One problem in the corrections is the motivation to sell "before it gets worse".  The fear of losing everything can overwhelm rational thought. Then when things start to look better, they jump back in when things are going up but nobody knows how far up and might go back down!  You can play the stock market like The Price is Right show or you can invest in companies you believe in.  

Sometimes, companies do hit the skids and do not return.  There should be warning signs for that, separate from the market as a whole moving.  People that look at stock price only are not getting a full picture of the company.  

Those who stayed the course from 2008 downturn recovered quite nicely.  I did not get out, I put more in, and have been rewarded for that.  Stocks on sale!!!  Price is only important to me when I buy and eventually when/if I sell.  Day to day fluctuations mean nothing to me because I do not jump in and out, I select, buy and monitor long term.  It is not Gambling to me, but I understand why some would see stock market that way.  

Nobody can time the market but following the herd or acting from headlines is not a great investment plan.  People often harm themselves by taking action when they shouldn't.  There is a gut feel to DO SOMETHING especially in situations where you seem to have no control.  This is why it is important to only invest in what you understand.  Exotic investments get people into trouble.  

I am an aggressive investor, always at least 90% equities (being a dividend hound, I will likely stay highly invested in stocks when I retire, contrary to 'common wisdom', but I want divs to support me, not liquidating positions - the more shares I can hang onto the more my divs will be).  Market corrects, does that suddenly mean that all these companies I own are suddenly bad companies and will disappear and take my money with them?  No, the market runs on speculation.  Good companies keep paying dividends regardless of market up or market down.  Some companies have paid divs without stop for over 100 years (google Dividend Champions).   

Investing is an advanced topic tangenting from basic financial management but I do hope that folks not only learn how to manage their money but grow it.   Do encourage The Young to begin an IRA as soon as there is a paycheck.  Every little bit helps, especially when left to compound for decades.  "I can't afford it" should be countered with "you can't afford not to".  Even $25 helps.


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## MuranoJo (Apr 8, 2014)

Kiplinger's had an article in this month's issue which outlined the general advice of having patience with the market.  (Similar to what Geekette has posted above and with which I agree.)

Re. Ramsey, I read his articles in the paper now & then, and he provides solid fundamentals, i.e., the basics which can be helpful as a guidepost.  I don't always agree with him, but so what.


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## ace2000 (Apr 8, 2014)

geekette said:


> I am an aggressive investor, always at least 90% equities (being a dividend hound, I will likely stay highly invested in stocks when I retire, contrary to 'common wisdom', but I want divs to support me, not liquidating positions - the more shares I can hang onto the more my divs will be).



We've been aggressive also and it has paid off for us.  My wife and I are both covered by a pension plan, so that's our low-risk path.  We've also invested in Roth IRAs and 403Bs and I tend to be very aggressive with those.  I feel I can continue to take the same aggressive approach throughout my retirement years, just because of our pension plans.  Probably not the best approach for everyone though, especially if you're getting close.


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## bogey21 (Apr 8, 2014)

IMO Dave Ramsey has a lot of good stuff to say.  Read it; put it in the memory bank along with the advice from other financial gurus; and use the pieces that seem to make sense in your personal situation.

George


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## SMHarman (Apr 8, 2014)

ace2000 said:


> We've been aggressive also and it has paid off for us.  My wife and I are both covered by a pension plan, so that's our low-risk path.  We've also invested in Roth IRAs and 403Bs and I tend to be very aggressive with those.  I feel I can continue to take the same aggressive approach throughout my retirement years, just because of our pension plans.  Probably not the best approach for everyone though, especially if you're getting close.



There is a general need to be more aggressive and not be an entire bond portfolio in retirement else you deflate your asset base over the potential 30 years of retirement.

http://www.investmentnews.com/article/20131205/FREE/131209942

Equally over that timeline you have a long term view of the market.

Seems like the pension is your bond portfolio and your 401k and 503b are the equity part of your portfolio.


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## geekette (Apr 8, 2014)

bogey21 said:


> IMO Dave Ramsey has a lot of good stuff to say.  Read it; put it in the memory bank along with the advice from other financial gurus; and *use the pieces that seem to make sense in your personal situation.
> *
> George


Very true, whatever The Joneses are doing has nothing to do with you, plot your own course.  Just because someone has a giant cross referenced binder and 10 years of full checkbook data in Quicken does not mean that this is the way for everyone.  Find a way, make it work, stick to it, tweak it over time.  

I haven't seen ramsey but occasionally watch Suze.  Much I don't agree with her on, but, she is providing a service and occasionally I will get a different perspective I need.  Most importantly, she often provides wake up calls that people need, like "you have 20,000 in retirement savings and you are 55, you are NOT retiring at 60!"  and the YOU CAN'T AFFORD IT segments.

Indeed, absorb what you can, apply what makes sense For You, do not be swayed by what works for someone else.  And do try to tune out "the noise" and make your own decisions.  No one is more interested in your financial success than you.


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## geekette (Apr 8, 2014)

ace2000 said:


> We've been aggressive also and it has paid off for us.  My wife and I are both covered by a pension plan, so that's our low-risk path.  We've also invested in Roth IRAs and 403Bs and I tend to be very aggressive with those.  I feel I can continue to take the same aggressive approach throughout my retirement years, just because of our pension plans.  Probably not the best approach for everyone though, especially if you're getting close.



I do wish I had a pension.  There is a job I almost took a couple years ago with a large insurance company that had a pension which was a huge attraction, just 5 years to vest.  But, I will be without that leg of the stool, as will most younger than me.  Not quite sure when The 401k Generation started, but I'm in it.  

I rather concur that the safety net does give you a bit more breathing room to reach in the other accounts.  Nice to have a 2 pension retirement to look forward to!  Good for you guys!!


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## SMHarman (Apr 8, 2014)

bogey21 said:


> IMO Dave Ramsey has a lot of good stuff to say.  Read it; put it in the memory bank along with the advice from other financial gurus; and use the pieces that seem to make sense in your personal situation.
> 
> George


Personal situation is a very key part of this.  For example, ideally when your oldest hits about 15.  You should should have crammed as much of your savings into your 401k and have as big a mortgage as possible as both of these lines are sacrosanct on the financial aid form.

Doing so should help get more financial aid for your kid and less college costs from your pocket.

If you followed Daves advice and paid down the mortgage instead of putting that money in your 401k / IRA / 503b you will now be putting more of your money to college than your neighbour.

Also you can use the 529 as a wash account.  Need to pay your childs tuition bill, put the money into the 529, a few days later pay the college bill from the 529 and now that contribution to the 529 to pay the bill will reduce your federal state tax bill [corrected to reflect the right tax benefit].

Daves 7 baby steps or 
Suzies 9 steps are a good baseline (though as I have said, I clearly disagree with the order of some - cramming the 401k is way up my list).

This is especially as you can 

borrow or retrieve from the 401k if crisis hits
401k assets are protected from creditors
401k assets are protected on many financial applications.


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## SMHarman (Apr 8, 2014)

geekette said:


> I do wish I had a pension.  There is a job I almost took a couple years ago with a large insurance company that had a pension which was a huge attraction, just 5 years to vest.  But, I will be without that leg of the stool, as will most younger than me.  Not quite sure when The 401k Generation started, but I'm in it.
> 
> I rather concur that the safety net does give you a bit more breathing room to reach in the other accounts.  Nice to have a 2 pension retirement to look forward to!  Good for you guys!!


Gen X is the 401k generation.  The size of the boomer generation broke the underfunded US company pension system.

http://en.wikipedia.org/wiki/Generation_X

'65-'85 is a good 20 year window to consider us Xer's to have been born in.


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## ace2000 (Apr 8, 2014)

SMHarman said:


> If you followed Daves advice and paid down the mortgage instead of putting that money in your 401k / IRA / 503b you will now be putting more of your money to college than your neighbour.



I believe this is wrong.  I've got a couple of kids in college right now.  Your primary mortgage debt has nothing to do with a FAFSA application - it is not factored in at all.  If anything, there would be the opposite effect... by paying off your mortgage, that gives you fewer assets to report and therefore your Financial Aid is actually increased.  Therefore it would be advisable to pay it down.


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## SMHarman (Apr 8, 2014)

ace2000 said:


> I believe this is wrong.  I've got a couple of kids in college right now.  Your primary mortgage debt has nothing to do with a FAFSA application - it is not factored in at all.  If anything, there would be the opposite effect... by paying off your mortgage, that gives you fewer assets to report and therefore your Financial Aid is actually increased.  Therefore it would be advisable to pay it down.



Yes you are right, just refreshed my memory on this.
http://www.interest.com/real-estate/advice/will-mortgage-chance-college-financial-aid/

So the primary residence is excluded as an asset, as is the 401k.

You can reduce the value of secondary residences by mortgaging them.

You can change the shape of your personal balance sheet by using savings to pay off the mortgage effectively protecting those savings from the FAFSA calculation as they are now part of the primary residence asset.  *Which is what you just concluded.*  I suggested you put that money into 401k which protects it in a different way (but can only be done at $17.5k pppy.


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## geekette (Apr 8, 2014)

SMHarman said:


> Yes you are right, just refreshed my memory on this.
> http://www.interest.com/real-estate/advice/will-mortgage-chance-college-financial-aid/
> 
> So the primary residence is excluded as an asset, as is the 401k.
> ...


or 22kish Catch Up (after 50 yo)


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## SMHarman (Apr 8, 2014)

geekette said:


> or 22kish Catch Up (after 50 yo)


Which Gen X starts to hit next year


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## Tia (Apr 8, 2014)

dioxide45 said:


> ........Lets give them real world experience. Not only are the children being failed by their parents, they are also being failed by the public school system.




I agree!!  The real world can be harsh if unprepared . Public schools continue to pass students who are not prepared where we're at


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## Beefnot (Apr 8, 2014)

SMHarman said:


> If you followed Daves advice and paid down the mortgage instead of putting that money in your 401k / IRA / 503b you will now be putting more of your money to college than your neighbour.




I don't get time to listen to his show much, but I recall Dave not being all that big on folks bleeding themselves to put their kids through college.  If they are not able to get sizable scholarships, I thought he advocated putting them into community college and transferring into a 4-year school.  So he might not be too sympathetic anyway.


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## Blues (Apr 8, 2014)

SMHarman said:


> Also you can use the 529 as a wash account.  Need to pay your childs tuition bill, put the money into the 529, a few days later pay the college bill from the 529 and now that contribution to the 529 to pay the bill will reduce your federal tax bill.



This is also erroneous advice.  529 contributions are not tax deductible.  The primary advantage of a 529 account is that the *gains* in the account are not taxed, as long as the money is used for college expenses.  But this is a long-term advantage, as it takes time for the gains to materialize.  Short term (put money in, take it back out), it provides absolutely no tax advantage.

-Bob


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## geekette (Apr 8, 2014)

SMHarman said:


> Which Gen X starts to hit next year



Yes, there is a reason I know the number!  However, it's difficult for me to identify with Gen X as I grew up as the youngest to older parents so am more boomer.  

Yikes, big ole birthday with a zero in it...  I'm not ready...

back to topic, my current employer doesn't match 401k contribs as you make them but "may" kick in profit sharing.  I love my job, but if they don't change their ways, I may need to leave them before I want to in order to capture reliable match in the last years leading to retirement.  Doesn't everyone want to retire on someone elses dime???

It's a benefit lacking that I'm having a difficult time accepting.   Times are not hard, this company is quite successful.  I understand the concept of "if you want something in your 401k, put it there yourself" but the competitive disadvantage in not offering the benefit could be painful.  Worse, they say they match, it's not until time goes by that you find out, well, no, they don't, unless they feel like it.  Which they did last September, the only match in my 3 years.

I'm focusing on feeding my Roth vs the 401k but do enjoy the reduced taxes from pretax treatment.


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## PigsDad (Apr 8, 2014)

Blues said:


> This is also erroneous advice.  529 contributions are not tax deductible.  The primary advantage of a 529 account is that the *gains* in the account are not taxed, as long as the money is used for college expenses.  But this is a long-term advantage, as it takes time for the gains to materialize.  Short term (put money in, take it back out), it provides absolutely no tax advantage.


At the federal level, this is true -- contributions are not deductible.

However, check with the state you live in.  In Colorado, contributions are deductible (to a limit) when filing our state income tax forms.  That saves me ~5% (our state income tax rate) for all contributions to our 529.

Kurt


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## SMHarman (Apr 8, 2014)

Blues said:


> This is also erroneous advice.  529 contributions are not tax deductible.  The primary advantage of a 529 account is that the *gains* in the account are not taxed, as long as the money is used for college expenses.  But this is a long-term advantage, as it takes time for the gains to materialize.  Short term (put money in, take it back out), it provides absolutely no tax advantage.
> 
> -Bob


No it is not erronious advice

http://en.wikipedia.org/wiki/529_plan#Advantages



> First, although contributions are not deductible from the donor's federal income tax liability, *many states provide state income tax deductions for all or part of the contributions of the donor*. Beyond the potential state income tax deduction possibilities, a prime benefit of the 529 plan is that the principal grows tax-deferred and distributions for the beneficiary's college costs are exempt from tax.



http://www.forbes.com/sites/ashleaebeling/2014/01/16/maximizing-529-college-savings-plan-tax-breaks/


> The state tax breaks keep getting better. In 33 states and Washington, D.C. you can get a tax break for contributions to 529 plans, usually a state income tax deduction. North Carolina eliminated its deduction as part of a tax reform package last year. But the trend is still for states to make their deductions more generous, say Joseph Hurley, founder of Savingforcollege.com, which has state-by-state details here.
> 
> Arizona made its deduction permanent in 2012 and in 2013 increased it from $750 to $2,000 a year for individual tax filers and from $1,500 to $4,000 a year for joint filers. Nebraska increased its deduction from $5,000 to $10,000 for single filers and married couples filing jointly and from $2,500 to $5,000 for a married individual filing separately, beginning in 2014. Ohio and Wisconsin are considering improvements to their deductions, Hurley says.



Of course a state tax deduction is not really relevant in a few other states like FL and NH.

So live in one of those 33 states, put money in, take it out and save state taxes.  
And here is a list of the states in question.
http://www.savingforcollege.com/com...uestion_ids[]=437&page=compare_plan_questions


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## PigsDad (Apr 8, 2014)

geekette said:


> I'm focusing on feeding my Roth vs the 401k but do enjoy the reduced taxes from pretax treatment.


Do you have a Roth 401k available?  My company started offering that option about 3 years ago and about a year and a half I switched to contributing to the Roth 401k (still maxing out contributions).  That took some discipline since it is a sizable hit on the take-home pay, but I believe it was the right move for me long term.  

Contributing to a Roth 401k effectively allows you to increase your retirement savings in a given year -- $17.5K in post-tax is worth more than $17.5K in pre-tax dollars (in your retirement account).  Since I believe my tax rate will be higher when I retire, this is hopefully a good move for me now.

Kurt


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## Blues (Apr 8, 2014)

SMHarman said:


> No it is not erroneous advice
> 
> http://en.wikipedia.org/wiki/529_plan#Advantages
> 
> http://www.forbes.com/sites/ashleaebeling/2014/01/16/maximizing-529-college-savings-plan-tax-breaks/



OK, I stand corrected.  Some states give you a state tax advantage for doing these quick transfers.  Who knew?  That list doesn't include the great (at taxing) state of California. 



SMHarman said:


> Also you can use the 529 as a wash account.  Need to pay your childs tuition bill, put the money into the 529, a few days later pay the college bill from the 529 and now that contribution to the 529 to pay the bill will reduce your *federal* tax bill.



But I still stand by my original statement that your advice was erroneous.  It does not reduce your *federal* tax bill.

-Bob


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## ace2000 (Apr 8, 2014)

SMHarman said:


> Also you can use the 529 as a wash account.  Need to pay your childs tuition bill, put the money into the 529, a few days later pay the college bill from the 529 and now that contribution to the 529



Actually this strategy might be helpful for me.


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## SMHarman (Apr 8, 2014)

Blues said:


> OK, I stand corrected.  Some states give you a state tax advantage for doing these quick transfers.  Who knew?  That list doesn't include the great (at taxing) state of California.
> 
> 
> 
> ...


  Duly corrected.  I did say federal.  There are a lot of moving parts here and clearly the interface between the thoughts and the keyboard misfired a federal instead of a state.

I'll correct my original post and reflect that in case anyone looks back on this.


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## geekette (Apr 8, 2014)

PigsDad said:


> Do you have a Roth 401k available?  My company started offering that option about 3 years ago and about a year and a half I switched to contributing to the Roth 401k (still maxing out contributions).  That took some discipline since it is a sizable hit on the take-home pay, but I believe it was the right move for me long term.
> 
> Contributing to a Roth 401k effectively allows you to increase your retirement savings in a given year -- $17.5K in post-tax is worth more than $17.5K in pre-tax dollars (in your retirement account).  Since I believe my tax rate will be higher when I retire, this is hopefully a good move for me now.
> 
> Kurt


No Roth 401k 

Twice now I have taken loan from 401k to fully fund my Roth.  Yeah, yeah, bad to take 401k loan, etc., but this is not my primary 401k (tho the only one I can currently contribute to) and I get the pre-tax salary reduction by contributing as much as is feasible and Roth filled up where the compounding will make a bigger difference (Roth account several years older than this 401k).  It is a bite from take home but the loans are never very large, just topping off the tank, so to speak, around this time of year, and paid off quickly (a few months depending on selected pmt schedule) then back to regular 401k contribution for most of the year.

Presumably by contributing more to 401k than I really want to (in order to feed Roth too) I will get a larger share of the match/profit-sharing, when and if it shows up.  

Not a plan most would follow but it's working for me.  401k funds are so-so, Roth is self-directed.  

My main nest egg is a rollover 401k (self-directed IRA) that I so far have not co-mingled funds with since the possibility exists that I will want to roll to a Good employer 401k at some point and I am not eligible for the tax deduction on contribs to traditional IRA.  

The Roth is my big focus as it will be the last bucket of dough touched (in theory) but tax advantage of 401k cannot be overlooked.  maximize contributions all around, decrease taxes.  lather rinse repeat for another decade or 2...


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## dioxide45 (Apr 8, 2014)

geekette said:


> No Roth 401k
> 
> Twice now I have taken loan from 401k to fully fund my Roth.  Yeah, yeah, bad to take 401k loan, etc., but this is not my primary 401k (tho the only one I can currently contribute to) and I get the pre-tax salary reduction by contributing as much as is feasible and Roth filled up where the compounding will make a bigger difference (Roth account several years older than this 401k).  It is a bite from take home but the loans are never very large, just topping off the tank, so to speak, around this time of year, and paid off quickly (a few months depending on selected pmt schedule) then back to regular 401k contribution for most of the year.
> 
> ...



I see no good reason to take a 401k loan to make a Roth IRA contribution. You are erasing much of the benefit of the Roth. When you take a 401k loan and pay it back, you are signing up for double taxation. You have to pay the loan back with post tax dollars and then taxes on the withdrawals at retirement.

Wouldn't you be better to roll over funds from the self directed IRA in to the Roth IRA. You will pay the ordinary income tax on the withdrawal from the IRA, but then get the tax benefits of the Roth. All without the double taxation?

I really see no reason to keep the self directed IRA separate for the possibility that you would roll it in to a "good 401k". IMO there is no 401k as good as a self directed IRA. With any 401k you are stuck with whatever investment options the employer offers. With a self directed IRA, you can buy whatever you want.


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## geekette (Apr 9, 2014)

dioxide45 said:


> I see no good reason to take a 401k loan to make a Roth IRA contribution. You are erasing much of the benefit of the Roth. When you take a 401k loan and pay it back, you are signing up for double taxation. You have to pay the loan back with post tax dollars and then taxes on the withdrawals at retirement.
> 
> Wouldn't you be better to roll over funds from the self directed IRA in to the Roth IRA. You will pay the ordinary income tax on the withdrawal from the IRA, but then get the tax benefits of the Roth. All without the double taxation?
> 
> I really see no reason to keep the self directed IRA separate for the possibility that you would roll it in to a "good 401k". IMO there is no 401k as good as a self directed IRA. With any 401k you are stuck with whatever investment options the employer offers. With a self directed IRA, you can buy whatever you want.


core problem is cash flow.  I have more dust settling on end of marriage before that clears up yet I need to feed both monsters.  I need to be "on record" with the 401k in case there is profit sharing yet feel strongly that I  should not let any year pass in which I do not fully fund roth because I started that late.  It seems like the perfect solution to pass thru the same few thou to do both.  well, not perfect, but reasonable.  I found a way, I'm happy with that part.  

This is a stopgap measure only.  dbl tax, yes, but it's not a lot of money so the tax is negligible.  tax in retirement is a certainty, but I pulled w2s a few years ago and saw that only 1/4 the money in the big nest egg came from me, the rest was employer and time value of compounding.  there are many years before I need this money.  I can't get too worked up about paying tax on the privilege of living off gains someone elses money gave me.  life is taxable, I roll with it.  

I want to preserve my option to roll back into a 401k as I could benefit from generous profit sharing beyond match with this employer.  It could serve me better to have one giant nest egg than 2 very large ones if there remains much time to retirement for compounding.  After all, it comes back to my control when I actually retire, unless I am in such a position as there is more profit sharing if I keep that account open (?  dare to hope...).  

I have no crystal ball but I work for great people, and we know that Roths and 401ks have not always existed so I can't say how the landscape will change before 2030something.  There would be tradeoffs:  juicy compounding in exchange for less choice and potentially lower returns (crapshoot, I assume fund expenses trim those returns but that assumes I invest about same as a mutual fund).  But 2 dollars in one account will generally earn more than 1 dollar in each of 2 separate accounts due to compounding.  I need to be able to roll together if it makes sense in the future.  

If it hasn't rolled by 5 years before retirement, it won't be rolling.  

Converting to Roth now doesn't work as it would be a large tax bill I can neither afford from cash nor in loss from rolling funds.  I can use the back door at any time but now isn't good and I have a problem with paying taxes I don't have to.  I would much prefer to pay the tax when I need use of the money in retirement and have grown it to an extent that it's taxing earnings of earnings from earnings.  

 I have much more work life ahead of me, I want to build diverse retirement accounts in order to figure best move, tax wise, year by year, when retired and living off of these accounts and non-retirement assets and income (SS, pt work?).  I'm cool with growing the Roth max annual contribution by max annual contribution as I expect to tap it last.  I simply want to make sure that I do put in the max each year.


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## SMHarman (Apr 9, 2014)

dioxide45 said:


> I see no good reason to take a 401k loan to make a Roth IRA contribution. You are erasing much of the benefit of the Roth. When you take a 401k loan and pay it back, you are signing up for double taxation. You have to pay the loan back with post tax dollars and then taxes on the withdrawals at retirement.
> 
> Wouldn't you be better to roll over funds from the self directed IRA in to the Roth IRA. You will pay the ordinary income tax on the withdrawal from the IRA, but then get the tax benefits of the Roth. All without the double taxation?
> 
> I really see no reason to keep the self directed IRA separate for the possibility that you would roll it in to a "good 401k". IMO there is no 401k as good as a self directed IRA. With any 401k you are stuck with whatever investment options the employer offers. With a self directed IRA, you can buy whatever you want.


Where is the double taxation here?  Seems more a double cashflow, paying off the loan in 2014 and funding the Roth IRA, both with after tax $'s
The 401k loan has no tax or withdrawal penalties and for this type of funding obligation seems a good source of funds.  Yes you have a short term impact on 401k funding but maybe not.  My 401k loans are at 5% interest.

I think you are saying I pay that loan back with post tax money, but if i took a loan from anywhere to fund the Roth i would be paying it back with post tax money.  That said, that 401k money was not taxed on the way in or the way out or back in again (just the usual payroll taxes that money would have seen).

As Geekette noted this gets a contribution allowance utilized, gives the potential for matching and puts the money into do not touch territory.  

As I have been pointing out throughout this, taking a hollistic balance sheet approach to saving and borrowing, the balance sheet is largely unchanged at the time the transaction is made.  You now have a new $2500 liability to your 401k and have a new Roth $2500 Asset.  The Balance sheet change is zero financially, just presentationally.


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## ace2000 (Apr 9, 2014)

SMHarman said:


> Where is the double taxation here?



The double taxation argument on 401K loans gets confusing.  There is some validity to it but it gets complicated and it's probably not worth going down the road of semantics about what "double-taxation" really means.

If you want to split hairs, you would have to agree that the interest you pay on the 401K loan is taxed twice, right?  That would be since you're using after-tax dollars to pay the interest back and then taxed again when you withdraw it.  

There are some good reasons not to take a loan against your 401K, the double-taxation is really a minor one.


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## SMHarman (Apr 9, 2014)

ace2000 said:


> The double taxation argument on 401K loans gets confusing.  There is some validity to it but it gets complicated and it's probably not worth going down the road of semantics about what "double-taxation" really means.
> 
> If you want to split hairs, you would have to agree that the interest you pay on the 401K loan is taxed twice, right?  That would be since you're using after-tax dollars to pay the interest back and then taxed again when you withdraw it.
> 
> There are some good reasons not to take a loan against your 401K, the double-taxation is really a minor one.


Ah Ok, I see it now, so I borrow $2500 at 5.25% for 6 months the $35 interest I pay on that loan to top off the Roth IRA will accumulate in my tax free 401k but went in from post tax money.
http://www.calcxml.com/calculators/loan-payment-calculator?skn=90#calcoutput

That could also be considered as a cost of purchasing the benefit of tucking that $2500 into the Roth IRA so in the future you have $2500 of tax free income stream.
If that is throwing off $70 a year 5% in income (lets forget the compounded lovelyness here, the money was already compounding in the 401k) then you are getting payback for your $35 of 2014 interest pretty quickly, but yes there is double tax on the interest.

At least 75% of the interest goes to you not a bank though!  And yes this is not the primary reason for avoiding borrowing on the 401k.  I'd put that as the risk of failure to repay and the loan becoming a withdrawal and all the tax implications that has.


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## geekette (Apr 9, 2014)

SMHarman said:


> ....
> At least 75% of the interest goes to you not a bank though!  And yes this is not the primary reason for avoiding borrowing on the 401k.  I'd put that as the risk of failure to repay and the loan becoming a withdrawal and all the tax implications that has.


and if done frequently and in large amounts, will impact compounding negatively.  I would have to be in extremely dire straights to borrow the max of 50k, but, how much better to borrow 50k from myself vs bank?  May the day never come...

For the record, my rate is 4% plus one-time loan process fee of $35.  

Also, before I was downsized a few years ago, I had taken a modest loan to put siding on the house.  It was interesting to find out that "due immediately" was absolutely not true.  job term was June/July, demand for payback was at least December.  Obviously I waited until near deadline (they would not accept partial payment).  Fidelity was the administrator.  I do not know if others are so generous on the timeline.  Point being, "Immediate" could have a definition that varies.

If one is in a precarious employment situation, definitely consider options other than 401k loan UNLESS it is reasonable to pay back within 3-6 months of job end.  Certainly the risk of it being classed as a distribution is there, worse if underage (as I am so far).

General rule of thumb for masses is don't take a loan on your 401k, but the reality is, some of us may need a little back out after having overzealously saved.  It is my money and while it is intended for 'my old age', I am now well older than when I started the first 401k (over 20 years), so, eh, cheap loan from myself beats a loan from any other source, and no credit agency impact because it's private (I'm considering selling my house to buy another and wish for low credit reporting activity for the next half year or so).  People should do their own analysis on their situation before doing something like this;  remember that I am a risk taker and rarely anywhere near The Herd.

it is personal financial strategy and those are never one size fits all.  I just wanted to share an unusual tactic in case it could solve a problem for someone in a similar situation.  I am not advocating this method for anyone but myself.

[felt like I should stub in a disclaimer of sorts...]


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## SMHarman (Apr 9, 2014)

^ Could not agree more.
I think the 5.25% interest rate my firm has set is an interesting one.  It is not far off the long term historic long term return of the S&P500 that I am being forced to replace.


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## rickandcindy23 (Apr 9, 2014)

> Personally, I would like to see at least 1/4 of math problems be written in terms of money instead of the speed of trains. Then we could do math and money at the same time.
> 
> elaine


Amen to that!  

I know it would have helped me in school to do more problems with money.  Relate school to real life, for goodness sake!

My 11-year-old daughter and I were shopping at the mall.  We were standing in the girls' department at Denver Dry Goods, looking at clothes on clearance.  The sign touted an additional 30% off everything on the rack.  There was a mom with an older daughter.  They were trying to figure out what a dress would cost.  The dress was marked down to $20, and they were saying, "Okay, so 50% off would be $10, so it should cost a little more than $10."  My daughter did the math for them in an instant, and she told them, "the price will be $14."  The mom asked my daughter how she figured that out.


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## laurac260 (Apr 9, 2014)

rickandcindy23 said:


> Amen to that!
> 
> I know it would have helped me in school to do more problems with money.  Relate school to real life, for goodness sake!
> 
> My 11-year-old daughter and I were shopping at the mall.  We were standing in the girls' department at Denver Dry Goods, looking at clothes on clearance.  The sign touted an additional 30% off everything on the rack.  There was a mom with an older daughter.  They were trying to figure out what a dress would cost.  The dress was marked down to $20, and they were saying, "Okay, so 50% off would be $10, so it should cost a little more than $10."  My daughter did the math for them in an instant, and she told them, "the price will be $14."  The mom asked my daughter how she figured that out.



I hated percentages in school.  Hated math in general, and I really didn't CARE what happened if Johnny had an apple and ate 10%, how much would he have left?  I mean, who eats just 10% of an apple anyway??

Then one day, it happened.  I was in a store.  With money.  Wanted to buy a sweater.  The sweater was 30% off (or something like that).  I quickly figured out how much 30% of the cost was (10% of 50$ is 5%, and 3x5=15, so the sweater would be 35$)  THAT I cared about.

So, when my daughter needed help with a math problem involving percentages, and she too, wondered why she should really CARE, I said, forget what the book is asking you.  You are at the store.  You have x amount of dollars, and the shirt you badly want is on sale for 40% off.  Mom isn't with you and you don't have a calculator.  How do you figure out if you have enough money?  Guess what?  She figured out how to do the math, real quick.


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## rickandcindy23 (Apr 9, 2014)

My daughter's name is Laura and she is now 33 years old and remembers this well.  

Yes, relate percentages to something a person can use, and understanding happens naturally.


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## dioxide45 (Apr 9, 2014)

SMHarman said:


> Ah Ok, I see it now, so I borrow $2500 at 5.25% for 6 months the $35 interest I pay on that loan to top off the Roth IRA will accumulate in my tax free 401k but went in from post tax money.
> http://www.calcxml.com/calculators/loan-payment-calculator?skn=90#calcoutput
> 
> That could also be considered as a cost of purchasing the benefit of tucking that $2500 into the Roth IRA so in the future you have $2500 of tax free income stream.
> ...



It isn't just the interest that is double taxed. When you make contributions to a 401K, they are taken out of pre-tax income. You then pay taxes when you withdrawal at retirement.

When you take a loan out of a 401K, you get that money out without paying tax on it. But when you pay it back, not just the interest, is paid back with after tax dollars. You then pay tax when you withdrawal it again at retirement.

Geekette is really signing up here to pay tax two times on the same money when they need only really pay it once. Pay it when you repay the 401K loan and again when withdrawing from the 401K. It would be better to take the money from paying back the 401K loan and just contribute it straight to a Roth IRA. Then you pay the tax once, when contributed to the Roth.

I suppose that geekette is putting tax free money in the Roth IRA, but is still paying tax twice. I suppose if geekette is maxing out both, it becomes a wash. There are other fees possibly with a 401K loan and other risks. Also 5% interest on a 401K loan would have been a poor return on their money in 2013 when the market hit closer to 30%.

One should only contribute to a 401K if they are getting a company match. If one maxes out a Roth, then they can contribute to a 401K or just open a non deductible IRA if the 401K plan doesn't offer any great investment options.


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## ace2000 (Apr 9, 2014)

dioxide45 said:


> When you take a loan out of a 401K, you get that money out without paying tax on it. But when you pay it back, not just the interest, is paid back with after tax dollars. You then pay tax when you withdrawal it again at retirement.
> 
> Geekette is really signing up here to pay tax two times on the same money when they need only really pay it once.



I thought that's where you might be going and I know that many choose to label this scenario as "double taxation".  That's why I said in my previous post that it really is a matter of "semantics".  

The bottom line is you got the tax break on the dollars you put in.  You then take out a 401K loan.  Next, you pay the loan off with "after tax dollars", which of course you didn't get the tax break.  The bottom line is... how can you consider that scenario taxation?  If anything it's a complete wash - except on the interest that I previously mentioned.  

Again, I also mentioned previously that it's complicated and it really is a matter of "semantics".  How did we go from Ramsey's baby steps to here?


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## SMHarman (Apr 9, 2014)

dioxide45 said:


> It isn't just the interest that is double taxed. When you make contributions to a 401K, they are taken out of pre-tax income. You then pay taxes when you withdrawal at retirement.
> 
> When you take a loan out of a 401K, you get that money out without paying tax on it. But when you pay it back, not just the interest, is paid back with after tax dollars. You then pay tax when you withdrawal it again at retirement.
> 
> ...


Thats a stretch and certainly not 'double taxation' where you are taxed on the same income twice.
1) Tax free income is contributed.
2) A loan is made to you (now you could substitute this with a loan from a commmercial bank)
3) The loan is reapaid to replenish the tax free income that was originally put in there.  Fungibility and substitution spring to mind, not double tax.
4) at retirement capital is withdrawn as income.

The alternate
1) Tax free income contributed to 401k
4) at retirement capital is withdrawn as income

2) Loan from commercial bank
3) Loan repaid

If I compare these scenareos no more tax is paid in either scenareo so there is no double tax.

I've yet to have it explained to me why the Roth IRA is so great.
http://en.wikipedia.org/wiki/Rate_schedule_(federal_income_tax)
If I look at the tax bands above, if you are in the higher bands (and I have to discount AMT from this though) then putting into the 401k now reduces your tax by up to 39.6c/$ and most of us will not be paying tax at those levels in retirement so 401k is better than Roth.

If you are in the lower bands then at most it appears to be a wash and considering the rules on the Roth could be changed in the future (tax code is a moving feast) a $ in tax saved today is far better than a $ in tax saved in 30 years.  If I can reduce my tax bill by 25 or 28c today why would I be better off not doing that but hoping I reduce my bill by 25-28c in 2040?


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## ace2000 (Apr 9, 2014)

SMHarman said:


> If I can reduce my tax bill by 25 or 28c today why would I be better off not doing that but hoping I reduce my bill by 25-28c in 2040?



You're not counting your capital appreciation, that's why.  You put $1000 in 401K and get your tax break on that amount today.  You put $1000 in your Roth and if you leave it in for 30 years with an average capital gain of 10% then that $1000 becomes about $17K (assuming yearly compounding).  Would you rather get a tax break on the initial $1000 or when you take out the $17K and don't have to pay taxes?  Of course, that's just with  $1000.


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## dioxide45 (Apr 9, 2014)

SMHarman said:


> Thats a stretch and certainly not 'double taxation' where you are taxed on the same income twice.
> 1) Tax free income is contributed.
> 2) A loan is made to you (now you could substitute this with a loan from a commmercial bank)
> 3) The loan is reapaid to replenish the tax free income that was originally put in there.  Fungibility and substitution spring to mind, not double tax.
> 4) at retirement capital is withdrawn as income.



This makes sense now. You are still paying tax twice, but you would be anyway if you were just putting the money in the Roth. Really one is putting money in to the Roth tax free. So paying the loan with after tax money really is a wash.

However, I still go back to the other main pitfall of a 401K loan. That is having your money out of the market. If the market goes down then perhaps you are ahead. Though if you had a big $10,000 loan out of your 401K last year, you gave up $2500 in earnings over what interest you would have paid yourself in interest at 5%.

I suppose you could come out ahead with the additional tax advantages of a Roth, but if you have the cash flow to support paying back a 401K loan, wouldn't you be better to just contribute that amount to the Roth and leave the 401K alone?


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## SMHarman (Apr 9, 2014)

ace2000 said:


> You're not counting your capital appreciation, that's why.  You put $1000 in 401K and get your tax break on that amount today.  You put $1000 in your Roth and if you leave it in for 30 years with an average capital gain of 10% then that $1000 becomes about $17K (assuming yearly compounding).  Would you rather get a tax break on the initial $1000 or when you take out the $17K and don't have to pay taxes?  Of course, that's just with  $1000.



Now you are using some seriously funny money math.  To put $1000 into the Roth at 25% I need to earn $1333.  To put the $1000 into the 401k I need to earn $1000.

Like the calculator linked below says


> Roth has an additional, somewhat confusing advantage that it lets you shelter more real money**: the same dollar amount, but in post-tax, rather than pre-tax dollars. (The idea is that a tax deduction isn't "money you're getting back"; it's "money you aren't sheltering".)


** But that is more real money than an traditional IRA, not a 401k where you could put the $5k of IRA money plus the tax saved so $6,667.

I was playing with the calculator here 
http://www.moneychimp.com/articles/rothira/rothintro.htm

I put $1000 in a 401k $1000 goes in, now if I were to put that same $1000 into my Roth I would be putting in 1000*75/100 (if a 25% taxpayer).   So I would be putting $750 into my Roth *(or are you suggesting an after tax $ == a pre tax one?)*.

Now if the 1000 in the IRA becomes 17k then the 750 in the Roth becomes $13Kk.

Now _When I take the money out of the 401k_ (and I will not do that all in year 1) I pay income tax on that (not capital gains tax, both funds have grown tax free).

So 401k withdrawal is $17k less tax at 25% again (maybe 15%) = $13k
Roth IRA withdrawal is $13k


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## Blues (Apr 9, 2014)

ace2000 said:


> You're not counting your capital appreciation, that's why.  You put $1000 in 401K and get your tax break on that amount today.  You put $1000 in your Roth and if you leave it in for 30 years with an average capital gain of 10% then that $1000 becomes about $17K (assuming yearly compounding).  Would you rather get a tax break on the initial $1000 or when you take out the $17K and don't have to pay taxes?  Of course, that's just with  $1000.



I've heard that argument before, and it just doesn't wash.  Let's take your numbers as an example.  Note that in the 25% bracket, it takes $1333 in income to be left with $1000 after taxes, which you then contribute to a Roth.  Or you contribute the entire $1333 pre-tax to a 401K.

Case 1, Roth - Contribute $1000 to Roth, after 30 years you can withdraw $17K tax free.

Case 2, 401K - You contribute the entire $1333 pre-tax to a 401K.  After 30 years, it grows to $1333 * 17 = $26666 $22666.  You withdraw it from your 401K and pay tax at 25%.  What do you have left?  Surprise!  The answer is $17K.

The Roth is primarily a vehicle that assists in post-retirement tax planning for those that expect to have a hefty retirement fund, and thus be in a similar tax bracket after retirement as before.

-Bob

SMHarman, it appears that great minds think alike.  You were a little bit quicker!


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## ace2000 (Apr 9, 2014)

SMHarman said:


> I think you are trying to say I put $1000 in a 401k $1000 goes in, now if I were to put that same $1000 into my Roth I would be putting in 1000*75/100 (if a 25% taxpayer).   So I would be putting $750 into my Roth *(or are you suggesting an after tax $ == a pre tax one?)*.



No that's not what I'm saying, you're making it way too complicated.  Let me simplify it for you.  The difference is when you get the tax break - now with the 401K or 30 years later with the Roth on the higher amount?  

With the 401K, you get the tax break on the $1000 you put in - in tax savings dependent on your tax bracket.  With the Roth you get the tax break on the $17K - which includes your capital gains.  What's so complicated?


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## dioxide45 (Apr 9, 2014)

SMHarman said:


> Now you are using some seriously funny money math.  To put $1000 into the Roth at 25% I need to earn $1333.  To put the $1000 into the 401k I need to earn $1000.
> 
> I was playing with the calculator here
> http://www.moneychimp.com/articles/rothira/rothintro.htm
> ...



Think of putting the same amount of money in to both the 401K and the Roth. $1000 a year for 10 years each. At the end you would have $10,000 in principle invested. Say you have total $25,000 in each now with your earnings.

Say you were in a 15% bracket when putting the money in and in the same 15% bracket when withdrawing.

So you paid $11500 to put the money in the Roth because it was a taxable contribution. But you get to pull it all out tax free.

You paid $10000 in to the 401K, but you now have to pay 15% on that $25000 income when you withdrawal. So you pay $3750 in taxes to take it out.

The Roth saves you $2250 in taxes.


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## Blues (Apr 9, 2014)

You're both making the same mistake.  Yes, if you put the same amount of money in each account, you end up with more in the Roth.  But what happened to the money you saved in taxes with the 401K?  If you blew it on new clothes or a new car, yeah, you should have used a Roth.  But if you put that money into your 401K, guess what?  It compounds just like the Roth money, and in the end, you end up with *precisely* the same amount of money.


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## ace2000 (Apr 9, 2014)

Blues said:


> Case 1, Roth - Contribute $1000 to Roth, after 30 years you can withdraw $17K tax free.
> 
> Case 2, 401K - You contribute the entire $1333 pre-tax to a 401K.  After 30 years, *it grows to $1333 * 17 = $26666*.  You withdraw it from your 401K and pay tax at 25%.  What do you have left?  Surprise!  The answer is $17K.



Blues, I think you need to check this amount bolded above.  Where did you come up with the multiplier of 17???  And if I do the math on an initial investment of $1333, I get a total of about 23K, not 26K.


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## SMHarman (Apr 9, 2014)

dioxide45 said:


> However, I still go back to the other main pitfall of a 401K loan. That is having your money out of the market. If the market goes down then perhaps you are ahead. Though if you had a big $10,000 loan out of your 401K last year, you gave up $2500 in earnings over what interest you would have paid yourself in interest at 5%.


Your pitfall is the main reason not to borrow from your 401k, I agree, but when looking at the 'give up' you need to compare apples to apples again.

On this hypothetical 10k loan at 5.25%.  I go to Citi for an unsecured 12 month $10k loan instead, this type of loan has an interest rate of 8.99 to 20.74%.

If Citi decided I was in the 20% bucket I have probably given up nothing as I would have seen my 401k grow but given Citi 20.74% from my after tax pay in interest.  

401k left alone 10k > 13k at 30% growth - But I needed the money somewhere else we would not be talking loan!
401k loan Hmm, you will recapture some of that growth as the loan is repaid.  The $857 that goes back in on month 1 will capture all the growth etc.  You will repay $287 in interest to yourself in addition to capturing a portion of that growth.  Lets guesstimate you see 50% of the growth so $1500 growth and $287 interest so $1787.
Citi 10k loan Repay total of 1160.
So you forgo $1213 if growth, not $2500 (based on some back of the envelope math), which is better than giving Citi the money - just - and last year was an exceptional year.  If you had decided to take this loan in 2008 you would be laughing now..


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## SMHarman (Apr 9, 2014)

ace2000 said:


> No that's not what I'm saying, you're making it way too complicated.  Let me simplify it for you.  *The difference is when you get the tax break* - now with the 401K or 30 years later with the Roth on the higher amount?
> 
> With the 401K, you get the tax break on the $1000 you put in - in tax savings dependent on your tax bracket.  With the Roth you get the tax break on the $17K - which includes your capital gains.  What's so complicated?



I'm not making it complicated.  I'm not the IRS.  The IRS is making it complicated.

If I, your employer pay you $1000.  You can put that into your 401k and all of it goes to your 401k (well some goes to disability funds and things but you get the picture).

If you want to put that into your Roth it goes through Payroll and I keep $250 and remit them to the IRS because at the end of the year you will owe them to the IRS and the IRS likes to get its money early.  You now have $750 in your hand to put into the Roth IRA.  Unless you hold up the IRS you cannot make this back into $1000.

Your post tax apple has a 25% bite taken out of it (who eats 1/4 of an apple anyway  )

Now run your math (which I agree with) on the 1k and the $750 and tell me what the difference is?

Else, show me where my tax break NOW on the 401k is?  You seem to say I get a 401k tax break then drop that from your calculation, or did you spend the $333 on a weekend in Vegas?



Blues said:


> You're both making the same mistake.  Yes, if you put the same amount of money in each account, you end up with more in the Roth.  But what happened to the money you saved in taxes with the 401K?  If you blew it on new clothes or a new car, yeah, you should have used a Roth.  But if you put that money into your 401K, guess what?  It compounds just like the Roth money, and in the end, you end up with *precisely* the same amount of money.



Yes we do seem to be on the same page here...


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## Blues (Apr 9, 2014)

ace2000 said:


> Blues, I think you need to check this amount bolded above.  Where did you come up with the multiplier of 17???  And if I do the math on an initial investment of $1333, I get a total of about 23K, not 26K.



Oops, typo.  That should have read $22666.  But after taxing it at 25%, that still works out to precisely $17K.  I just hit a wrong key.  I'll fix it in the original post.


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## ace2000 (Apr 9, 2014)

SMHarman said:


> If you want to put that into your Roth it goes through Payroll and I keep $250 and remit them to the IRS because at the end of the year you will owe them to the IRS and the IRS likes to get its money early.  You now have $750 in your hand to put into the Roth IRA.  Unless you hold up the IRS you cannot make this back into $1000.



If I have an extra $1000 to invest, that $1000 is after it's gone through your payroll and tax scenarios above.  That is $1000 free and clear.  You are making it way more complicated than necessary.


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## ace2000 (Apr 9, 2014)

Blues said:


> Oops, typo.  That should have read $22666.  But after taxing it at 25%, that still works out to precisely $17K.  I just hit a wrong key.  I'll fix it in the original post.



I see, let's analyze those numbers then.


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## SMHarman (Apr 9, 2014)

ace2000 said:


> If I have an extra $1000 to invest, that $1000 is after it's gone through your payroll and tax scenarios above.  That is $1000 free and clear.  You are making it way more complicated than necessary.



Whatcha talking about Willis, if I have an extra $1,000 to invest in a Roth it has gone through payroll etc.

The 401k part will not go through tax.  That is my upfront break you keep talking about.

If I divert $1,333 to my 401k, that reduces my take home pay (the bit I could put in the Roth) by $1,000.

You can't compare $1,000 in the 401k to $1,000 in the Roth and then take credit for the Roth end tax break without taking credit for the 401k begining tax credit.


If you compare the $1,333 in the 401k to the $1,000 in the Roth with identical starting and ending tax brackets you come out equal.
If you compare with a higher retirement bracket (less usual) the Roth comes out ahead.
If you compare with a lower retirement bracket (more usual) the 401k comes out ahead.
Most are in the first or last of these points.  To that extent it makes more sense to take the credit today and get more $ in there to grow.


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## ace2000 (Apr 9, 2014)

Blues said:


> *You contribute the entire $1333 pre-tax to a 401K.*  After 30 years, it grows to $1333 * 17 = $26666 $22666.  You withdraw it from your 401K and pay tax at 25%.  What do you have left?  Surprise!  The answer is $17K.



You're also overestimating the $1333.  You do not gain a current savings of $333 in taxes by doing the traditional 401K vs the Roth.  Do you want to share a specific example of how you came up with that?


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## SMHarman (Apr 9, 2014)

ace2000 said:


> You're also overestimating the $1333.  You do not gain a current savings of $333 in taxes by doing the traditional 401K vs the Roth.  Do you want to share a specific example of how you came up with that?


$1333 - 25% = $1,000.  Do we agree on that?

So $1333 into a 401k (as it is pre tax - that is where you get the 401k benefit right?)
Grows with this x17 factor we all agree to = $22661 in the pot 30 years later.

So $1000 into the Roth (you get the break later - we agree to that) grows to $17,000

Take it all out at once
401k gets taxed at 25% = 5665.25 tax = keep $16995.75
Roth no tax = $17,000


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## ace2000 (Apr 9, 2014)

SMHarman said:


> $1333 - 25% = $1,000.  Do we agree on that?



No, I don't agree with your "funny" math here.

If my taxable salary is 10K, here is how it really breaks out.  

Salary 10K

IRA contribution 1K
Roth contribution 1K

25% tax bracket of 9K (for IRA) = $2250
25% tax bracket of 10K (for Roth) = $2500

Difference is $250.  Use whatever salary level you like with the 1K contribution and the $250 difference is the same.


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## ace2000 (Apr 9, 2014)

ace2000 said:


> Difference is $250.  Use whatever salary level you like with the 1K contribution and the $250 difference is the same.



So, even when you add that $250 to this year's IRA contribution, it still doesn't compute to $333 - which is an overestimation.


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## SMHarman (Apr 9, 2014)

ace2000 said:


> No, I don't agree with your "funny" math here.
> 
> If my taxable salary is 10K, here is how it really breaks out.
> 
> ...


OK 
So *in 401k world *you are putting $1,333k into your 401k and being taxed on 8667 at 25% (2166.75) *leaving $6500 in your pocket*.

*In Roth world *you are being paid 10,000, being taxed 2500 and taking home 7500 putting 1000 into the roth *leaving 6500 in your pocket*.

If you accept there is a 401k upfront tax break you gotta give it to me somewhere!

Alternate math.

So *in 401k world *you are putting $1,000k into your 401k and being taxed on 9000 at 25% (2250) *leaving $6750 in your pocket* - Thats more money because you have not contributed a comparable amount to the 401k.

*In Roth world *you are being paid 10,000, being taxed 2500 and taking home 7500 putting 1000 into the roth *leaving 6500 in your pocket*.

This is your math.  You keep / take home $250 more.  But you have paid the IRS tax on that $250 of $83.  Add those together and you get back to the $333 we first thought of.

You keep forgetting the upfront tax break of the 401k.


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## SMHarman (Apr 9, 2014)

ace2000 said:


> So, even when you add that $250 to this year's IRA contribution, it still doesn't compute to $333 - which is an overestimation.



$250 after (in your pocket) tax is 

$333 (gross from your employer) - 25% tax ($83 to the IRS) = $250 you thought of.

Compare Pre Tax or Post tax.  Mix and match and you get confusion.  Or a comparison of apples and 3/4 apples.


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## Big Matt (Apr 9, 2014)

Great banter about taxes and IRA vs. Roth.

Roth always wins.  You are putting money away that will never be taxed.  It has nothing to do with what tax rates are now or in the future.

Most people make a big assumption when putting a ton of money into a traditional IRA or 401k.  That is that taxes now will be the same as taxes when you take the money out.  Taxes today are at a historical low.  You have no idea what rate they will be when you take them out.  You may be deferring taxes today to pay them at a much higher rate in the future.  You are better to put money into investments after tax (Roth).  That way you don't speculate on future taxes, capital gains, etc.


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## SMHarman (Apr 9, 2014)

Big Matt said:


> Great banter about taxes and IRA vs. Roth.
> 
> Roth always wins.  You are putting money away that will never be taxed.  It has nothing to do with what tax rates are now or in the future.
> 
> Most people make a big assumption when putting a ton of money into a traditional IRA or 401k.  That is that taxes now will be the same as taxes when you take the money out.  Taxes today are at a historical low.  You have no idea what rate they will be when you take them out.  You may be deferring taxes today to pay them at a much higher rate in the future.  You are better to put money into investments after tax (Roth).  That way you don't speculate on future taxes, capital gains, etc.



NEVER?  What happened to it when it passed from my employers hands to mine?  IT WAS TAXED!!!  Thats not speculation on future taxes or captial gains, etc, it is real tax, real money, today!

There are many certainties in the 401k world.  A certainty that my 2013 tax filing is closed down and that tax free money is now and will remain tax free.
A certainty that there will be tax on it in the future.  A Certaintly that if some disaster strikes my life that the content (including that tax break) will be passed to my heirs.

Correct, I have no idea what tax rates will be in 30 years, but I do know that the time value of money means an extra $ in my fund today is better than a $ saved at some indeterminate time in the future.  Furthermore, I should be able to plan when I am taking money out of the 401k to make sure my AGI in retirement stays below the marginal rate bands.

I also have no faith or certainty that they won't change the Roth IRA rules to put some kind of tax on the back end of the Roth in 30 years time.  That is speculation on future taxes or captial gains, etc


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## geekette (Apr 9, 2014)

dioxide45 said:


> ...
> One should only contribute to a 401K if they are getting a company match. If one maxes out a Roth, then they can contribute to a 401K or just open a non deductible IRA if the 401K plan doesn't offer any great investment options.


puzzled.  You have concerns about taxation but believe that the pretax benefits of 401k are easily dismissed if no company match?


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## dioxide45 (Apr 10, 2014)

geekette said:


> puzzled.  You have concerns about taxation but believe that the pretax benefits of 401k are easily dismissed if no company match?



I do, but only up to the $5,500/6,500 contribution limit of an IRA. If you don't have an employer matching 401K, you can get more control of your investments by putting your money in a Roth IRA or even a traditional IRA. When you max out the IRA, then go to the 401K.

Never put more in to a 401K than they will match. Any extra goes in to an IRA. Unless you are maxing the IRA out too. Then go back to the 401K.

401Ks can be extremely limiting. My company only offers a bunch of target funds and index funds. Don't get me wrong, I think index funds are great, but in an IRA you can buy pretty much anything you want. Including individual stock.


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## ace2000 (Apr 10, 2014)

SMHarman said:


> OK
> So *in 401k world *you are putting $1,333k into your 401k and being taxed on 8667 at 25% (2166.75) *leaving $6500 in your pocket*.
> 
> *In Roth world *you are being paid 10,000, being taxed 2500 and taking home 7500 putting 1000 into the roth *leaving 6500 in your pocket*.
> ...



Ok, this ties it all together.  I've been giving you all a break the whole time - just a $250 break though.  I've seen people run through the examples similar to what you've described here, but they used the $250 scenario vs. the $333 amount you all have used.  I can see here that your example is closer to reality.  

Anyway, to answer your original question - there's a couple of good reasons I can think of why it's better to go with the Roth.

1.  If you feel you're going to be in a higher tax bracket when you retire (I'll even say if it's close to the same).
2.  You do not have to start the withdrawals at age 70.  

Both are potentially valid reasons and if you're not sure, just split the difference then.


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## Elan (Apr 10, 2014)

dioxide45 said:


> I do, but only up to the $5,500/6,500 contribution limit of an IRA. If you don't have an employer matching 401K, you can get more control of your investments by putting your money in a Roth IRA or even a traditional IRA. When you max out the IRA, then go to the 401K.
> 
> Never put more in to a 401K than they will match. Any extra goes in to an IRA. Unless you are maxing the IRA out too. Then go back to the 401K.
> 
> 401Ks can be extremely limiting. My company only offers a bunch of target funds and index funds. Don't get me wrong, I think index funds are great, but in an IRA you can buy pretty much anything you want. Including individual stock.



  I'd rather fund my own IRA than my 401K for the reasons you've mentioned.  But the limit on IRA contributions is so low that it's not much of a retirement plan unless one starts _very_ early.


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## SMHarman (Apr 10, 2014)

dioxide45 said:


> 401Ks can be extremely limiting. My company only offers a bunch of target funds and index funds. Don't get me wrong, I think index funds are great, but in an IRA you can buy pretty much anything you want. Including individual stock.



Individual stocks in a retirement plan for most is a bad idea. 

Enron, Bear Stearns, Lehman, WaMu employees will all tell you why. 

Generally individual's are bad stock pickers.


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## geekette (Apr 10, 2014)

dioxide45 said:


> I do, but only up to the $5,500/6,500 contribution limit of an IRA. If you don't have an employer matching 401K, you can get more control of your investments by putting your money in a Roth IRA or even a traditional IRA. When you max out the IRA, then go to the 401K.
> 
> Never put more in to a 401K than they will match. Any extra goes in to an IRA. Unless you are maxing the IRA out too. Then go back to the 401K.
> 
> 401Ks can be extremely limiting. My company only offers a bunch of target funds and index funds. Don't get me wrong, I think index funds are great, but in an IRA you can buy pretty much anything you want. Including individual stock.



Ok, appreciate the elaboration, thanks.

Sure, for you and me, limit of choice is a concern.  For the masses, not so much, as many need the auto pilot saving, and fund returns are better than not saving.

I won't say NEVER put more than they will match as each person has their own deal, and I definitely want the tax savings as I am reaching the prime of my career.  There aren't a lot of tax shelters for the common man and I plan to maximize mine.   Getting IRA deduction is not the same thing and I can no longer get it anyway, so 401k and Roth for me.

I would also be hesitant to encourage Everyone to go the DIY route, but for some, it is completely appropriate.


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## geekette (Apr 10, 2014)

SMHarman said:


> Individual stocks in a retirement plan for most is a bad idea.
> 
> Enron, Bear Stearns, Lehman, WaMu employees will all tell you why.
> *
> Generally individual's are bad stock pickers*.


Yes, can be terrible idea for some.  Too easy to erode savings with transaction fees, too many fall prey to emotional decisions based on headlines, chase flavor of the day, buy high/sell low,etc.

Companies that match in stock, that can be a mixed bag and folks need to beware having all their eggs in one basket.  Diversification is key.  

It's been a long time since I worked for a public company that matched in stock, but I think you end up kind of stuck with it.  Has this changed?  Are you able to convert the company stock within the plan?  Or is that only possible after you leave ?


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## SMHarman (Apr 10, 2014)

geekette said:


> Yes, can be terrible idea for some.  Too easy to erode savings with transaction fees, too many fall prey to emotional decisions based on headlines, chase flavor of the day, buy high/sell low,etc.
> 
> Companies that match in stock, that can be a mixed bag and folks need to beware having all their eggs in one basket.  Diversification is key.
> 
> It's been a long time since I worked for a public company that matched in stock, but I think you end up kind of stuck with it.  Has this changed?  Are you able to convert the company stock within the plan?  Or is that only possible after you leave ?



It changes after Enron. A firm can have a own stock option but it can't be the only option. Or the default option. 

Personally my 401k has historically had 15% going to own stock but I am dropping that down as I am getting uncomfortable with the $ value that now is. Especially as it has grown to 20% of the fund (a good thing)


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## Big Matt (Apr 10, 2014)

I'm not sure what you are trying to promote, but your money will never be taxed after you put it in a Roth IRA. Sure it was taxed when you got it, but taxes are at an all time low now.

My assertion is that you are better off putting post tax money into an account that will never be taxed (on the growth).  

With certainty you will pay taxes on every dollar that you withdraw from a traditional IRA or 401k.  Right now taxes are low. So it looks like a good deal, but you have no optionality other than to not take money out (oh, I forgot, you have to...). 

 I'd rather put money in now when taxes are low and not worry about when they will increase.  They aren't going down.




SMHarman said:


> NEVER?  What happened to it when it passed from my employers hands to mine?  IT WAS TAXED!!!  Thats not speculation on future taxes or captial gains, etc, it is real tax, real money, today!
> 
> There are many certainties in the 401k world.  A certainty that my 2013 tax filing is closed down and that tax free money is now and will remain tax free.
> A certainty that there will be tax on it in the future.  A Certaintly that if some disaster strikes my life that the content (including that tax break) will be passed to my heirs.
> ...


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## SMHarman (Apr 11, 2014)

Big Matt said:


> I'm not sure what you are trying to promote, but your money will never be taxed after you put it in a Roth IRA. Sure it was taxed when you got it, but taxes are at an all time low now.
> 
> My assertion is that you are better off putting post tax money into an account that will never be taxed (on the growth).
> 
> ...



I'm not trying to promote anything. Why do you think I am?

Which taxes are low right now?

You know with certainty that Roth rules will never be changed?  

I know with certainty the tax break I got on my 401k is real money today. 

This started with me commenting I don't get the benefit of Roth. The minority that pay more tax in retirement than in Work benefit. The rest, not so much. 

Sent from my LT26i using Tapatalk


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## Htoo0 (Apr 11, 2014)

When the government takes over all of our 401K, traditional IRA, and Roth IRA's because they decide they can administer it better than we can it will all be a mute point anyway.


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## Tia (Apr 11, 2014)

Htoo0 said:


> When the government takes over all of our 401K, traditional IRA, and Roth IRA's because they decide they can administer it better than we can it will all be a mute point anyway.




 This has thinking along that line  -  http://www.passportira.com/unleash.html


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## geekette (Apr 11, 2014)

Tia said:


> This has thinking along that line  -  http://www.passportira.com/unleash.html



hilarious.  Was nearly moved to send in my money to learn about the Special IRA!


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## Clemson Fan (Apr 11, 2014)

SMHarman said:


> I'm not trying to promote anything. Why do you think I am?
> 
> Which taxes are low right now?
> 
> ...



He was referencing the following graph which shows income tax rates now to be relatively low especially compared to the middle of the 20th century.  That's the main argument in favor of a Roth.  If the income tax rates go up a certain % (like say 10%) by the time you retire then you'll end up "winning" if you take a Roth.


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## sue1947 (Apr 11, 2014)

The issue of 401K vs IRA vs Roth is a moot point for most.  The real issue is to maximize retirement saving.  Utilize whatever options you have available to the maximum possible so that when you retire, you have a choice in your lifestyle, especially if the choice to retire isn't yours (due to job loss or health issues).   I was able to retire early at 54 because I saved in a 401K, IRA and Roth.  In hindsight, I should have done more in all 3.  
 Tax situations vary by individual and time of life so having both types of IRA helps.  I'm currently in a very low tax bracket so am taking money out of the regular IRA and converting some to Roth.   When I hit 70.5 years and the required minimum distributions kick in, I hope to not be forced into a higher tax bracket by converting to Roth's strategically now.  When I put money into those regular IRA, I was at a higher tax bracket so have reaped the rewards of the original tax break and the compounding of those tax savings over all these years (not an insignificant amount).  

The key is to start early and not take it out.  Compound interest takes some time to start building up.  The graph/picture of the formula is a curve that starts fairly flat and then steepens over time.  You have to be patient through the flat part to get to the steep part (when your money is really working for you).  If you take money out, you restart that process over and over again. 

Sue


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## geekette (Apr 11, 2014)

sue1947 said:


> *The issue of 401K vs IRA vs Roth is a moot point for most.  The real issue is to maximize retirement saving. * Utilize whatever options you have available to the maximum possible so that when you retire, you have a choice in your lifestyle, especially if the choice to retire isn't yours (due to job loss or health issues).   I was able to retire early at 54 because I saved in a 401K, IRA and Roth.  In hindsight, I should have done more in all 3.
> Tax situations vary by individual and time of life so having both types of IRA helps.  I'm currently in a very low tax bracket so am taking money out of the regular IRA and converting some to Roth.   When I hit 70.5 years and the required minimum distributions kick in, I hope to not be forced into a higher tax bracket by converting to Roth's strategically now.  When I put money into those regular IRA, I was at a higher tax bracket so have *reaped the rewards of the original tax break and the compounding of those tax savings* over all these years (not an insignificant amount).
> 
> The key is to start early and not take it out.  Compound interest takes some time to start building up.  The graph/picture of the formula is a curve that starts fairly flat and then steepens over time.  You have to be patient through the flat part to get to the steep part (when your money is really working for you).  If you take money out, you restart that process over and over again.
> ...


Thank you, early retiree.  Nothing beats Experience.  My mileage can't vary until I get there, but I agree with you.  

Presumably I will be able to control how much income I make and therefore taxation.  Taxation will also depend on where you live as certain retirement income is exempt from taxes in certain states (Kiplingers had a great table showing this).

I figure the best I can do is have multiple stashes and figure it out year by year.  That said, tiny trad IRAs will be spent first, then the larger Trads/Rollover 401ks, with Roth being the last man standing.  

I just can't get too freaked out by future taxes on money I put in 20 years ago and won't touch for another 20, as all has kept earning more money.  While it's all MY money, some of it I didn't put in, so I don't really have a problem with the siphoning of a portion of what didn't actually come from my pocket in another 20 years (it's more than 20 until RMD's kick in).  

For me, I feel it would be foolish to put all of my eggs into the Roth basket and much of that has to do with having started a 401k before Roth's existed - my main nest egg was already established, and paying the taxes on that for the sole purpose of making it a Roth ...  it's not something that makes sense for me right now.  Best to keep the entire amount earning for me while continuing to save as much as possible in all of them that I remain eligible for until I am no longer eligible.


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## dioxide45 (Apr 11, 2014)

Given all the 401K and IRA talk. I still think that the HSA is one of the best vehicles for saving. Tax free money in and tax free money out. If used for healthcare costs. You can't really beat that. The only problem is the rather meager contribution limits.

I just wish I had started in a HDHP with HSA far earlier than I did. When I actually took the time to crunch the numbers, it was cheaper than the traditional health plan that I had been using for so many years.


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## Rose Pink (Apr 11, 2014)

dioxide45 said:


> Given all the 401K and IRA talk. I still think that the HSA is one of the best vehicles for saving. Tax free money in and tax free money out. If used for healthcare costs. You can't really beat that. The only problem is the rather meager contribution limits.
> 
> I just wish I had started in a HDHP with HSA far earlier than I did. When I actually took the time to crunch the numbers, it was cheaper than the traditional health plan that I had been using for so many years.



I look at the HDHP each year when benefit enrollment rolls around.  It is never less expensive for us.  When I calculate in the costs of the care we consume, the more expensive premium plan always wins out.  This frustrates me.  It could work out for one or for three or more but with just the two of us, the deductible limits do not make sense.  I don't know why DH's employer has it set up to make it less reasonable for a couple.


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## Icc5 (Apr 12, 2014)

*Anything that works for you*

Everyone has a different way of learning and understanding things.  I'm one of those that did understand and learn from talking to and seeing how my parents ran a household and their finances.  Each of my kids do things different.  My son does a lot of things I do but not other things.  My daughter keeps making mistakes and has to pay because of it.  She seems to have to learn from her own mistakes and listens to friends instead of our advice and example.
I like dealing with money as does my son.  Money and money matters just seem to confuse my daughter.
Never bounced a check in my life,  daughter has bounced plenty.  My 92 year old mother said they learned in 8th grade to balance a check book.  Both my Mom and I have never been off by a penny in balancing.
If Ramsey system or any system works then great, use it.  Not having to make mistakes saves fortunes.  I've seen it in my family and how much better off those of us that can manage are then those that can't.
Bart


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## dioxide45 (Apr 12, 2014)

Rose Pink said:


> I look at the HDHP each year when benefit enrollment rolls around.  It is never less expensive for us.  When I calculate in the costs of the care we consume, the more expensive premium plan always wins out.  This frustrates me.  It could work out for one or for three or more but with just the two of us, the deductible limits do not make sense.  I don't know why DH's employer has it set up to make it less reasonable for a couple.



I think this is just the nature of HDHP. There is no individual deductible like with a traditional health plan. So if the deductible is $1500 per person, $3000 for all covered members. Then even if one person has a claim, you have to meet the full $3000 family deductible. Not just the $1500 for that one person. The plan though our employer is the same.

DW and I are lucky, we work for the same employer so we each buy an individual plan. It is cheaper and we only have the individual deductible to worry about.


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## bogey21 (Apr 13, 2014)

This is the stuff that should be taught in High School.  Start with how to balance a checking account and work up to retirement planning.  Surely there is something in the (core?) curriculum this could replace.

George


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## sue1947 (Apr 13, 2014)

bogey21 said:


> This is the stuff that should be taught in High School.  Start with how to balance a checking account and work up to retirement planning.  Surely there is something in the (core?) curriculum this could replace.
> 
> George



As a former high school math teacher, I can assure you this is all taught in a variety of math classes from general math/consumer math up to pre calculus.  Most teenagers aren't ready to hear it and it doesn't stick in the memory.  Remember story problems?  

Sue


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## Rose Pink (Apr 14, 2014)

sue1947 said:


> As a former high school math teacher, I can assure you this is all taught in a variety of math classes from general math/consumer math up to pre calculus.  Most teenagers aren't ready to hear it and it doesn't stick in the memory.  Remember story problems?
> 
> Sue



I agree.  We didn't have 401Ks and IRAs (or even pocket calculators) back when I was in public school but our math problems did involve $ signs and %s.  I think there may have even been compounding interest problems.  I was not a fan of math and my concerns centered on whether I was going to get asked to the dance and not on how I was going to pay for retirement.  

My mom worked at a bank.  She had a small red book with the simple title "Loan Payments Handbook."  It's been mine for decades. It is hundreds of pages of tables listing percentage rate, loan amounts, and years to pay it off.  I keep it for its sentimental value.  Of course, such tables can probably be found on the internet these days.  The internet--another thing we did not have. 

Anyway, even though children cannot "see" their retirement years, they can still relate to the cars and other material desires of the now.  They can learn about investing to help them achieve more immediate goals.  I've heard about classes where the students learn about the stock market by pretend investing and tracking their stocks throughout the class term.  In some classes (or extracurricular clubs) they learn about running business ventures.   These tend to be elective classes, though.


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## geekette (Apr 14, 2014)

Rose Pink said:


> I agree.  We didn't have 401Ks and IRAs (or even pocket calculators) back when I was in public school but our math problems did involve $ signs and %s.  I think there may have even been compounding interest problems.  I was not a fan of math and my concerns centered on whether I was going to get asked to the dance and not on how I was going to pay for retirement.
> 
> My mom worked at a bank.  She had a small red book with the simple title "Loan Payments Handbook."  It's been mine for decades. It is hundreds of pages of tables listing percentage rate, loan amounts, and years to pay it off.  I keep it for its sentimental value.  Of course, such tables can probably be found on the internet these days.  The internet--another thing we did not have.
> 
> Anyway, even though children cannot "see" their retirement years, they can still relate to the cars and other material desires of the now.  They can learn about investing to help them achieve more immediate goals.  I've heard about classes where the students learn about the stock market by pretend investing and tracking their stocks throughout the class term.  In some classes (or extracurricular clubs) they learn about running business ventures.   These tend to be elective classes, though.


Never cared about dances, but in 8th grade social studies class we did a couple weeks of stock market study.  We each had a fictitious $10k to invest for a week.  I made 10% and got very interested in stock market.  wasn't until about a decade later that I had any money to invest, but already knew a lot about how it worked. 

I was lucky, some never understand the stock market at any age.  

I do think there is more money management taught than is actually absorbed but this will vary greatly.


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## Blues (Apr 14, 2014)

With all the discussion here about Roth vs traditional IRA, I was amused to see this article in my Yahoo Finance news feed:

http://blogs.marketwatch.com/taxwatch/2014/04/14/how-a-roth-ira-totally-screwed-up-my-taxes/

"What I didn’t know is that the Roth assets get lumped in with my regular income, which in this case bumped me into a different tax bracket."

And this guy is a financial journalist???   I find it amazing that anyone, much less a financial writer, could do this conversion without knowing even the most basic facts about the tax ramifications.  He didn't know it would bump him up in brackets?  He was advised to re-characterize.  Then advised not to re-characterize.  Why didn't he know the rules in the first place?  Why didn't he do his own research and make his own decisions, rather than being whipsawed by conflicting advice from co-workers (also financial writers)?

Makes me sad, thinking about the implications for financial literacy in this country. :ignore:

-Bob


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## Rose Pink (Apr 14, 2014)

Blues said:


> ...  Why didn't he do his own research and make his own decisions, rather than being whipsawed by conflicting advice from co-workers (also financial writers)?
> 
> 
> -Bob



This speaks to me about how complicated the issue is.  While doing his research, the author contacted 1) "the parents" (and I do not know what their expertise is), 2) "Jonelle--MarketWatch's resident tax expert," and 3) "Dan Thomas, a CPA financial planner and partner at Thomas and Thomas in Orange County, Calif."

Trying to understand the market and investments makes my anxiety disorder flare to debilitating heights.  I simply cannot think and I feel sick.  I would have relied on a CPA financial planner as well.  That would have been my research.  

I am awed by the Tuggers who seem so sure of their investments and their investment strategies.  I have never, ever felt that secure.  I try to read and learn but even for me, a college graduate, it is all so convoluted and confusing.  When I hear that even the "experts" (whoever they are) cannot predict the market, then I know I can't.  

We have contributions to a 401K made automatically every paycheck (we hope that will not have lost money in a downturn when it comes time to retire).  DH is eligible for a pension (we hope it will still be there come retirement time).  We will have social security (we hope that will still be there come retirement time).  We are saving up to get our home ready for the long haul--40 year shingles on the roof, new car when I turn 65, some cash in the bank for a few month's worth of expenses.  If all else fails, we will rely on our children and grandchildren.  DH says he will work as long as he is able and can hold a job.  

And I am still nervous!


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## geekette (Apr 14, 2014)

Rose Pink said:


> This speaks to me about how complicated the issue is.  While doing his research, the author contacted 1) "the parents" (and I do not know what their expertise is), 2) "Jonelle--MarketWatch's resident tax expert," and 3) "Dan Thomas, a CPA financial planner and partner at Thomas and Thomas in Orange County, Calif."
> 
> Trying to understand the market and investments makes my anxiety disorder flare to debilitating heights.  I simply cannot think and I feel sick.  I would have relied on a CPA financial planner as well.  That would have been my research.
> 
> ...


Sounds to me like you + spouse are doing all you can that is within your control  so long as you watch your risk as you edge closer to retirement so that you don't have to worry about downturns.  Saving is the important thing, reducing future expenses the next most important thing.

Most likely, there are things that you are well more adept at than I could ever be so don't beat yourself up for talents you never developed or simply had no interest or knack for, whatever the case may be.  Maybe I could learn how to fix my own car, but it makes sense for me to seek an actual professional mechanic as I really don't have the time nor aptitude.  For some, it makes sense to seek an actual finance professional.


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## Sandy (Apr 14, 2014)

dioxide45 said:


> I think this is just the nature of HDHP. There is no individual deductible like with a traditional health plan. So if the deductible is $1500 per person, $3000 for all covered members. Then even if one person has a claim, you have to meet the full $3000 family deductible. Not just the $1500 for that one person. The plan though our employer is the same.
> 
> DW and I are lucky, we work for the same employer so we each buy an individual plan. It is cheaper and we only have the individual deductible to worry about.



I think it may differ among employers. We have the HDHP and it is a max of $5000 for both, or $2500 individual. So my DH has high med expenses, and he meets his amount quickly.  I don't.  There are different plans, and the employer selects which one to offer. 

For us, at least at this point, it has worked for us.  Interesting that they "sold" it as perfect for folks with minimal medical expenses, but we have high expenses.  With all of his prescriptions, after April or so, he has met his deductible and all prescriptions from then on are covered. 

Just MHO.


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## ace2000 (Apr 14, 2014)

Rose Pink said:


> I am awed by the Tuggers who seem so sure of their investments and their investment strategies.  I have never, ever felt that secure.  I try to read and learn but even for me, a college graduate, it is all so convoluted and confusing.  When I hear that even the "experts" (whoever they are) cannot predict the market, then I know I can't.



The ones that seem so sure are the ones that have confidence in the theory that stocks will generally stay on an upward trend for the long term.  As long as everyone can grasp onto that concept there will be a lot of confidence.  Will it always hold true for the future?  We'll see.  But for now, why ruin it?


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## geekette (Apr 14, 2014)

ace2000 said:


> The ones that seem so sure are the ones that have confidence in the theory that stocks will generally stay on an upward trend for the long term.  As long as everyone can grasp onto that concept there will be a lot of confidence.  Will it always hold true for the future?  We'll see.  But for now, why ruin it?



It's been true a very long time for most 10-12 year time periods, so, yes, I have confidence thru the long term and don't fret on the downsides.  

I would not call it theory, given there is factual data available since before and after the great depression crash.  I have strong belief in American business else I wouldn't own any of them.  Any one company or industry could fail or become obsolete, so while I am considered Buy and Hold, it's more like Buy and Monitor in case I need to relinquish a company truly hitting the skids vs temporary stock price depression.


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## ace2000 (Apr 14, 2014)

geekette said:


> I would not call it theory, given there is factual data available since before and after the great depression crash.



You mean there's factual data available that supports your theory?  And you even said yourself - "most" 10-year periods.  There is no guarantee that past performance will indicate future results.  Why do you think that little saying is required on all money manager publications and advertising?  I subscribe to the same myself, and just saying that's why I feel confident.  No guarantees though.


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## geekette (Apr 14, 2014)

ace2000 said:


> You mean there's factual data available that supports your theory?  And you even said yourself - "most" 10-year periods.  There is no guarantee that past performance will indicate future results.  Why do you think that little saying is required on all money manager publications and advertising?  I subscribe to the same myself, and just saying that's why I feel confident.  No guarantees though.



No guarantees.  

Sure, I said "most" because I wasn't going to go look it up and there are likely some recent 10 year periods you can find it wasn't true and I'm not going to be responsible for that ; )    And it does of course depend on what you invest in.  Are we talking about the DOW or SP500 or your personal portfolio or mine?  If one wishes to spend the time to work up a sample they should generally find it to be true.  Check Yahoo Finance historical prices.

I'm a-ok with many more decades than my age of 'evidence'.  I will leave the rest to the statisticians.


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## Rose Pink (Apr 14, 2014)

geekette said:


> ... so while I am considered Buy and Hold, it's more like Buy and Monitor in case I need to relinquish a company truly hitting the skids vs temporary stock price depression.


How much time do you spend monitoring/researching companies that you invest in?  What tools do you find most useful for your research?


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## bogey21 (Apr 15, 2014)

I have a Son age 35 who doesn't save and won't be talked into saving.  Most of his friends look at the world in a similar manner.  The only income I see him having when he retires are his monthly Social Security and VA disability payments.  The one thing I have been able to convince him to do is to have his house "free and clear" (he has 10 years left on a 3.25% mortgage) when he reaches retirement age.  My logic is that with a little part time work he should be able to limp by.  Not great but it beats being totally unprepared.

George

PS  Another advantage of having the house "free and clear" is that he can do a Reverse Mortgage at the appropriate time.  That will give him 3 monthly cash receipts (Social Security, Disability, and the Reverse Mortgage payments) to live on.  Add Medicare and it is actually not bad if one has no savings.


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## geekette (Apr 15, 2014)

bogey21 said:


> I have a Son age 35 who doesn't save and won't be talked into saving.  Most of his friends look at the world in a similar manner.  The only income I see him having when he retires are his monthly Social Security and VA disability payments.  The one thing I have been able to convince him to do is to have his house "free and clear" (he has 10 years left on a 3.25% mortgage) when he reaches retirement age.  My logic is that with a little part time work he should be able to limp by.  Not great but it beats being totally unprepared.
> 
> George



He still has time to change his tune.  Good that he can expect 2 legs to the stool altho sorry one is disability.


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## geekette (Apr 15, 2014)

Rose Pink said:


> How much time do you spend monitoring/researching companies that you invest in?  What tools do you find most useful for your research?



Time spent varies.  This time of year it's more because after tax time I do the financial assessment for the year.  In the coming weeks I'll spend maybe 24 - 40 hours checking up on things and after that it will drop off to 2-8 hours a week.  

Normally, I check headlines, investigate lawsuits, insider actions, skim earnings reports, and spend an hour at least on an annual report (more if warranted, like lawsuit or spinoff/acquisition, new mgmt).

I like Yahoo Finance for daily info, used to like Motley Fool but my dividend appetite is not shared there so nothing for me except taunts about being old-fashioned.  Back when fool was an AOL offering, it was awesome info that I ate up but it doesn't seem as good anymore.  I choose Seeking Alpha instead where there are many like me.  Investopedia is my "what are they talking about" go-to.  I look at marketwatch, coattailinvestor periodically and check news links from broker site.

I don't need much in the way of tools, I simply consume the financials, mgmt statements, annual reports, charts....  and can mock up whatever I want in excel tho I don't go too crazy on projections.   I am considering a subscription to FastGraphs.  I check on dripinvesting.org info/tools/forms for the dividend champion spreadsheet (site doesn't look to have been updated in a decade or more but the spreadsheet is refreshed monthly).  

In short, I spend as little or as much time as necessary to satisfy myself that the ship is pointed in the right direction.  Since most of my holdings are big blue chips, it would take a lot to topple the giants and they have navigated rougher times than this.  Were I to be more of a speculator, it would be a lot more time spent due to increased risk.  If I were more of a trader, it would be a lot more time in attempting to buy lowest and sell highest.  But all I really need is to buy in at a value and keep track of what's going on, hoping to never find one of my companies in deep enough trouble that I need to jettison (diversification mitigates my risk of "Missing The Signs").  Deciding what to buy is time-consuming (so hard to choose!) but once I have the short list, it's just waiting to buy at palatable price.  

Time spent is largest when the business isn't something I know a lot about. Caterpillar and Lockheed Martin fit that description, and it was time well spent given that CAT led my portfolio for about 6 months a year or so back and LMT has recently done that.  I like good companies and buying quality on sale is part of my strategy.  If quality slips, then I have to determine whether a company still meets my needs or if slip is temporary.  Has a competitor bridged the moat?  Is the new CEO doing crazy stuff?  Are insiders dumping their stock?  is this lawsuit the end of the good times?

For me this is fun, yet it is still Work.  continuing to learn is both fun and to my longterm advantage.  At Seeking Alpha, I have found people much older than me living off their dividends so I know it can work.  I will keep soaking up their wisdom while remaining true to my own strategy.


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## Rose Pink (Apr 16, 2014)

Thanks, Geekette.  It's clear that you really enjoy this.


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## geekette (Apr 16, 2014)

Rose Pink said:


> Thanks, Geekette.  It's clear that you really enjoy this.



indeed.  It is the only hobby I have that is profitable.


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## SMHarman (Apr 16, 2014)

ace2000 said:


> I believe this is wrong.  I've got a couple of kids in college right now.  Your primary mortgage debt has nothing to do with a FAFSA application - it is not factored in at all.  If anything, there would be the opposite effect... by paying off your mortgage, that gives you fewer assets to report and therefore your Financial Aid is actually increased.  Therefore it would be advisable to pay it down.



Read this at the weekend, seems it depends on what financial aid we are all talking about.

http://www.nytimes.com/2014/04/13/e...know-about-financial-aid-but-should.html?_r=0



			
				NYT said:
			
		

> Colleges typically want, in addition to a share of parents’ incomes, about 5 percent of the value of their assets, plus 20 to 25 percent of the students’ (Penn settles for just 5 percent of student assets). *But there are differences in how colleges define assets. Cornell, Stanford, Columbia and Duke, for example, take into account home equity. Harvard and Princeton do not, and neither does the federal formula. *New Yorkers might fare better with one of the elite private colleges, nearly all of which consider regional variations in cost of living. High medical expenses and kids in prep school? A few top schools, like Princeton, discount for both. The federal government and state colleges do not.


So if your kids are applying to Cornell, Stanford, Columbia and Duke, for example then a big mortgage helps increase the amount of financial aid they should get.


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