The Fora: A Higher Education Community

How are you managing finances now so you can have a retirement?

What are your other plans for retirement?

Let's share some great tips and help each other sort through the complexities.

One of the things I learned on these fora is the existence of another forum, at mrmoneymustache.com
That has helped me to realize I'm in pretty good shape for my age, but I have only found a couple of academics over there. Most of the folks on that forum are highly paid techies who absolutely hate their jobs and aim to be financially independent in their 30's and retire.

But you all are my peeps over here.

Only three years ago (way too late based on what I know now), I learned about the 403b and 457b programs that my university offered. I've been playing catch-up and filling those accounts as much as I am able, some pre-tax and some Roth.

I'm at the point where a 50% appointment would be wonderful. I'm starting a list of all the things I want to do outside of my academic job. (Like, make fine chocolates. And make artisan cheese.)  In between my last adjunct job and this current soft money staff scientist job, I was unemployed from May to October, but I called it "practicing retirement". We learned that we are close, but not quite there.

I've learned to separate the concepts of being "able" to retire, from being "willing" to retire. I'm close to being able, but not sure about willing, because I like my job.

So, fellow 50-somethings, how are you feeling? Will you work until you're 75 in the Emeritus office in your department?  Or are you itching to leave academia?

I don't have any hobbies or interests or bucket lists I'm dying to find more time to address. I have a couple of hobbies that serve as sanity preservers. I don't want to start woodworking, hiking the Appalachian Trail, taking up painting, or working on that old car I've got sitting around (if there is an old car at my house, it's being used). If anything, I'd like to spend the energy others are devoting to retirement planning toward cutting out the parts of this job I dislike.

Given that, I am still saving for retirement. I have my old government retirement plan still out there, and am contributing to our pre-tax accounts at an accelerated pace.

As a state employee (or a non profit employee), you probably have access to a 403b (the non profit version of the 401k).  you should have 2 choices - Roth and traditional/regular.  In addition you may have access to a 457 plan.  Currently you can contribute $19000 a year, plus an additional $6000 if you are over 50.

In addition, employees (and spouses if not working outside the home) can contribute up to $6000 in 2019 (plus an extra $1000 if over 50).  If your income is too high you will not be able to contribute

Roth or Regular/Traditional?
The Traditional 403b/401k and 457 plans allows you to deduct the contribution from this year's taxes.  However, you have to pay taxes on everything you withdraw (both the initial contributions and the earnings). The tax rate will be your ordinary income rate, so even though the earnings will be 'capital gains', you will pay the higher regular income tax rate. If you contribute to a Roth version of the plans, you pay taxes on the contributions, but everything that is withdrawn is taken out tax free.

Pros and cons?
One argument for the traditional over the Roth accounts was made by an accounting professor I know. He argued that you never pass a tax deduction today for the promise of a tax deduction in the future.  The government can always change or modify the code and reduce or remove past promises.

The argument FOR the Roth versions is the tax savings.  Suppose that one contributed $20,000 a year for 25 years in a combination of 401/403 plans, 457 plans &/or IRA plans.  They would have paid taxes on those contributions of say $4000 a year (assuming an average tax rate of 20%).  Let's also assume that the account grew to $1,000,000.  In the Roth account, the withdrawals are not required, but would be tax free.  The retiree could withdraw the entire million and pay not taxes.

IF on the other hand, the employee contributed the same money to traditional accounts, they would have received a tax savings each year, but under current law would have to begin mandatory withdrawals from the accounts at age 70 1/2.  Assuming the same million dollar balance, the initial withdrawal would be about 36,500 the first year.  This would be taxed as regular income.  Further, this income would be counted as part of your "combined income" to determine if you will pay taxes on your social security income.  So in addition to paying taxes on the withdrawals, this income counts against you when determining if and how much of your social security income is also taxed.  So the answer to the question, "will you be in a lower tax rate when you retire?" is not so simple if you count all of the sources of income the government used in calculating your "combined income" (with even includes interest on tax free bonds... so you dont pay income taxes on tax free bonds, but the income does determine how much of your social security is taxable).  Currently, withdrawals from a Roth account are not required (there is no Required Minimum Distribution on a Roth, and any distributions you take are tax free, and dont count towards your 'combined income".

Even if you have a 'pension' (or a defined benefit plan that promises to pay some percent of your salary * your years of service) you can still contribute to a 403b, 457 plan and an IRA. 

"Im not going to retire, so I dont need to save for retirement". 
Are you sure?
One of the reasons cited for people taking Social Security at age 62 rather than waiting for full retirement is that they unexpectedly exited the work force due to job loss or poor health.  Can you guarantee that your state will not cut your position?  Can you guarantee that your health will remain in tact?  Can you guarantee that your administration will not change and challenge your mental well being? 
Prepare for the worst, but hope for the best.

If you have a traditional pension, is your state plan healthy?

Are you sure that you will be getting what was promised?  Search the news for stories of pensions that have been cut.  I dont remember the cities or states, but I am aware of retired police and firefighters that have suffered cuts in retirement payments after the cities they worked for had financial difficulties.  These cuts were appealed, but upheld by the courts.  That "payment for life" is not necessarily for YOUR life!  It could be the financial life of the state's/City's plan. IF there is no more money, there are no more payments.  Do a google search to see what the plans are for the retirees of Puerto Rico.  Is Illinois on the same plan?  Is your state?

IF You are Looking out for YOU, then NO One IS!

Thanks, clean, for this summary. I sure could have used this information 10 years ago!
I need to really think through the pretax vs Roth at this stage, counting the required minimum distributions.
At some point I'm going to stop the pretax and switch over to Roth. Unsure when, and how to decide when.

One additional point to clarify, if they are both available to you, you can contribute $19,000 (plus $6000 if over 50) to BOTH the 403b and 457b.  So at my age, up to 50K a year.

QuoteI've learned to separate the concepts of being "able" to retire, from being "willing" to retire. I'm close to being able, but not sure about willing, because I like my job.

So, fellow 50-somethings, how are you feeling? Will you work until you're 75 in the Emeritus office in your department?  Or are you itching to leave academia?

Willing and Able are definitely different!  One might precede the other, and hopefully you are Able no later than you are Willing!!

My hope is to be fully ABLE in about 2000 days when I meet the qualifications for retirement health care (I have a countdown clock running!).  My TIAA advisor claims that I have met the funding level I would need to retire, but Im not exactly sure that I trust their assumptions and Im not sure that I am know what age they projected I would stop working.  (Did they assume 67, my social security age?  Was it 70 an age I would have used long ago?  Or some other age?)

Not too long ago, i expected that I wouldnt 'retire' until I was 70, and 'retire' was more like not teach summers.  many things have changed.

First,  the university and college administrations changed.  It is not the place that hired me, and it is not the kind of place that I would have applied to when I was last on the job market. (Why not return to the job market?  Well, Im trapped here now- at least until I have health insurance in retirement. IF I leave now, under most plans I would not qualify for retirement health insurance until I was 65 to 67, and I d rather suffer here until I qualify for health insurance, than move and be trapped somewhere else 'til  Im 65 to 67)

Second, my parents retired when they were in their early 60s and they did A LOT of things! Now they are in their low/mid 70s and are physically not able to do what they did a decade ago. Both of my parents have either had or scheduled to have knee replacement surgery.  One parent has a genetic form of arthritis (I dont have the marker) and is getting progressively worse.  I guess that the bottom line is that I want to be ABLE to retire as early as I can.  I want to be ABLE to do the same sorts of things my parents did and I no longer think that I will be able to do them if I wait. 

QuoteSo, fellow 50-somethings, how are you feeling? Will you work until you're 75 in the Emeritus office in your department?  Or are you itching to leave academia?

I guess I would be in the middle.  I no longer think that I will stay employed until I am 70.  Im not sure that Im exactly itching to leave today, though, or even the moment I am convinced I am ABLE .  Once I am ABLE, I suspect my tolerance for administrivia and admincritters will markedly decrease.  I can certainly imagine, for instance, some admincritter giving me a crappy schedule (again) and me saying, "I dont think that will work for me, I suggest you make these adjustments".  I m sure that I will be reminded that there are plenty of people who would love this schedule and are itching to move here.  I can see myself giving them a few week's notice of my immediate intention to continue the current break indefinitely.  (And reminding them what they have said, that they should have no difficulty finding my replacement, from what they tell us regularly). 

I think that I will be happier when Im ABLE to retire, just knowing that they no longer have as much power to threaten me.  Im not sure that I would just walk away, but knowing that I could would make me happy!  Concentrating on the parts of the job that I enjoy most, knowing that when they really push me to do things I dont want to do, I really dont have to do them anymore, if I so choose!

QuoteOne additional point to clarify, if they are both available to you, you can contribute $19,000 (plus $6000 if over 50) to BOTH the 403b and 457b.  So at my age, up to 50K a year.

The short answer is Yes. The longer answer is that the IRS allows 457 plan participants a further catch up provision if you are within (I think) 2 years from retirement. IF your employer's system allows (mine doesnt anymore with the conversion to 'workday') you can double up that contribution.  So, IF your employer allows, you might be able to contribute even more than $50K in your last few years of employment.

Another post mentioned the FIRE movement (and Mr. Money Mustache).  IF I were in that crowd and able, my primary contributions would be in the 457 plan.  Generally, you can not withdraw from retirement accounts until 59 1/2. The rules for 401/403 accounts is a little complicated if you retire in your 50s, as you may have access to some 401/403 accounts prior to 59 1/2 if you retire. However, you can access 457 plans at ANY AGE, once you leave that employer.  So even if you were to retire at say 38, IF you had amassed a fortune in a Roth 457 plan, you could withdraw any or all of it, tax free. 


Remember, also, you can always simply save the money in a taxable account (either CDs, or a broker like Ameritrade, E*Trade, Shwab or whoever you choose).  These accounts wont have the protection from taxes or creditors as retirement accounts, but they dont have the restrictions either. You can use the money for any purpose and at any age!  If you invest in stocks, you will only pay capital gains taxes on the gains you actually realize.  You dont pay taxes on profits until you sell the stock, so not only are capital gains taxes lower than ordinary income rates, you have the option of deferring them if you choose to hold the stock. 

Again, all great things to have known a while ago. Thanks!
Since I'll be 59 1/2 in less than 100 days, I suppose I can put things wherever I wish. But I hope this discussion helps some 40-somethings in our group.

Back to one point you made, you said that once retired and receiving a pension, I can still contribute to IRA and these 'bee' programs? Am I understanding you correctly? I suppose if the pension is W2 income, then contributions can continue, and that's the rule, right? A retirement advisor told me that IRA contributions would end upon the end of my W2 income. Maybe I misunderstood, or they don't assume that most people get pensions. Huh.

I've learned a great deal from the Personal Investments forum at Bogleheads:

https://www.bogleheads.org/forum/index.php

QuoteA retirement advisor told me that IRA contributions would end upon the end of my W2 income. Maybe I misunderstood, or they don't assume that most people get pensions. Huh.

You can contribute to an IRA ONLY if employed... and there are some other sticking points....like you must be under 70 as well, so even if you work and get a W2, but are over 70, IRAs are no longer an option (from what I understand of the programs). 

Your retirement distributions will be taxed as ordinary income (just as interest on a CD is taxed).  It is not employment income, however, so you can not use retirement distributions to fund an IRA. 

There are a lot of generalities that hold most of the time.  There are some special case rules that are harder to deal with because they are sort of special cases.
For instance, as I mentioned above, if you retire at 55, you can access your 401k/403b without paying the penalty usually associated with withdrawing from retirement accounts before 59 1/2 .  However, the rules are technical. IF you retire at 55 (or older) you can access the retirement account only of the employer you retired from.  SO lets say you worked somewhere else for 10 years before this job you are retiring from.  You can not access that account until 59 1/2 without a penalty.

Again, there are a lot of good, general rules that work in most cases, but there are some special situations that are treated differently. 

QuoteBack to one point you made, you said that once retired and receiving a pension, I can still contribute to IRA and these 'bee' programs?

I dont think that I said this. 
As I have clarified above, you can only contribute to an IRA if you have wage income (what you called W2 income). That is true.  You can not contribute to a 401k or 403b plan unless you are working (and only if your employer offers them).  These are essentially "salary deferral' plans... as such you have to receive some sort of salary to participate in them.

While working, however, you can contribute both a pension And a 'salary deferral' plan like a 403b or 401jK.  I do suggest that even if you have a pension plan, that you still take advantage of the 401k or 403b plans where you work.    It gives flexibility in a lot of ways.

I got a chunk of money at my mother's death that could be rolled over into an IRA. I haven't been able to contribute to it since, though. So it will probably be of little use.  On the other hand, I'm vested in one University system's retirement plan (which may actually pay me some money, even if it's only 'couch change,' about to be vested in another plan (which is in good shape at the moment), and have two other plans from other institutions (both of the TIAA or VALIC sort). On top of that, SocSec claims that if I wait until I'm 70 I will get a large chunk of money each month from them.

Since I'm in fairly good health, no chronic conditions that I know of, I'm likely to wait until I'm 70 to retire, and then take all I can get from each of those sources.  It would probably mean I'd be no worse off in retirement than I am now, though with less ability to handle cost-of-living increases.

Quote from: clean on July 05, 2019, 12:30:26 PM

QuoteBack to one point you made, you said that once retired and receiving a pension, I can still contribute to IRA and these 'bee' programs?

I dont think that I said this. 
As I have clarified above, you can only contribute to an IRA if you have wage income (what you called W2 income). That is true.  You can not contribute to a 401k or 403b plan unless you are working (and only if your employer offers them).  These are essentially "salary deferral' plans... as such you have to receive some sort of salary to participate in them.

While working, however, you can contribute both a pension And a 'salary deferral' plan like a 403b or 401jK.  I do suggest that even if you have a pension plan, that you still take advantage of the 401k or 403b plans where you work.    It gives flexibility in a lot of ways.

That makes much more sense. I reread your original point and now I see what you meant. Sorry, I misunderstood. I think I don't understand what kind of income that my pension will be considered. Evidently not wage income. A friend of mine just retired at the end of May. I'll learn these kinds of things from her.

QuoteI got a chunk of money at my mother's death that could be rolled over into an IRA. I haven't been able to contribute to it since, though. So it will probably be of little use

I dont know if this is a terminology issue or not.  "rolled over into an IRA"... Was the money you got an 'inherited IRA"?  You could not exactly "roll that over" as 'inherited IRAs' have their own rules for non spouses transfers. IF this is an inherited IRA then you must see an accountant quickly as you must move it into  'inherited IRA' status before December 31 of the year after your mom died.  (As I mentioned before, there are sometime picky rules for special cases, and inherited retirement accounts have special rules that are different from the general case of retirement accounts inherited by spouses).

IF you are saying that you got a chunk of money and had intended to move it into a retirement account, but havent been able to do so you, I can offer some suggestions. 
1. Keep it out of your retirement accounts.  Simply transfer the money into a brokerage account or open a savings account or CD with a bank. You can invest it as you see fit. Better, you can use it at any time, for any purpose - retirement or not - with no tax consequences!  The downside is that any realized earnings would be taxed each year.  (Interest at your ordinary rate, and capital gains at the lower, capital gains rate.... and you only pay taxes on realized capital gains.  In addition if you are sued or file bankruptcy, non retirement money can not be shielded from creditors).

2.  IF you want it in a retirement account (and not being able to touch it until you retire at 70), I have some suggestions. I assume that you are not able to contribute any of it into a traditional or Roth IRA because you earn more than the income limits. 
A Otherwise, that is my first suggestion to make it a retirement account.  You are free to deposit $6000 a year or 7000 a year if over 50, and dont exceed the income limits.  Once you are 59 1/2 you can withdraw the money without a penalty, whether you are officially retired or not, and the growth will be shielded from taxes (forever if a Roth account, or until you take the money out if a traditional account).

B.  Transfer an amount of money into a checking/savings account, and then go to your HR office and increase your annual contributions sufficient to use up that money.  For instance, lets say that you are not fully funding your 457 or 403b accounts and you want to save an extra $9000 this year (and you get 9 checks a year - no summer checks).  {I hope that I dont lose you by setting up all of the assumptions,} but the bottom line is that if you want to save for example $9000, move it into your checking account, go to HR and have them deduct $1000 a month for each of your 9 checks a year.  The money in the account, which came from your bequest, will make up for the pay cut and you have indirectly contributed it to your retirement account.  (At the end of the year, make sure you go back to HR and reduce the distribution once you have fully depleted the money you wanted to put into retirement)

Again, assuming that this is money that is NOT in the form of an 'inherited IRA', you could use the money to pay down your mortgage  or any other outstanding debt if you have one/any.  That is a guaranteed, risk free return!
(A reason NOT to pay down the mortgage - if you have one- is that IF you are married, this converts a personal asset into a marital asset.  Should you divorce, you dont have to split or share inherited assets (unless you have commingled them with other marital assets).  Home equity is usually a marital asset and would be split, so using an inheritance would be making a 'gift' to your (potential, future ex) spouse of half of whatever you use to pay down the debt. 

Anyway, I m sure that you are not fully funding all of your retirement account options available, and you should be able to indirectly put the inheritance into your retirement accounts if that is what you decide to do.  This may not be your best course of action, though, if you think that you might want even the option to access the money while you are still employed.

Quote from: clean on July 05, 2019, 01:31:04 PM

QuoteI got a chunk of money at my mother's death that could be rolled over into an IRA. I haven't been able to contribute to it since, though. So it will probably be of little use

I dont know if this is a terminology issue or not.  "rolled over into an IRA"... Was the money you got an 'inherited IRA"?  You could not exactly "roll that over" as 'inherited IRAs' have their own rules for non spouses transfers. IF this is an inherited IRA then you must see an accountant quickly as you must move it into  'inherited IRA' status before December 31 of the year after your mom died.  (As I mentioned before, there are sometime picky rules for special cases, and inherited retirement accounts have special rules that are different from the general case of retirement accounts inherited by spouses).

I was unclear; I got this money (split between myself and my sister) back in 2010, when my mother passed away. I was advised by my financial advisor that it should be rolled into an IRA, because if I didn't, there would be a fair size chunk of money taken out of it. I did, and my sister did, and all was well; after 9 years, if we'd done it wrongly, someone should have noticed.

For those of you with offspring, how much and for how long do you intend to support/help them? We figure through college and maybe a bit in grad school, but it is hard to think about how to manage prioritizing them, planning for our own retirement, and being ready for whatever comes with our own aging parents. Right now, MIL could really use some respite care for FIL but it's prohibitively expensive. And I don't yet have a great plan for my own mother.

Quotebut it is hard to think about how to manage prioritizing them, planning for our own retirement, and being ready for whatever comes with our own aging parents

Your retirement has to come before the other 2.  Remember the 'miracle of compounding'.  The sooner you contribute, the more time your investments have to double and double again.  You can not delay this.  The cost of delaying is multiples of what should be contributed. 

Planning for graduate school at the expense of your own retirement savings is incorrect.  We know that you will retire.  We dont know that you will be needed to fund graduate school either because the youngin can secure funding another way,  or even if they will actually go to graduate school.  It may be better for them financially to work first. Perhaps the employer will fund graduate school and the student will gain experience. 

Im not sure what to suggest about your aging parents, but I will reiterate the need to fund your own retirement.  Do you want your own children to have to worry what to do about you? IF you have enough resources, you can take care of yourself, and you will not be a burden to them. 

As much as I an loath to suggest borrowing, at least that is an option available to the potential graduate student. It is not an option for the retiree.  So, again, you must be saving for your own retirement.

Here is a phrase that may help. Only the strong can help the weak.  If you are not financially strong enough to support graduate school, then you can not do it. 
You (implicitly probably) promised to provide shelter for your kids when they were born.  That doesnt mean that you promised to  buy them a house when they turn 18 (or whenever).  AND even if you did, you can only fulfill that promise IF you have the money and the desire, but you can only do what you can do, and only with what is available after you have taken care of your own needs and expenses first.  Retirement savings is not a luxury.  Graduate school tuition for your children IS! 

Unfortunately, we are banking pretty hard on my pension.  I really don't see how people manage to put away as much as they do.  We live pretty modestly and are finally starting to get ahead and save, but it has been a long road to get here and I don't see how we would be able to retire without the pension, which I am extremely grateful to have.

Quote from: Tenured_Feminist on July 06, 2019, 11:58:44 AM
For those of you with offspring, how much and for how long do you intend to support/help them? We figure through college and maybe a bit in grad school, but it is hard to think about how to manage prioritizing them, planning for our own retirement, and being ready for whatever comes with our own aging parents. Right now, MIL could really use some respite care for FIL but it's prohibitively expensive. And I don't yet have a great plan for my own mother.

My intentions do not always match reality when it comes to supporting/helping my offspring.  My daughter has never needed a thing except for co-signing a car loan soon after her marriage.  My son, however, needed extensive dental work recently and could not afford it, and has had other financial crises in the past.  He has a relatively modest-paying job that he loves and is fine most of the time, yet has no cushion for when things go wrong.

Fortunately, my parents bought good long-term care insurance many years ago.  My father did not need it, passing relatively quickly, but my mother needed it for several years in order to remain at home.  Unfortunately, such policies are now much more expensive and do not provide the same level of benefits in many cases.  But long-term care insurance is increasingly important as people are living longer. 

Only recently -- should have done it long ago -- have I been regularly contacting HR to ask "Given my current earnings, what's the percentage of my biweekly pay that has to be deducted for the remainder of the year for me to hit the annual legal maximum 403b contribution, and what will my take home pay be after that percentage is deducted?"

I am in year 7 of a 20 year mortgage at 3.375 percent. Maturity date is coincidentally when I hit 65 years of age. I hope to pay off the mortgage a few years early and put the $1,400 that I pay monthly in P&I into a Roth IRA and other investments instead.

I've recently found that long-term care insurance is a huge PITA and often very limited. After countless problems with the plan my  grandmother had, my parents decided to put money into CDs and good old-fashioned savings accounts for when the time came, and that has proven a much better plan. YMMV, of course, but it's something to think about.

Quote from: bibliothecula on July 06, 2019, 05:17:13 PM
I've recently found that long-term care insurance is a huge PITA and often very limited. After countless problems with the plan my  grandmother had, my parents decided to put money into CDs and good old-fashioned savings accounts for when the time came, and that has proven a much better plan. YMMV, of course, but it's something to think about.

Many companies stopped writing LTC because they were losing their shirts on it. Turned out people were living longer and rates of return were lower than expected.

And  they thought people wouldn't go into LTC until the last possible moment. In fact, people were choosing to go into LTC earlier than they medically "needed" to.

Quote from: ciao_yall on July 06, 2019, 05:41:01 PM

Quote from: bibliothecula on July 06, 2019, 05:17:13 PM
I've recently found that long-term care insurance is a huge PITA and often very limited. After countless problems with the plan my  grandmother had, my parents decided to put money into CDs and good old-fashioned savings accounts for when the time came, and that has proven a much better plan. YMMV, of course, but it's something to think about.

Many companies stopped writing LTC because they were losing their shirts on it. Turned out people were living longer and rates of return were lower than expected.

And  they thought people wouldn't go into LTC until the last possible moment. In fact, people were choosing to go into LTC earlier than they medically "needed" to.

It's true that long-term care insurance is not what it used to be, and many financial advisors advise against it for those capable of self-insuring.

At age 50, I started planning to be able to retire at 62, after realizing how many people I knew were struggling to continue working into their late 60s and early 70s because they couldn't afford to retire. My retirement strategy:

Current Employer Pension: 45% of current gross salary if I stop work at age 62.
Previous Employer Pension: 17% of current gross salary beginning at age 65
Social Security: 35% of current gross salary beginning at age 67
403b and 457: $200,000 now, contributing 22% of gross monthly salary

Since the second pension and social security both would be substantially reduced if I start them earlier, I plan to use the 403b/457 to maintain standard of living from age 62 to 67. I should have about $200k left when I reach 70.5 and have to start taking RMDs.  Both pensions are in well-funded state systems, but neither has a guaranteed COLA, so I'll may need those RMDs to keep up with inflation in my 70s. As long as I resist the urge to increase my standard of living, I should be comfortable. Health costs are my major concern, as long-term care is likely to exceed my monthly income.

Quote from: Vkw10 on July 06, 2019, 09:28:46 PM
At age 50, I started planning to be able to retire at 62, after realizing how many people I knew were struggling to continue working into their late 60s and early 70s because they couldn't afford to retire. My retirement strategy:

Current Employer Pension: 45% of current gross salary if I stop work at age 62.
Previous Employer Pension: 17% of current gross salary beginning at age 65
Social Security: 35% of current gross salary beginning at age 67
403b and 457: $200,000 now, contributing 22% of gross monthly salary

Since the second pension and social security both would be substantially reduced if I start them earlier, I plan to use the 403b/457 to maintain standard of living from age 62 to 67. I should have about $200k left when I reach 70.5 and have to start taking RMDs.  Both pensions are in well-funded state systems, but neither has a guaranteed COLA, so I'll may need those RMDs to keep up with inflation in my 70s. As long as I resist the urge to increase my standard of living, I should be comfortable. Health costs are my major concern, as long-term care is likely to exceed my monthly income.

Ooh, I really like the way you have laid this out, Vkw10! Thanks. My retirement spreadsheet is organized in grand totals, but your way of looking at it is better, because I'm having a hard time translating the grand totals to what is sufficient.

Current employer pension (not been eligible for very long):     14% of current salary if I stop at 65, 11% if I retire tomorrow
Social Security:     38% of current gross salary at 67, 50% of current gross salary if I start at 70   
403b, 457b, and IRAs for me and partner combined:    $330,000 now, ~half Roth and half traditional (plan to convert some traditional to Roth early in retirement). Currently, I'm deciding how much longer to continue to contribute as aggressively as I am now.

We also have rental property equity and rental income - where most of our investments lie. We need to figure out how much longer we wish to keep these. At some point we can sell properties and invest instead in an annuity, for example (which we figure is pretty much like receiving rent but with no tenants, mortgages, property taxes, or maintenance).  Our net rental income (with today's rents, after mortgages and taxes, but not counting other expenses or principal payment part of the mortgage) is about 60% of my current employer salary.  And I, too, am most concerned with health care costs.

Quote from: spork on July 06, 2019, 05:14:10 PM
I been regularly contacting HR to ask "Given my current earnings, what's the percentage of my biweekly pay that has to be deducted for the remainder of the year for me to hit the annual legal maximum 403b contribution, and what will my take home pay be after that percentage is deducted?"

Spork, at our university, you don't have to worry. Once you hit the legal max for the year, our system won't let us contribute any more, automatically.  For example, I round off the 403b contributions to $2100 per month. In December, that value adjusts to whatever amount is left to reach the $25,000 total. I don't need to do anything.  I'd be surprised if most places don't do it this way (there might be a legal requirement to do it this way), but I suppose HR offices are full of surprises.

Coincidentally this video on risk management has been posted on YouTube, something I remember seeing when it was first broadcast nearly twenty-five years ago: https://www.youtube.com/watch?v=g4Gh_IcK8UM (https://www.youtube.com/watch?v=g4Gh_IcK8UM).

Quote from: monarda on July 07, 2019, 08:52:46 AM

Quote from: spork on July 06, 2019, 05:14:10 PM
I been regularly contacting HR to ask "Given my current earnings, what's the percentage of my biweekly pay that has to be deducted for the remainder of the year for me to hit the annual legal maximum 403b contribution, and what will my take home pay be after that percentage is deducted?"

Spork, at our university, you don't have to worry. Once you hit the legal max for the year, our system won't let us contribute any more, automatically.  For example, I round off the 403b contributions to $2100 per month. In December, that value adjusts to whatever amount is left to reach the $25,000 total. I don't need to do anything.  I'd be surprised if most places don't do it this way (there might be a legal requirement to do it this way), but I suppose HR offices are full of surprises.

Probably my university's payroll system has some kind of deduction cut-off that automatically kicks in, but my income varies month to month because, for example, we don't get paid for fall overloads until the spring semester, summer courses might not make minimum enrollment, etc. Base salary I can count on, but everything else fluctuates, which affects how much I can divert to my 403b and still have enough to pay day-to-day expenses.

Quotebut my income varies month to month

I wonder if this is common.  My checks are pretty consistent from Jan- May.  But until recently, the June check was different because the software would take out insurance payments for the summer out of that check (rather than evenly over the 9 scheduled checks). 
Summer pay is different (from 0) to something higher, depending on if or how many of your classes made. 
October might be different from May if there are any pay raises, or if the benefit costs changed.
In November, I usually beat either the part of the Social Security income cap (depending on how many summer classes made) or part of the retirement contribution cap.  December would see the final caps met.

As for the Robot Insurance Spork posted... I had a problem with the retirement contribution deduction last summer and HR was unhelpful (blaming ME for it!!)
When I signed up sixteen years ago for retirement contributions, I specified that it would only come out of the 9 regular checks, not summer.  For 15 years, it worked as it was supposed to work.  But they changed the software vendor last year and the new software could not handle stopping the distribution automatically.  When I complained to HR about this, they said that I was supposed to complete the paperwork to have it stopped, if that was my desire. They argued that the new system worked just the same as the old system.
They didnt seem to believe me that it was supposed to be automatic, so I made them produce my original paperwork and asked when THEY informed ME that THEY were not longer living up to the contract they designed.  This was escalated to the System VP in charge of HR and she was satisfied that the new system worked as designed (no mistake had been made), even though no one informed the faculty that the process had changed. 

This year, the system did send a message to faculty that IF we didnt want retirement deducted from our paychecks, we would have to file additional paperwork (and remember to file again so that we restart it in October1)
Idiots!! With all of the behavioral finance showing that participation is so much higher when it is automatic, having faculty remember to stop and restart their contributions is just stupid and Im sure will bite some faculty in the ass.

So while Spork may distrust the Robots, I take a "Trust but Verify" approach with the humans in HR. 

As always, YMMV.

Lived below my income for my entire career, the surplus going to "portfolio."  Made significant additions to my supplemental retirement account.  Waited/worked to seventy for collecting maximum SS.

And now?  M.O.L. retired?  Well, the future is never clear, but more comes in than goes out.  But to what end?  Do my worthless relatives [nephews/great nephews] deserve to be in the will?  Do the friends and organizations presently in it merit largess?  What's the point of leaving an estate, really, if there is no direct posterity?

Quotethe future is never clear

Quoteif there is no direct posterity

Juvenal,
If you are male, it may not be too late to obtain a 'posterity' or 2
(Mick Jagger 73, Steve Martin 67, George Lucas 69, James Doohan 80!!, Charlie Chaplin 73, Anthony Quin 81!!!, )
There are a few stories online about the deaths of 'confederate widows' who died in their 90s. Most married at about 18 to former soldiers who were then in their 80s! Times are different, but as you said, The future is never clear!

Regardless of whether one is male or female, I am certain that adoption is available!  And Im not limiting this to children!  Im sure that there are some 50 year olds that would consider being adopted! 

Establish a scholarship of some kind?

M.

Quote from: Tenured_Feminist on July 06, 2019, 11:58:44 AM
For those of you with offspring, how much and for how long do you intend to support/help them? We figure through college and maybe a bit in grad school, but it is hard to think about how to manage prioritizing them, planning for our own retirement, and being ready for whatever comes with our own aging parents. Right now, MIL could really use some respite care for FIL but it's prohibitively expensive. And I don't yet have a great plan for my own mother.

We have 2 girls, 15 and 11, and this is roughly our plan.  We'll support them through college age for sure.  After that, it will depend on what they are doing and how much they need.  My wife and I don't totally agree on how much we should leave them when we both are gone.  I don't put a high priority on this but my wife does.  We never had to financially support my parents who are now deceased and my MIL is in decent financial shape but we wouldn't hesitate to help her if she should need it.  Both our parents emphasized their own financial independence; saving for our own retirement has always been very high priority for us.

Quote from: clean on July 07, 2019, 02:18:03 PM
Im sure that there are some 50 year olds that would consider being adopted!

My cousin was adopted in his forties.  My uncle couldn't will his share of a family trust to his wife, my aunt, but he could leave his share to an adopted child.  Thus, while the uncle was a stepfather to the cousin since the cousin was a minor child, the legal adoption occurred only as estate planning kicked in and it was clear that my aunt would be in bad financial shape when my uncle dies and the income from that trust goes away.

Quote from: Tenured_Feminist on July 06, 2019, 11:58:44 AM
For those of you with offspring, how much and for how long do you intend to support/help them? We figure through college and maybe a bit in grad school, but it is hard to think about how to manage prioritizing them, planning for our own retirement, and being ready for whatever comes with our own aging parents. Right now, MIL could really use some respite care for FIL but it's prohibitively expensive. And I don't yet have a great plan for my own mother.

We have several children. We plan to offer support through college and have laid out for each of the older ones options to finish debt free (our help = state school; or other options with scholarships; or live at home and go to community college to start, transfer to a state university if needed, and end with $ for grad school or life). Upon graduation or 5 years (whether done or not) we help with a roof over their heads if they want to live at home for awhile.
They also can stay on our health insurance until 26 since our younger kids are on it anyway. Some have needed more time/help than others. If they are an adult living at home, we have basic expectations (pay your own bills, remember this is not a frat house, be helpful around the house, contribute financially to the degree you can while also saving for your exit plan). Time will tell. It is not easy, and I find they do not WANT to stay...I think they find it hard to boomerang back after living out of the nest (though one back now seems a little too comfy...he might need a nudge!).

Elderly relatives? We've had elderly relatives live with us, paid some bills for another, now oversee the care of one in a home, and is now on medicaid (and facilitated the endless paperwork for all of that). As with the kids, some have needed more/different than others. Had to go with the flow here too!

We're currently being given the hard sell on an insurance product that can be used to pay for end-of-life care with a life insurance benefit if we don't end up using the end-of-life care option.

Clean (or anyone), is purchasing that a good use of money or are we better off investing that same money in something we can use for any expenses we like?

How old are you?  Are your parents still alive, and if not, how old were they when they died?  (in other words, how long can you reasonably expect to live?)

What are "end of life care options"? 

Are these expenses that would be covered by health insurance/medicare?  If so, then why duplicate the coverage?

IF this is in fact a life insurance policy with an 'option' that allows the payout to be slightly before death, these are not cheap.  The question then becomes "do you need life insurance"? 

Life insurance is used to replace someone's income (not to leave an inheritance) .  If you have no income, you dont need life insurance in the vast majority of cases.  (If you have a traditional pension that only covers the one person, then maybe you have an 'income' of sorts, but this is rare, and can usually be avoided if you took the benefits initially for the longer of the 2 lives anyway). 

Finally, if you are being given "the hard sell" I have to wonder if this is something that is in YOUR benefit, or a great commission on the side of the agent.  What brought this 'need' to your attention, or the attention of your financial adviser/agent?  Why does he/she think that there is a whole in your financial plan that this product is perfect to fill?

My first pass assumption is that you probably do not need  a policy that covers 'end of life care' anymore than you need a policy that pays off if you get cancer. 

IF this is some sort of nursing home coverage, know that these policies have become very expensive. Not that they are not a good idea, but if you need nursing home insurance, you dont necessarily need nursing home insurance that doubles as a life insurance policy (making it even more expensive, because part of the way that the insurance is workable is that some will die before they go into the nursing home, and the insurance does not pay out for those. If this policy pays out anyway, then it must be even more costly).

Quote from: polly_mer on July 27, 2019, 05:24:25 AM
We're currently being given the hard sell on an insurance product that can be used to pay for end-of-life care with a life insurance benefit if we don't end up using the end-of-life care option.

Clean (or anyone), is purchasing that a good use of money or are we better off investing that same money in something we can use for any expenses we like?

Yes. Take the premiums and invest them.

Between the returns on investment they promise (stupidly low) and the very limited end-of-life care, they are not worth it.

Companies lost their shirts on these policies and stopped writing them for years because (1) rates of return were grossly overestimated (2) people were living much longer than expected (3) people went to into long-term-care sooner and stayed much longer.

Now the companies are trying again but the new formulas aren't in your favor.

My work has a 401a, so I cannot change the amount I contribute. However, the university does match a higher percentage than the employee contribution. If I think I'll hit the income limit for Roth IRA contributions, then I'll max out a Traditional IRA with non-deductible contributions, then convert it to a Roth IRA (no limit on IRA conversions—they call this a backdoor Roth). If I'm below the income limit, then I contribute directly to a Roth IRA. My IRAs are investment accounts with a simple three fund portfolio [1].

[1] https://www.bogleheads.org/wiki/Three-fund_portfolio

Quote from: clean on July 27, 2019, 07:31:10 AM
Finally, if you are being given "the hard sell" I have to wonder if this is something that is in YOUR benefit, or a great commission on the side of the agent.  What brought this 'need' to your attention, or the attention of your financial adviser/agent?  Why does he/she think that there is a whole in your financial plan that this product is perfect to fill?

This was part of the standard annual review by our financial planner.  Two years ago, the financial planner pointed out that with my new job in a much more expensive region and me as sole wage earner with a minor still at home, we were underinsured so we bought more life insurance on me.  Last year, she leaned on us to do wills, financial powers of attorney just in case, and medical powers of attorney, just in case.  Her current mission is pointing out the unpleasant reality that many people will need extra home care or nursing home care in their last couple of years so that has to be part of planning for retirement, which does make sense.  The financial planner gets no commission from the insurance policies; instead, she's paid commission from other investments we have with her.  She's written articles in the local newspaper giving some very sad examples of failing to plan ahead by her current elderly clients so I'm sure this is more a reflection of that than something nefarious.

The plans being shown are hybrid insurance policies where one can take some or all of the money before death and use it for a variety of expenses including nursing homes and in-home care.  Any benefit still remaining at death is then paid as life insurance.  Looking at the sticker price per month for the next 20 years (yes, very expensive; only the mortgage is higher), my counterargument was all four parents (my husband's and mine) are still alive and living in their own homes. 

We're in our mid-forties and the last biological grandparent just died. All the grandparents who didn't die in accidents lived to 90 and tended to have a very rapid decline in that last year.  Thus, I'm much less worried about extended time in a nursing home than I am about the situation where I retire too early and then live another 25-30 years to possibly outlive my savings.  My grandmother who just died only avoided that situation because she had her pension and my grandfather's pension.  I have no pension.

Quote from: ciao_yall on July 27, 2019, 08:32:03 AM
Companies lost their shirts on these policies and stopped writing them for years because (1) rates of return were grossly overestimated (2) people were living much longer than expected (3) people went to into long-term-care sooner and stayed much longer.

Now the companies are trying again but the new formulas aren't in your favor.

These points accord with my thoughts upon reading the tables and the explanation of how the premiums are allocated, so I'm glad to have it confirmed.

The plans being shown are hybrid insurance policies where one can take some or all of the money before death and use it for a variety of expenses including nursing homes and in-home care.  Any benefit still remaining at death is then paid as life insurance.  Looking at the sticker price per month for the next 20 years (yes, very expensive; only the mortgage is higher), my counterargument was all four parents (my husband's and mine) are still alive and living in their own homes. 

We're in our mid-forties and the last biological grandparent just died. All the grandparents who didn't die in accidents lived to 90 and tended to have a very rapid decline in that last year.  Thus, I'm much less worried about extended time in a nursing home than I am about the situation where I retire too early and then live another 25-30 years to possibly outlive my savings.  My grandmother who just died only avoided that situation because she had her pension and my grandfather's pension.  I have no pension.

Polly_mer:  Based on the above,  and what what I know about you via your posting history,  I seriously doubt that you need this hybrid insurance policies.  My 2 parents died at ages 90 and 92 and neither needed insurance like you described.  Like your grandparents, their decline was very rapid in the end (6 months for my mom - 4 months she was in assisted living and 2 months for my dad - hospice at his home).   I think you are on the right track without these insurance polices. 

Quote from: polly_mer on July 27, 2019, 05:24:25 AM
We're currently being given the hard sell on an insurance product that can be used to pay for end-of-life care with a life insurance benefit if we don't end up using the end-of-life care option.

Clean (or anyone), is purchasing that a good use of money or are we better off investing that same money in something we can use for any expenses we like?

What is the commission earned by your financial planner if you buy one of these insurance policies?

Quote from: Volhiker78 on July 07, 2019, 03:53:02 PM

Quote from: Tenured_Feminist on July 06, 2019, 11:58:44 AM
For those of you with offspring, how much and for how long do you intend to support/help them? We figure through college and maybe a bit in grad school, but it is hard to think about how to manage prioritizing them, planning for our own retirement, and being ready for whatever comes with our own aging parents. Right now, MIL could really use some respite care for FIL but it's prohibitively expensive. And I don't yet have a great plan for my own mother.

We have 2 girls, 15 and 11, and this is roughly our plan.  We'll support them through college age for sure.  After that, it will depend on what they are doing and how much they need.  My wife and I don't totally agree on how much we should leave them when we both are gone.  I don't put a high priority on this but my wife does.  We never had to financially support my parents who are now deceased and my MIL is in decent financial shape but we wouldn't hesitate to help her if she should need it.  Both our parents emphasized their own financial independence; saving for our own retirement has always been very high priority for us.

I don't have any kids (yet!), but my parents subsidized my income beyond grad school... and I plan to do the same. When you're a student, an extra $10k/year makes a huge difference to your quality of life: it's microwave food vs. restaurants. Or living in a rat infested building with a roommate vs. having your own, livable place. If they inherit money when they're 60, it's unlikely to have any impact on their standard of living -- and so effectively distributing the (expected) inheritance early on makes much more sense.

I don't believe in making anyone show they can "make it" on their own. That's not what anyone who has parents with disposable income does anyway: they have a massive insurance policy that'll effectively bail them out whenever they hit a hardship. If anything, they're likely to learn the wrong lessons (if I could live on this, so can poor people!). But more importantly, they'd miss out on memorable experiences, like traveling with their friends, for no good reason. And some of those are much harder to come by when you're not in school anymore. Similarly, working minimum wage jobs is just not a good use of their time (economically speaking): they're better off doing an unpaid internship or investing in social capital.

In grad school, I had friends who took positions they really didn't want, because the available postdocs didn't pay enough. They had parents who could easily have subsidized the difference... and while it's hard to project what would have happened, there's a good chance their career trajectory would have been very different and they'd likely have a higher income now (and, perhaps, also be happier). That just seems insane to me...

Which brings me to my favorite John Adams quote:

Quote
I must study politics and war that my sons may have liberty to study mathematics and philosophy. My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce, and agriculture, in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.

Translates pretty easily into "I build savings so that my kids can make choices with fewer economic constraints."

Quote from: pigou on August 01, 2019, 11:35:38 AM
I don't have any kids (yet!), but my parents subsidized my income beyond grad school... and I plan to do the same. When you're a student, an extra $10k/year makes a huge difference to your quality of life: it's microwave food vs. restaurants. Or living in a rat infested building with a roommate vs. having your own, livable place.

Maybe, though I took a lot of pride in supporting myself on my own salary. Yes, I lived modestly and made some financial mistakes but they were always my own.

QuoteIf they inherit money when they're 60, it's unlikely to have any impact on their standard of living -- and so effectively distributing the (expected) inheritance early on makes much more sense.

I did inherit some money and while it went straight into the retirement account, I see it as a responsibility as much as a blessing. It did make some moves more flexible and reminds me that I need to help others.

Inheritance is an interesting topic in itself.  If I die before my spouse  (most likely),  all of our savings will go to her.   In the unlikely event that she dies first, then the savings go to me and I will rewrite my will.  The majority of the estate will likely go to other causes.  My daughters would be well taken care of but I feel like the majority should be left to causes I think would benefit others.  So,  I disagree with John Adams' quote.   

I don't have kids, and ideally I'd like to die broke or close to it. I wouldn't mind dying in the red. But I've got a fair amount invested and so long as the economy does not completely crash, I will be fine. Indeed, if I am to die broke, I will probably need to spend more money than I am now.

There is of course the worry about what care needs I will have in my old age, and what my medical costs will be. Any estimates I see of those for the next 30 years are pretty scary.

Anyone else planning for their total worth to go to zero by the time they die?

QuoteWhen you're a student, an extra $10k/year makes a huge difference to your quality of life: it's microwave food vs. restaurants. Or living in a rat infested building with a roommate vs. having your own, livable place. If they inherit money when they're 60, it's unlikely to have any impact on their standard of living -- and so effectively distributing the (expected) inheritance early on makes much more sense.

For what it is worth, consider that your children may be more grateful that you are set up for a self sufficient retirement, more than they may enjoy an extra restaurant meal while in college. IF part of someone's financial plan defaults to 'my kids will take care of me' (for whatever reason), that may be a mistake.  The summary is that whatever your plans are toward helping your children through graduate school (especially when it concerns the luxuries mentioned), please make sure that you have enough saved to take care of your own retirement, health, nursing home, and final year's maintenance costs. (An extra $10,000  invested for 30 years or more would cover a lot of care that your children will not have to worry about). 

So please be generous to your children while the children will appreciate it in graduate school, but I hope that no one is doing this before fully covering his/her own expenses, including the final years' expenses. 

QuoteThere is of course the worry about what care needs I will have in my old age, and what my medical costs will be. Any estimates I see of those for the next 30 years are pretty scary.

And one's children would probably not want the pressure of trying to cover those costs for their parents, especially IF their parents could have saved for those costs earlier.

I probably wasn't clear in my last post -- it got truncated because of other attention-demanding tasks.

Even though the financial planner might say that she gets no commission from the insurance policies, you know she gets commissions if you act on her advice to buy or sell other financial instruments. She could very well get some kind of bonus if she meets a certain quota of transactions -- e.g., if she is a franchisee of a financial services company. Or she might simply be giving people bad advice.

Quote from: spork on August 01, 2019, 05:46:51 PM
I probably wasn't clear in my last post -- it got truncated because of other attention-demanding tasks.

Even though the financial planner might say that she gets no commission from the insurance policies, you know she gets commissions if you act on her advice to buy or sell other financial instruments. She could very well get some kind of bonus if she meets a certain quota of transactions -- e.g., if she is a franchisee of a financial services company. Or she might simply be giving people bad advice.

This.

We quit our (ahem) financial planner when they demanded we include our tax returns in their files.  Not gonna happen.  Stock brokers (financial planners) are in sales.  Beyond an estimate of annual income, they don't need personal financial information.   

You and your partner/family need to know your financial instruments.  The service people can help you choose the instruments you ask about, but they certainly shouldn't get permission to figure out how to spend your money for you.  Educate yourself before you visit any financial provider.  You should know your goals and some options before you ask for help.  Be a smart consumer. 

Quote from: Volhiker78 on August 01, 2019, 02:08:45 PM
The majority of the estate will likely go to other causes.  My daughters would be well taken care of but I feel like the majority should be left to causes I think would benefit others.  So,  I disagree with John Adams' quote.

These questions, of course, come down entirely to personal preferences. So I don't think there's any "right or wrong."

But if you want some food for thought, I'd note that for someone who is talented and accomplished, it's much easier to turn down a $300k/yr job on Wall Street and do unpaid work on a pro-social startup when they have assets to live off of. And more often than not, the limiting factor for social impact is not that existing charities don't have enough money, but that most existing charities get a ridiculously low return for the money they spend. (Even supposed-accountability services like Charity Navigator just look at what fraction of money goes toward administrative expenses. In that world, evaluating the impact of your projects is a non-program expense and hence counts against you. But it wouldn't matter if every last cent went to actually delivering programs if it turns out that the programs don't impact the desired outcome.)

Quote from: clean on August 01, 2019, 03:11:13 PM
The summary is that whatever your plans are toward helping your children through graduate school (especially when it concerns the luxuries mentioned), please make sure that you have enough saved to take care of your own retirement, health, nursing home, and final year's maintenance costs. (An extra $10,000  invested for 30 years or more would cover a lot of care that your children will not have to worry about).

To the extent that saving for one's own retirement comes first: obviously true and thanks for making that point. But keep in mind that the income of children is not exogenous. The amount of money I spend on ("invest in") them when they are young can materially impact the earnings they make in the future.

If they don't have to worry about money and can take an unpaid internship (vs. work at Starbucks), that experience is going to increase their chances of getting a high-paying job later. If they can afford to go out with well-connected students, then that social network can again translate into higher salaries. This often gets lost when people speak of "partying" or "wasting" money on luxuries: participating in social activities is how you build a social network and there are substantial economic and personal returns to those.

This is exactly the systemic inequality that we often discuss as obstacles for people from low-income households. The flip-side is that not making the investments when you can afford it does deprive them of an opportunity.

Quote from: pigou on August 02, 2019, 05:27:23 AM

Quote from: clean on August 01, 2019, 03:11:13 PM
The summary is that whatever your plans are toward helping your children through graduate school (especially when it concerns the luxuries mentioned), please make sure that you have enough saved to take care of your own retirement, health, nursing home, and final year's maintenance costs. (An extra $10,000  invested for 30 years or more would cover a lot of care that your children will not have to worry about).

To the extent that saving for one's own retirement comes first: obviously true and thanks for making that point. But keep in mind that the income of children is not exogenous. The amount of money I spend on ("invest in") them when they are young can materially impact the earnings they make in the future.

If they don't have to worry about money and can take an unpaid internship (vs. work at Starbucks), that experience is going to increase their chances of getting a high-paying job later. If they can afford to go out with well-connected students, then that social network can again translate into higher salaries. This often gets lost when people speak of "partying" or "wasting" money on luxuries: participating in social activities is how you build a social network and there are substantial economic and personal returns to those.

This is exactly the systemic inequality that we often discuss as obstacles for people from low-income households. The flip-side is that not making the investments when you can afford it does deprive them of an opportunity.

I was just reading about that reality in https://www.theatlantic.com/magazine/archive/2018/06/the-birth-of-a-new-american-aristocracy/559130/ that was prompted by https://www.nytimes.com/interactive/2019/08/01/upshot/are-you-rich.html .

One reason we live in the community we do is the opportunities.  Some of that is concrete like my employer that has a vibrant formal apprenticeship program as well as paid internships that start in high school.  Some of that is more social: when "all" the other kids are going to STEM camp, then you start asking to go, too, and make those friends with whom you keep in touch "forever". 

Like pigou, I am familiar with research like https://www.pbs.org/newshour/economy/if-you-grew-up-poor-your-college-degree-may-be-worth-less.  "If you've ever had to pick people for your group or team, chances are you asked your friends to recommend people they know. In much the same way, nearly 80% of the positions available are usually filled through personal referrals." (ibid)  If you're not in the network, then you won't get the niftiest job offers because they are going to friends of a friend, especially if it's not exactly clear what formal education qualifications are required to succeed at the job so recommended friend of a friend is probably good enough and therefore a formal job ad will never be issued.

Likewise, "fit" is not just a term for the TT search.  The PBS article has a great anecdote on how the author did not fit by her clothing choice, but changing it made all the difference.

Quote
I would add that this emphasis on "fit" applies to all facets of education and the workplace. Local communities often recruit from local colleges and universities, and recruiters are just as likely to prefer to hire graduates with strong connections to peer groups and alumni. The difficulty is that participation in structured extracurricular activities is a luxury that working-class students often cannot afford. Many of the working-class students I taught worked during the school year to help defray the costs of their college education. This puts them at a disadvantage in securing jobs after graduation. And that disadvantage too often leads to reduced lifetime earnings.

Reference: https://www.pbs.org/newshour/economy/if-you-grew-up-poor-your-college-degree-may-be-worth-less

This social network situation is related to some of the tragedies of death-marching adjuncting instead of jumping to another area.  People who have great networks with many educated people doing interesting, high-enough-paid work with their degrees are more likely to be able to transition in a shorter time to a good enough position.  People who are applying blindly to formal job ads trying to make a hard transition are much less likely to get that new middle-class job when people with directly related experience exist and are also applying. 

The trap was enhanced by the assertion that formal credentials through school are more important than the human aspect.  The Atlantic article kept bringing up The Great Gatsby as an example of how the human aspect and the realities of social class in even in modern America combine in unfavorable ways for those who focus purely on the transactional, credentialing mechanism at the expense of the human factors.

 

Well, I finally did it - I retired at the end of July. I guess the feeling I have in the evening of 'gotta stop what you're doing now and get ready for work tomorrow' will eventually pass, but it's weird.  No immediate plans, though some interested parties have asked me about consulting, so I'll probably do that after a bit, but not much. I wanna see how this 'not having to worry about anybody but myself' thing works out.

QuoteWell, I finally did it - I retired at the end of July.

Congratulations!!

If you dont mind answering, did you retire on a defined benefit pension plan or did you save with a defined contribution (403b type) plan?

Are you going to celebrate in any notable fashion?  (Take a cruise or some other trip to mark the event?)

Congratulations, indeed!  Let us know how it goes.

wahoooo! Way to go, punchnpie. Congratulations!

The comfort of my retirement depends in part of the stability of the State of Missouri pension system. Missouri is a red state. I'm probably screwed, but too scared to look.

Quote from: larryc on August 06, 2019, 06:15:29 PM
The comfort of my retirement depends in part of the stability of the State of Missouri pension system. Missouri is a red state. I'm probably screwed, but too scared to look.

The Pew report https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2019/06/the-state-pension-funding-gap-2017 (https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2019/06/the-state-pension-funding-gap-2017) suggests that Missouri's pension system is a bit better than average state. 79% funded, but net amortization at 104% so they're slowly improving funding level. Congratulations!

My red state recently approved increase in employee contributions for next year. While I'm not looking forward to contributing more, I want a stable pension.

Quote from: spork on July 06, 2019, 05:14:10 PM
I am in year 7 of a 20 year mortgage at 3.375 percent. Maturity date is coincidentally when I hit 65 years of age. I hope to pay off the mortgage a few years early and put the $1,400 that I pay monthly in P&I into a Roth IRA and other investments instead.

Check the math on this plan.  With that low of an interest rate on the mortgage, putting your "extra payments" into an index fund (which should average a 10%ish return) in the IRA may net you more money.

QuoteCheck the math on this plan.  With that low of an interest rate on the mortgage, putting your "extra payments" into an index fund (which should average a 10%ish return) in the IRA may net you more money.

Check that math too.  What is the standard deviation of that 10% return, and is that 10% return based on long, long term averages that are not necessarily likely to be sustained with the current population.  (Not to be too technical, but the historic return of the stock market is often quoted to be 11.8% since 1930 or something like that.  However does today's economy resemble the 1940s, 1950s, ... or has the population changed where there will be less invested in the market as boomers dissave to fund their retirements?... Rhetorical questions, but food for thought.  Should one use 10% rates in this economy and environment for long term planning anymore?)

Paying down a mortgage is a low return investment, but it is a risk free investment! 

The advice to delay paying down the house (or worse, to get a home equity loan) and instead invest in the stock market comes around periodically. But with any cycle it comes and goes.  It was heard a lot in the late 90s (before the 'dot com crash') and again in mid 2000s (before the 2008/2009 market crash).  I didnt hear much of it in 2010, though.  I wonder why? (I dont really wonder why). 

I do wonder how many people invested in the market who could have paid off their house are still paying off their house because they lost that money in the stock market? 

I will caution readers to take my advice with a grain of salt, though.  As readers will know from my posts at the other forum, I paid off my house and invested what was a payment into my retirement accounts.  I am well on the way to retiring early (if the market doesnt wipe my too high equity allocation), with a paid for house.  Even IF I lose half my retirement funds, at least my house will still be paid for, and I will still be able to retire at a 'normal' age.

there is a lot to be said for a paid for house! 
I agree that there is a lot to be said for a high value portfolio, but the volatility (risk) of a portfolio is much greater than the security and peace of mind from a paid for house. 
(And as someone with both a paid for house and a reasonably sized portfolio, I can speak to both!)

I'm far more worried about what Boomers trying to downsize will do to the real estate market than what their retirement portfolios will do to the overall economy.

Too many big houses sitting on the market because no one wants them anymore...  Too many houses on the market in disrepair because people couldn't afford to maintain them after the last real estate bubble...  Too much competition for the sensible properties that give you the opportunity to age in place is pricing younger workers out of the market...

Quote from: craftyprof on August 11, 2019, 08:18:15 AM
I'm far more worried about what Boomers trying to downsize will do to the real estate market than what their retirement portfolios will do to the overall economy.

Too many big houses sitting on the market because no one wants them anymore...  Too many houses on the market in disrepair because people couldn't afford to maintain them after the last real estate bubble...  Too much competition for the sensible properties that give you the opportunity to age in place is pricing younger workers out of the market...

That's the current fear here as we're looking at a large wave of retirements in basically a company town.  Job offers are being turned down because the trade-offs are bad for housing.  Usually, the trade-off is small town, not much to do, but a 3-4 bedroom, 2 bath house is pretty affordable or urban area with lots to do and you're living in a 1-2 bedroom, 1 bath apartment.  I continue to tell management the story about how a studio apartment here in a student-grade neighborhood cost me more per month than either of mortgages I'm paying off elsewhere on 4-bedroom, 2-4 bath houses.  That's not a happy situation for people who can get other jobs elsewhere and have a better trade-off for either more local amenities or substantially cheaper housing.

People are already commuting more than 4 hours per day to live in a more urban area with cheaper housing.  However, very few people do that for long because getting a good enough job in the more urban area is possible since our biggest competitor there has the same looming worker retirement wave.

Bookmarking, since we just moved and are looking long and hard at all of our finances, retirement, and estate planning.

Has anyone ever heard of a faculty member successfully buying out some of their teaching from their own salary?
I make good money, and hate teaching. I'd gladly pay more than adjunct rates for someone to take half my teaching off me.... anyone heard of such a thing?
I  don't mean dropping down to half time, which I'm also not sure a full-time faculty member can do here until they are in semi-retirement status, but that is also a possibility.

Quote from: pedanticromantic on August 11, 2019, 07:13:41 PM
Has anyone ever heard of a faculty member successfully buying out some of their teaching from their own salary?
I make good money, and hate teaching. I'd gladly pay more than adjunct rates for someone to take half my teaching off me.... anyone heard of such a thing?
I  don't mean dropping down to half time, which I'm also not sure a full-time faculty member can do here until they are in semi-retirement status, but that is also a possibility.

Will your research bring incredible prestige to the institution? If not, unlikely. Teaching makes $$$ in a college. And they tout their full-time faculty teachers as a marker of quality for recruitment.

Can you get a research grant to buy yourself out?

When I got tired of teaching I started taking on extra service commitments in lieu of course load, and eventually moved into administration.

Quote from: ciao_yall on August 11, 2019, 07:50:34 PM
When I got tired of teaching I started taking on extra service commitments in lieu of course load, and eventually moved into administration.

I wasn't tired of teaching at that point, but the extra service commitments to replace courses that didn't make did pave the way for moving into administration for me as well.

Quote from: polly_mer on August 12, 2019, 04:24:17 AM

Quote from: ciao_yall on August 11, 2019, 07:50:34 PM
When I got tired of teaching I started taking on extra service commitments in lieu of course load, and eventually moved into administration.

I wasn't tired of teaching at that point, but the extra service commitments to replace courses that didn't make did pave the way for moving into administration for me as well.

Not sure what's worse--teaching or service! Probably teaching is worse for me, so that may be an option.

It's either the post-tenure blues or the mid-life doldrums, but lately I've felt lost in terms of "what do I want out of life?".  Up to now, the goal was to have career stability (tenure), a comfortable house in a neighborhood we like, and be comfortable in daily life.  All of those things are now checked off the list and I feel the years flying by faster than ever.  We don't have kids and we don't really have hobbies either, so what's next?

In my quest to answer this question, I discovered a website describing the Six Stages of Financial Freedom https://www.getrichslowly.org/stages-of-financial-freedom/ (https://www.getrichslowly.org/stages-of-financial-freedom/).  It's been very helpful for me to re-frame my expectations.  I thought we were in good shape financially, but it turns out that there's a lot more that we can achieve and that we're really not there yet.

Currently, we are only in Stage 1 on the scale and have been very close to Stage 2 for a long time, but just don't have the "emergency" funds set aside.  Stage 2 is described as "You achieve stability once you've repaid your consumer debt, established some emergency savings, and continue to earn a personal profit. You may still possess some 'good debt' — college loans, a mortgage — but you've eliminated other obligations and built a buffer of savings to protect you from unfortunate events." 

Over the weekend, I calculated our net worth, our monthly expenses, and income.  It turns out that we need to accumulate $10-15k in savings to have a 3-6 month emergency fund, we currently have only about $4k saved.  In retirement accounts, we a combined $190k in 401a,401k, and 403b, but my calculations are that we will need about $1.25M before we reach our "cross-over" point where interest (at 5% rate) is equal to our monthly expenses.  Currently, I have a contribution of 13.5% into my 401a, but I'll need to invest an estimated $1,200 monthly in my 403b to be able to reach the "cross-over" point in about 20 years and until today, was contributing $0 to that account.

Today submitted paperwork to meet the $1,200 monthly contribution to my 403b and I'm working on a plan to reduce our monthly expenses.  I also want to keep our emergency fund in some type of CD or other asset that can be liquidated in case of an emergency. 

My bank offers 1-year CDs at a rate of 2.4% --- does anyone know of banks offering a CD with higher rates?  I've only just started to look into this.

You might want to check into building a CD "ladder" so that you have liquidity rolling in as various CDs mature.

I have no experience in this, either, but that's one piece of advice I keep running across.

M.

CD ladders are among the worst financial advice out there -- readily exploited by financial institutions, of course, because it means cheap access to capital for them. I strongly encourage staying away from any of that nonsense. The second worst financial advice is the very notion of an "emergency fund," beyond a few hundred dollars. Yes, it's sensible if you're living paycheck to paycheck, don't have access to a credit card, and a $50 payment means you're now paying overdraft fees... but that's not the group of people who actually apply the idea.

What should you do instead? Have your money in a regular, taxable, brokerage account (*assuming you have maxed out a Roth 401(k): it shares most of the features of a brokerage account, except that your gains are all tax-exempt and you can only withdraw the amount you contributed with no tax penalty, i.e. not the gains).

You can get money from a taxable brokerage account into a checking account within 4 days. Could it be that you have to sell when stocks trade at lower than their height? Sure... but so what? Your reference point is not how much profit you could have made if you had timed your sell optimally ex-post (impossible anyway), but what you would have made with another investment. People are, over the course of their working lives, literally leaving hundreds of thousands (and millions) on the table for the small annoyance of not having gotten the most profit possible?! It just boggles the mind.

I have an emergency fund. Of my cash hoard, I have $15000 designated as my 'emergency fund'.  Why?  I dont try to tempt fate to ask questions like, "what is the worst that could happen?" as I dont want to tempt fate to come up with far worse than I can imagine. 

Do I have easy access to credit?  Yes, I will admit that I possess 4 or 5 credit cards.  All have credit limits of at least $15000.  However, that does not mean that the credit card companies can not instantly reduce those numbers.  Why would they do that?  Perhaps because someone had an emergency that caused their credit score to drop and the card company got nervous.  Have credit card companies done that in the past?  Hell Yes!  In fact, in the era of 'universal default' if you got in trouble with one credit card, the others could lower your limits and increase your interest rates!  Could it happen again.  What is there to prevent a credit card company from modifying your interest rate, or credit limit?

So of my cash holdings (which are more than a year's take home pay - not a recommendation, but where I find myself now), $15,000 is designated as an 'emergency fund'. That amount is almost sufficient to cover both my homeowner's insurance deductible and my out of pocket medical deductible.  IF there were something else that would be designated as an 'emergency', I m probably ok.  The bottom line, though, is that your ability to borrow may be an illusion in an emergency.  The ability to liquidate a portfolio could provide cash, but part of the definition of "Liquidity" is "The ability to go to cash Quickly, WITHOUT losing value".  Id rather pay the 'insurance premium' of the loss of return for the security (insurance) that the money will be there at full value, instantly. 

CD ladders?  I have set them up in the past, but it has been nearly a decade since the last one 'matured'.  that will coincide with the 'historic lows' of interest rates.  Why build a ladder when I still expect that rates will rise?  (and someday, dammit, Im going to be right - rates will increase!).  I dont find anything inherently evil about CD ladders, but as I expected interest rates to rise, why lock in money at low rates for long periods of time?  That does not mean that I would not use them again if we return to a time of 'more normal' (whatever that means anymore) interest rates. 

A problem with using retirement funds (Roth IRAs) for your emergency fund are that you may not be able to put the money back in.  It is a one shot deal.  Then you have to deal with the tax reporting issues that it involves when the time comes.  Will you have the mental energy after the emergency to deal with the tax documents to support that your withdrawal was the contribution and not the earnings?  Why unplug retirement savings for decades because of a short term crisis?

Advice about investing usually involves having paid off consumer debt first, and then having $10,000 in a market tracking mutual fund (or an Exchange Traded Fund that tracks the market like the SPY or QQQ).

AJ Katz, i am glad that you are taking action to secure the option to stop working.  I am sure that the $1200 a month is a stretch at the start. However, you can contribute $19000 in a 403b account if you are under 50.  (You can contribute more after 50).  I am concerned with the estimate of your 'need'.  Your note was not very detailed in how you came up with the number. You mentioned

Quote
M before we reach our "cross-over" point where interest (at 5% rate) is equal to our monthly expenses.

essentially, it looks like you are calculating a value where your retirement portfolio will be sufficient to live on.  However, I wonder about the 5%.  If that is indeed an "interest rate" that is currently a very high number.  IF that is a 'withdrawal rate' note that the old theory of a safe withdrawal rate was closer to 4% and that highly quoted study was done when savings rates were much higher.  At this point, I am simply suggesting that your number may be too low.  It could be too low because you have not accounted for inflation over the next 20 years, overestimated the withdrawal or interest rate, or some combination of both.  On the positive side, you may not have calculated your Social Security benefits that may be coming your way that would slightly offset some of the amount you need to fund your retirement. 

The bottom line I think is that you have begun to consider what sort of life you want and estimate what it will cost to support it!  So few have even started to think about such things!  You are ahead of the curve in that respect! 

Quote from: clean on September 24, 2019, 01:34:46 PM
I have an emergency fund. Of my cash hoard, I have $15000 designated as my 'emergency fund'.  Why?  I dont try to tempt fate to ask questions like, "what is the worst that could happen?" as I dont want to tempt fate to come up with far worse than I can imagine.

$15,000 on a savings account since the year 2000 is approximately $15,000 today. $15,000 in the S&P 500 since 2000 is now $30,000.

Ultimately, all of these decisions come down to personal risk tolerance and tradeoffs. But we should be clear about the (opportunity) costs of these decisions. If an insurance company walked up to you and offered you $30,000 in the future, if you ever lost your job, your credit card limits got slashed, and you had an emergency -- and charged you $15,000 for the privilege... you probably wouldn't sign up.

Quote
Do I have easy access to credit?  Yes, I will admit that I possess 4 or 5 credit cards.  All have credit limits of at least $15000.  However, that does not mean that the credit card companies can not instantly reduce those numbers.  Why would they do that?  Perhaps because someone had an emergency that caused their credit score to drop and the card company got nervous.  Have credit card companies done that in the past?  Hell Yes!  In fact, in the era of 'universal default' if you got in trouble with one credit card, the others could lower your limits and increase your interest rates!  Could it happen again.  What is there to prevent a credit card company from modifying your interest rate, or credit limit?

I think we've had the debate before, so we may just fundamentally disagree. :) But I still think the "risk" you're insuring against is not merely that your credit card company will lower your limit, but that it will lower the limit faster than you can liquidate your assets. There's just no way a credit card company responds instantly to a change in your income... not least because they don't have access to your income and that it takes them at least one billing cycle (30 days) to effect any change! And it takes approximately 4 days to get money held in an S&P 500 into a checking account from which you can pay bills.

QuoteThe ability to liquidate a portfolio could provide cash, but part of the definition of "Liquidity" is "The ability to go to cash Quickly, WITHOUT losing value".  Id rather pay the 'insurance premium' of the loss of return for the security (insurance) that the money will be there at full value, instantly.

That's not part of any standard definition of liquidity. Liquidity is getting access to cash within short periods of a time. Stocks are liquid assets. A house is not.

Medical bills are not even short-term expenses. It takes a hospital between 30 days and 365 days to send you a bill and, once you have it, you get at least 30 days to pay it. The 4 days it takes you to get stocks into a checking account just aren't going to be an issue.

Quote
A problem with using retirement funds (Roth IRAs) for your emergency fund are that you may not be able to put the money back in.  It is a one shot deal.  Then you have to deal with the tax reporting issues that it involves when the time comes.

You can withdraw from a Roth IRA with no penalty and no tax reporting. And yes, you can't put the money back in... but how's that different from not having put the money into the account in the first place, because it's stuck in a checking account? If you max out your IRA already, then you'd take the money out of a taxable brokerage account instead and avoid this issue.

QuoteWill you have the mental energy after the emergency to deal with the tax documents to support that your withdrawal was the contribution and not the earnings?

Your brokerage takes care of this. But also: on even $15k in savings since 2000, you've forgone $15,000 in asset growth. I get that paperwork is annoying, but you can hire a wonderful tax lawyer for much less than $15,000.

QuoteThat's not part of any standard definition of liquidity.

www.investopedia.com/terms/l/liquidity.asp
Liquidity refers to the speed with which an asset or security can be bought or sold in the market, without affecting its price—the ease of converting it to ready money, or cash.

Sorry, but the study if Risk and Return IS my discipline and the definition I gave is correct. 

Quote$15,000 on a savings account since the year 2000 is approximately $15,000 today. $15,000 in the S&P 500 since 2000 is now $30,000.

and in 2008, invested in the market, it was worth $7500

QuoteYou can withdraw from a Roth IRA with no penalty and no tax reporting.

IRS Form 1040 Line 4.  You must disclose the distributions of an IRA.  Then you report the taxable amount.  In an audit, I m sure that the IRS will want proof provided of the amount that was contributed to confirm that the amount distributed is less than that. There are also restrictions that the account must be at least 5 years old.  So not as easy and all encompassing a source of funds in an emergency.


I think that we agree that a source of funding should be available to address an emergency.  I am more risk averse, so I would rather have the cash available to address a problem and not depend on volatile security prices or having to access credit (which I would have to pay back at some point, at potentially lower future income).

The bottom line, for me, is that I sleep better knowing I have an emergency fund (in savings).

Quote from: clean on September 24, 2019, 01:34:46 PM
AJ Katz, i am glad that you are taking action to secure the option to stop working.  I am sure that the $1200 a month is a stretch at the start. However, you can contribute $19000 in a 403b account if you are under 50.  (You can contribute more after 50).  I am concerned with the estimate of your 'need'.  Your note was not very detailed in how you came up with the number. You mentioned

Quote
M before we reach our "cross-over" point where interest (at 5% rate) is equal to our monthly expenses.

essentially, it looks like you are calculating a value where your retirement portfolio will be sufficient to live on.  However, I wonder about the 5%.  If that is indeed an "interest rate" that is currently a very high number.  IF that is a 'withdrawal rate' note that the old theory of a safe withdrawal rate was closer to 4% and that highly quoted study was done when savings rates were much higher.  At this point, I am simply suggesting that your number may be too low.  It could be too low because you have not accounted for inflation over the next 20 years, overestimated the withdrawal or interest rate, or some combination of both.  On the positive side, you may not have calculated your Social Security benefits that may be coming your way that would slightly offset some of the amount you need to fund your retirement.   

Thank you for noticing this!  I used the "25x rule" (linked here)  (http://"https://www.forbes.com/sites/robertberger/2017/02/23/the-25x-rule-to-early-retirement/#4c16afbc6faf") to estimate the amount we would need based on our annual expenses, but now that you mention inflation, it seems that is not clear whether or not that is part of the calculation and so I am now suspicious that it is not included.  I would appreciate direction to relevant resources to calculate our needs.  I estimated our annual expenses were about $50k in the last year, and used that as the basis of my calculation.  That calculation does not include that our house will be paid off in 19 years and would free up $15k/yr.  I also did not include social security as a source of income in the future if we can retire before being eiligible to collect SS. I'd like to retire in 25 years, but I'd certainly retire sooner if the funds were there.

You think a 5% rate of return is high?  I thought it was on the low end for estimating rates of return.  I'm trying to be as conservative as possible with my estimates and set up my 403b to be a higher risk index fund.  One thing I did not take into account in my estimate of needing to contribute $1200/mo is that it also includes the amount already being contributed to my 401a, which is currently $1,090 monthly (including the match contribution). But if the 25X rule is not including inflation then I need to recalculate. 

AJ_Katz,
For what it's worth, I think we're also shooting for 1.25M, but like you we figuring it in an assortment of different ways.
Folks on financial forums like MMM (Mr Moneymustache) often say you shouldn't include your primary residence equity in that number, because you have to live somewhere- but with or without that amount, we're in the home stretch.

I'm not into cash emergency funds. I've got over a dozen credit cards, with lines between 5K and 20K each.  So, I'm with pigou on that issue. We use those credit cards for any big expenses and all of our daily living expenses. And I almost always go for the 0% promotional rate credit card offers that come in the mail. That way, I have a year to pay off any major expense that might come up. We are carrying $40K in 0% interest CC balance now from a major remodeling project, and all of our other living expenses. Haven't paid a dime of interest (the offers I get don't have the balance transfer fees, either). We have a HELOC that can pay that all off tomorrow, but we so far haven't needed to touch that.  This approach might be risky to some, but a single spreadsheet and setting all the cards to autopay for the minimum balance  has served us very well for the past three years, allowing me to contribute the max to my 403b and 457b while doing this large remodel project.

In 5 days, I'll be 59.5 years old, so my IRAs will be available, but I don't plan to touch those either.

I looked at the stages on the 'get rich slowly' site that AJ_Katz mentioned above. I think we're between stage 4 and 5.

However, I disagree with the premise of their stage 3, that there needs to be no mortgages. We have three mortgages, one for our primary residence and two for the rental properties that we intend to keep for 10-15 more years. We should be at stage 5 or 6 within 3 years.

The "25 Times rule" would be a 4% rate.  That is at the high end of what would be a safe withdrawal rate in today's market. 

Things to consider for retirement:
This is a website that can provide an estimate of your "retirement Inspired quotient" - an estimate for your retirement goal.  It includes inflation estimates, but I think that the return estimates are a bit high so it underestimates your actual contribution needs (but that is just my opinion as I reviewed the spreadsheet assumptions that were used).
https://www.chrishogan360.com/riq/. 

You are doing the right first steps to consider what your current expenses are.  Then essentially, this is a future value projection. If you think that inflation is going to be 2% (you pick a number) over the next 25 years,  then the estimate of your expenses will be 50000 * (1.02)^25 = 82030  (assuming a 2% inflation rate, you would need 82K in 25 years to buy the same things as 50K today).  If you use your 4% rule (25 times rule), 82030*25= 2050757.50 (at full decimal precision)

However, that would set you up to withdraw 82K every year, forever (at 4%).... If you had a portfolio of $2 million, and it earned 4%, it would earn 80K a year, forever.  So that is a good starting point.  It does not include future inflation (so you would need more), but you wont need the money forever!  So technically, you could live on less than the 2+million figure (ignoring future inflation).  (I did a quick financial calculator for the 82K in expenses for 30 years assuming a roughly 3% real rate of return (assuming you would earn 3% plus inflation) and you would need about 1,610,000

So I think that a target between 1.6 and 2.1 Million would be a better starting point.  (maybe target $1.75 M  as a first pass estimate)

Here is an article that will help (I assign it to my finance classes to give them a starting point to think about retirement - Two Million is the New One Million)

https://www.washingtonpost.com/news/get-there/wp/2016/04/25/2-million-is-the-new-1-million/?utm_term=.9989ab039a2a

Something else to think about

Taxes!!
If you are saving in accounts that get a match, then they are going to be taxable when you withdraw the money. IF you need 82K for expenses, then remember that you need to pay taxes on that money before you can spend the 82K!  So you will need even more, or you must start to convert to the Roth accounts as early as you can.  (At a minimum, the amount that you are contributing should be in a Roth account).

Do you think that your tax rate will Increase or Decrease?  Most think that their taxes will decline when they retire. Im not in that camp!  I think that the federal budget deficiet will catch up with us and tax rates will increase.  Further, social security is already taxed and Required Minimum Distributions from traditional (non Roth) retirement accounts are taxed as well.  So while you may have some control over your taxes today, once retired, you will have far fewer choices on tax planning.

Other considerations
What are your going to DO in retirement?  What will those 'hobbies' cost?  Is that in your 50K estimate?
What do you think about Health care costs?  Will you need home health care later?  (might your medical care cost more?) (What other costs might you have in the future that you do not currently have?)


ANYWAY....
It looks like a first pass estimate is that you need at least $1.6 Million to cover your basic needs for 30 years of retirement.  IF you live longer, you need more. IF you need to pay taxes on the money withdrawn to pay for your needs, you need more. If your living expenses (hobbies) were not in your first estimate, then you need more. You did not include Social Security in your calculations (probably wise), but assuming that you get any positive, after tax flow from that program, you need Less!

The good news is that you have some money already saved, and you have 25 years (at least) to save more.    You can work longer if necessary.

For comparison, Im 55. My future wife is 45, so my planning horizon is another 45 years. I m planning to be 'able' to retire in about 5 years, and I have considered taxes and social security, and I am estimating that i will need about  $2.3 Million to cover us until she is 90.  (If she lives past 90, she had better save whatever inheritance she gets from her parents, or be prepared to work at Walmart, or move in with her sisters!! because by then, my estimates are that the money is gone!)

Again, I want to congratulate you for looking at this NOW while you still have a chance to make changes that will positively influence your potential retirement!!  My own thoughts are to save as much as you can now. It has 2 effects.  It lowers your current consumption (keeps you living within your means), and it provides more available for future needs!

Thanks, clean, for walking through that.
Your analysis will be useful to affirm or tweak my numbers.

Folks should remember to adjust their annual expenses, factoring in whether their house is paid off or not.
Also, I wonder how to budget for medical costs. I'm not sure how to approach that in this (hopefully) changing political climate. Not counting home expenses (currently paid for by rental income), we live on a lot less than 50K, but with a medical allowance, who knows.

I dont know how to estimate health care spending.  My own situation is that I SHOULD have health insurance paid by my employer (for me, not my bride) in retirement.  I can buy it for her, but at what cost, I dont know.
However, the state could always change their promise to pay my health insurance and Id be screwed! 
The politics is in play here too.  The Affordable Care Act (Obama Care) has been gutted and Im not sure what to expect?  Medicare for all?  What does that even mean?

Health care costs are a leading reason for people to file for bankruptcy. 

It is a black box to me. I m assuming as that is my best guess, that I will be covered by some combination of medicare and my employer's plan in retirement, but it will be one of my largest retirement expenses, especially as my future bride is 10 years younger than I, so even when I qualify for Medicare, I need to cover her for another decade.  (Until we Both qualify for Medicare, my employer will charge the higher rate for insurance!  I expect it will cost up to $15000 a year for health care in retirement until she qualifies for medicare.  I hope Im overestimating, but fear Im not!  It  could be a major reason I continue to work past my 'hope to retire' date).

Quote from: clean on September 24, 2019, 03:10:47 PM

QuoteThat's not part of any standard definition of liquidity.

www.investopedia.com/terms/l/liquidity.asp
Liquidity refers to the speed with which an asset or security can be bought or sold in the market, without affecting its price—the ease of converting it to ready money, or cash.

Sorry, but the study if Risk and Return IS my discipline and the definition I gave is correct. 

Mine, too. :)

That part of the definition is there because every asset is perfectly liquid at some price. I can sell a house in 30 seconds if I put it up for $20 when it's valued at $200,000. Unless you're liquidating a *lot* of shares, you're a price taker and your sale doesn't affect the price of the asset. The volatility of an asset is not part of its liquidity, but it's a concern that matters independently anytime you invest money. In fact, your link uses (commonly traded) stocks as an example of a liquid asset.

My point is largely that it makes little sense to have $100,000 in stocks and a dedicated $15,000 in cash. You could get the same risk exposure by doing something like $80,000 stocks and $20,000 bonds with a higher risk-adjusted rate of return. It's like someone investing in stocks and buying the extended warranty on their TV: either one on its own is sensible, but the two decisions made by the same person is just outright a mistake. And we can argue it away by introducing some psychological costs (also my field of research), but that just provides some reasoning for why people are making the mistake -- it's still a mistake from a financial decision perspective.

Quote

QuoteYou can withdraw from a Roth IRA with no penalty and no tax reporting.

IRS Form 1040 Line 4.  You must disclose the distributions of an IRA.  Then you report the taxable amount.  In an audit, I m sure that the IRS will want proof provided of the amount that was contributed to confirm that the amount distributed is less than that. There are also restrictions that the account must be at least 5 years old.  So not as easy and all encompassing a source of funds in an emergency.

This does not apply to a Roth IRA. You only have to report the distribution *subject to an income tax* and the rule is that contributions are withdrawn first. So if you invest $1,000, it grows to $1,200, and you withdraw $800, it's assumed to come from your contributions. There's similarly no 5-year minimum to withdraw contributions. For a Roth IRA, you only report withdrawal in excess of contributions, which your brokerage will report for you -- and it's not relevant for this particular example. If you get to the point of reporting earnings due to an emergency withdrawal, it's a hassle resulting only from the fact that you have more money than you otherwise would have had. In the above example, you could withdraw $1,200 (the remaining $200 only if the account has been open for 5 years) and you'd have to report $200 in taxable gains. But in every world, that's no worse than having access to only $1,000 to begin with.

Quote
The bottom line, for me, is that I sleep better knowing I have an emergency fund (in savings).

Ultimately, that's just a matter of personal preferences and we don't have to have the same views on this. ;)

I just think that people should be aware of the opportunity cost that comes with them. If they run out of money at old age and/or can't afford the things they need/want, decisions like these contribute. That is, for most people, there's a serious risk of not having enough money when they need it. The stress that comes from that doesn't strike me as less than the stress of investing in stocks, but that part is also entirely a personal preference.

When you estimate income in retirement, it's much easier to think of everything in real (i.e. inflation-adjusted) terms. You can forecast 7% rate of return and adjust the amount you need for 2% inflation per year, or you can just forecast a 5% rate of return and keep your expenses the same: the result is the same. That's why rules of thumb for returns in retirement are lower than you might expect: they rely on inflation-adjustments. They often also assume that you shift from stocks into less risky investments as you near retirement, which I think is a costly mistake, but I assume clean will disagree. :) (I can't imagine that actually comes out of a model: the optimal rule should be constant risk allocation over your lifetime, much like it's utility maximizing to smooth your consumption over your lifetime.)

All my retirement savings are in Roth 401(k)s and Roth IRAs, so my tax rate on withdrawing in retirement will be zero. This also means social security payments won't bump me over the threshold where they get taxed, so I'm not paying taxes on those either. No minimum distribution requirement, so I don't have to sell and get taxed on money I don't need. Plus, no need to forecast future changes in income or capital gains tax rates (there is a risk of an increase in sales taxes).

I do estimate about a 5% withdrawal rate, so for $200k/year I'd want about $4m. But I also don't own a house/condo and plan to continue renting... which is easily $50k-$70k/year for a nice apartment in a high COL city.

QuoteAll my retirement savings are in Roth 401(k)s and Roth IRAs

Im older, I guess. I had been earning before the Roths were available to me. They didnt exist, and then my employer didnt jump on them.  So I have been contributing the max to the Roth 403, but the money that Im required to contribute and the matches go in pretax.  The amount in my retirement accounts is now so out of balance, that I think it would take another lifetime before the Roth balance would overtake the traditional balance.  Im considering some IRA transfers to at least offset the required retirement contributions plus the state match.  I suppose that it is a good problem to have! 

As a "curse" my coworker would tell his classes "I hope you pay a Million Dollars in Taxes!"  (imagine what you would have to earn to pay a million in taxes!) 
SO im in a similar boat.  I will owe a lot of taxes!

Thank you, clean, for providing the formula.  I've found it very helpful!  I've created a spreadsheet to estimate what we need, how much we'll have from our current investment, the shortfall, and then how much we would need to contribute to make up for that shortfall.  I am not including SS benefits in my estimate.  Please review my estimate to see if you think I missed something:

Annual expenses in today's dollars:  $33,258 (I've subtracted monthly student loans and mortgage paid off in 10 and 20 yrs)
Additional money for retirement traveling: +$12,000
= Expenses in retirement in today's dollars:  $45,258
Calculating for retirement in 25 years at a 3.3% inflation rate, our annual expenses translate to be:  $101,906.58
(For reference, that value changes to $120,650.42 @ a 4% inflation rate)

Using the 25X rule, we would need $2,547,671.36 to retire in 25 years
Including my partner's 401k, we have a total of roughly $190,000 in retirement accounts
If we get a 5% rate of return, I calculated it will increase to a value of $643,407.44 in 25 years
That means we will have a shortfall of $1,904,263.92 compared to the amount estimated with the 25x rule

Using your formula in reverse, I calculated that we need to invest $7,219.83 monthly to meet the shortfall
Converting that back into today's dollars, it is equal to $2,1332.04
My current 401a contribution with employer's match is $1090 per month
Therefore, I calculate that an additional $1,042.04 is needed to meet our shortfall

Firstly, does this appear correct?  Second, what are good conservative estimates for inflation and rates of return on a diverse investment portfolio?  What I found online is that the 30-year rolling average inflation is 3.3%.  I could not find a good estimate of rates of return though.  Apparently Dave Ramsey claims it is 12%, others say 8% is a good estimate, and even others suggest that 5% is conservative.  For the purposes of my 25-year estimate, what ranges for inflation and returns should I include as conservative estimates?  I've presently created a spreadsheet that shows several scenarios.  In my worst case scenario of 4% inflation and 5% return, we are short by about $1,570 per month.  In the best case scenario of a 3.3% inflation rate and 8% rate of return, we are over-paying into our retirement by about $400.

I know these numbers are just guidelines.  We're talking estimating what might happen in 25 years, which is ridiculous if you consider that our best and most complex algorithms can't even predict the weather 2-weeks from now.  Still!  It's a helpful exercise for me to understand factors that influence our potential future income.  I really appreciate the feedback.

Using a financial calculator, you have 190000 today. You plan to invest for 25 years, you plan to earn 5% and want to accumulate $2,547,671.36  and calculate the payment
N= 25   I=5  PV =-190000   FV = 2547671 and calculate the payment = - 39899 per year contributed to the retirement account.  (3325 per 12 months or 4433.25 on a 9 month contract.  Some of that is being contributed by you and your employer now --you indicated 1090 a month, but you dont say if that is for 9 or 12 months) 

If your contributions earn 7%, you will need to contribute only 23976 in total for 25 years.

At 12% (which I think is too high to use)  you do not  need to contribute any more, but again, that is likely too high a number to use. 


Here is another site to play with
https://financeformulas.net/Future-Value-of-Growing-Annuity.html#calcHeader

It is for a 'growing annuity'.  It may be too complex a formula or too many variables to play with, but essentially, you start with one payment, and then increase that payment by some rate every year.  The benefit is that you start with a lower payment, but you must increase the payment by a constant rate every year.

I played with the online tool using your numbers... You indicate that you are short 1904000 or so.  In the calculator I assumed that you would earn a 6% return, and grow the payment by 2 percent a year.  (Essentially, I assumed that you earned 4% above inflation).  By playing with the initial payment, if you start contributing roughly 29000 a year and increase your contribution by 2 % every year, then you will accumulate the 1904000 you are short.  I assumed that your 190K would grow the other $643K as you indicated. 

So if 39899 is too much to contribute a year, you can contribute almost 11K less a year to start if you can raise that number 2% a year.  Of course that assumes that you earn 6% on your assets. 

Anyway, that gives you plenty of things to think about. 

Quote from: clean on September 25, 2019, 07:19:27 PM

QuoteAll my retirement savings are in Roth 401(k)s and Roth IRAs

Im older, I guess. I had been earning before the Roths were available to me. They didnt exist, and then my employer didnt jump on them.

And wiser, I'm sure. :)

Employers were really slow on the Roth 401(k)s and many still don't offer them. I just helped a friend of mine set up some retirement planning stuff and when she reached out to her benefits manager, the guy was ecstatic that someone asked about Roth 401(k)s. So many exclamation points and smiley faces... she was less enthused, forwarded it to me, and asked if there's anything in there she needed to know. (There, alas, was not. But she brought the guy cookies the next day anyway. Benefits managers are totally underappreciated.)

QuoteThe amount in my retirement accounts is now so out of balance, that I think it would take another lifetime before the Roth balance would overtake the traditional balance.  Im considering some IRA transfers to at least offset the required retirement contributions plus the state match.  I suppose that it is a good problem to have! 

As a "curse" my coworker would tell his classes "I hope you pay a Million Dollars in Taxes!"  (imagine what you would have to earn to pay a million in taxes!) 
SO im in a similar boat.  I will owe a lot of taxes!

Given your expertise on retirement planning, you probably don't need any advice... but have you talked to a tax attorney? There are some weird quirks in the tax code that, for example, let you contribute to a tax-advantaged account and, a few days later, withdraw the money at a lower tax rate with no penalty. I'm not versed on the details, but I think it's just before you turn 64.5... I only remember from a seminar that there are discontinuities in the returns and a tax lawyer would know where they are. (Economists, of course, assume that people are automagically aware of those opportunities and then are puzzled when they don't take advantage of them. But cute: you can use the same model of how viruses spread to model which people take advantage of those quirks. Someone learns about it, then goes to tell their friends.)

AJ_Katz: for your retirement calculation, working in real terms will dramatically simplify your life. You have $190k in today's dollars and your projected expenses are $45k in today's dollars. If you want to go with the 25x heuristic, you need $1.125m in today's dollars in 25 years.

If you get a nominal rate of return of 7% and expect 2% inflation, you have a real rate of return of 5%. Now you use the real rate for your projections, and you'll find that saving $10,000 per year gets you to $1.145m in 25 years. That means you need to save $10,000 in real terms per year. So you save $10,000 in the year 2019, $10,200 in the year 2020, and so on.

I will mention that I have a non-Roth-401(k) through my employer and a Roth IRA through a financial advising company.  One is not limited to just the retirement options that the employer offers.

Quote from: polly_mer on September 26, 2019, 09:44:06 PM
I will mention that I have a non-Roth-401(k) through my employer and a Roth IRA through a financial advising company.  One is not limited to just the retirement options that the employer offers.

Yes. I have a 403(b) managed by TIAA-CREF through my employer and a Roth IRA account that I set up many years ago. I am maxing my contributions to the 403(b) (I'm over 50 years old) but have not contributed anything to the Roth IRA for a long time, unfortunately. I seem to have hit a consumption-savings plateau. While I would like to save more, the mortgage, property taxes, car expenses, wife expenses, etc. make it difficult to reduce spending by appreciable amounts. I'm banking (literally and figuratively) on getting promoted to full professor within two years and putting much of the raise toward retirement.

Clean asked about health care expenses upthread so I thought I'd share my experience.

I retired in late 2016 at 55.  My spouse retired in mid-2017 at 54.  For health insurance we relied on her COBRA through the end of 2018.  The premium was about $1400/month for the two of us.  This year we switched to the ACA (Obamacare).  Effectively this is our only option.  Had I continued working until age 60 I could have continued on my employer's policy (state system) until age 65,  but I did not want to work another five years. 

I think our premium is $1,800-$2,000 per month.  I say "think" because when I was investigating the ACA landscape in late 2018 I discovered that we qualify for a subsidy.  Net of the subsidy our premium is $316 per month.  For a family of two people the cut-off for receiving a subsidy is about $66,000 in annual income.  I am not sure if this is a national figure or whether it varies by region.  If our earnings exceed the limit then we will owe the full amount of the premium retroactively. 

We are lucky enough to be able to control our income because it all comes from investments and retirement accounts.  In 2017/2018 I had been rebalancing our portfolio to reduce equities from around 80% towards 60% when I learned about the subsidy.  I accelerated the process to realize the gains in 2018 and not 2019.  We now have enough cash in regular (non-retirement) accounts to last at least two years.  Since almost all of our taxable savings are in index funds we should have virtually no capital gains until we decide to start liquidating again.  I expect to receive the subsidy next year as well.  The subsidies are based purely on income.  Assets do not affect it. 

I will add that I found the ACA incredibly difficult to navigate.  We needed an insurance agent to help with the on-line registration.  Even with only one provider, Blue Cross, there were about 25 different plans to choose from.  Comparing the plans is difficult because few of the benefits appear to be standardized;  many differed only slightly.  I think we narrowed it down to about 5-7 choices and then basically picked one at random.

Aside from the premiums, we have paid a lot this year.  I have had two medical procedures this year for a chronic condition and I have exceeded the plan's $5,000 individual out-of-pocket limitation.  Last year (2018) I think we may have spent $3000 on health care over and above insurance premiums.  2017 was uneventful. 

For planning purposes we had budgeted $2000/month for health care.  $2200 to 2500 is probably a more accurate estimate assuming no subsidy.

Neither of us has any regrets over choosing to retire early.

https://www.msn.com/en-us/money/retirement/why-the-4-percent-rule-for-retirement-wont-work-anymore/ar-AAHVI3j?li=BBnbfcN#page=2
(https://www.msn.com/en-us/money/retirement/why-the-4-percent-rule-for-retirement-wont-work-anymore/ar-AAHVI3j?li=BBnbfcN#page=2)

That is an article that I saw today about the 4% rule and some issues with it.

Thanks Retired_Prof for the information on health care. 

I think that we are in a similar situation. I have to work until 60 to get health care in retirement.  However, as I wrote earlier, if I want a single policy, I should be covered (unless the state changes its policies, and they can at any point!).  IF I want coverage for me and my future bride, then the premium is going to be the based on our duel medicare situation. Once we are both on Medicare, we get a sweet(er) rate.  When only one qualifies for medicare, then the premium is set as if neither is on medicare, so the highest premium is charged.  When we get closer to making the final retirement decision, I will have to compare what it will cost to use my employer's policy for both of us, or price an individual policy for her alone as my employer should continue to cover me.

I dont expect that we will qualify for any subsidies.  Again, as we get closer to the decision date, I will run some more numbers, but currently my Roth/Traditional balances are leaning too much toward traditional.  I had planned to do a lot of conversions from traditional toward Roth in the first years of retirement, far more than the $66000 you mentioned to qualify for the subsidy.  However, that is sort of a 'tax' as well, so Ill have to include that into the analysis when the time comes. 


For those still reading, and for what it is worth, I talked to my father about retiring 'early'.  He retired at 62, my mom at 60.  He noted that their health care costs were their biggest expenses until they qualified for Medicare.  Something to consider, and something that is very much being debated in the political circles.  I guess that the bottom line is that it is not likely to be something that one can easily forecast for more than a few years into the future!

I went to see the HR person today.  She wasnt in, but I was able to get the price sheet. If I understand the document,  It looks like as a retiree, my insurance would be free (as I suspected.). For both of us, it would be a bit less than $350 a month (for those currently covered today).  When we are both covered by Medicare, the premiums drop to about $200.  Those prices are not nearly as bad as what I had suspected. 
A coworker was telling me that it would be closer to $1200 a month.  (though that is about what the forms say is the university's cost). 
I still need to ask the HR person the details, but at this point, it looks like I can currently plan on $400 a month for insurance, once I am eligible for retirement health care... in five more years!

IF others have guidance on the cost, it would be welcome!!

Thanks Polly for starting a very useful thread. Bookmarking.
A related question regarding where to retire. One of my long-time academic colleagues, who is many years older than me, vacations in Mexico whenever school is not in session, and now she plans on retiring there (she likes warm weather and she says everything is cheaper). Does anyone with first-hand info about retiring abroad (I live in USA) have any tips to share? My retirement is projected to afford me the same lifestyle I enjoy now, if I stay in my same location, but my opinion of this place is meh. Having lived abroad, in several different countries, for many years, it's not a stretch for me to live in a foreign country, again.

Quote from: lightning on September 27, 2019, 05:38:01 PM
Thanks Polly for starting a very useful thread. Bookmarking.
A related question regarding where to retire. One of my long-time academic colleagues, who is many years older than me, vacations in Mexico whenever school is not in session, and now she plans on retiring there (she likes warm weather and she says everything is cheaper). Does anyone with first-hand info about retiring abroad (I live in USA) have any tips to share? My retirement is projected to afford me the same lifestyle I enjoy now, if I stay in my same location, but my opinion of this place is meh. Having lived abroad, in several different countries, for many years, it's not a stretch for me to live in a foreign country, again.

My husband's cousin and her husband retired to Spain. Just on his and her SS they were accepted on a retirement visa for the rest of their lives.

They could be on the national health but decided to buy private insurance for a small amount.

Anyway, they live a million dollar lifestyle for a fraction of the cost outside of Malaga. They have a 5 acre farm, a horse, golf nearby... no regrets!

This is our dream scenario as well, retiring in Europe.

Does anyone know if income from withdrawals while permanently leaving abroad falls under the "expat" tax laws where you have to reach a certain amount of income in the foreign country (I think it is $80K) to be taxed in the US or the tax in the US is inevitable when drawing from a 401k/403b regardless of where you live? 

I just found these very interesting pages:
A calculator
https://dqydj.com/net-worth-by-age-calculator-united-states/
and a summary
https://dqydj.com/net-worth-brackets-wealth-brackets-one-percent/

Striking difference between average and median (of course we know how much of an insane amount that top 1% really has).

I must say that I was surprised to see that with or without our primary residence equity included, we were sitting around the 80th percentile. We really do live pretty modestly.

It says a lot about the state of wealth inequality.  We all have seen these kinds of graphs from Sanders and Warren campaigns (and others), but somehow this one makes a stronger impression on me.

And I also just found this page helpful:
https://investornews.vanguard/how-much-does-retirement-health-care-cost/

Okay folks, I've increased contributions to my 403b for this month and noticed immediately in my paycheck how the extra $1200 deducted did not result in $1200 off my paycheck, it was only about $900 less, because they were pre-tax dollars.  It really drove home to me how the Traditional vs. Roth makes a difference and means I could up that contribution to $1500 per month.

But now I'm struggling to understand which choice is better for my 403b contributions...  Roth or Traditional.  I understand the general mantra is to calculate your estimated tax bracket at retirement and if you'll be at a higher tax bracket at retirement you should go Roth and if at a lower bracket go Traditional.  Despite that, I see a lot of information online pushing the Roth, saying things like "go Roth if you have the option." 

But I simply don't think it's as simple as that.  In retirement, I won't need as much in income because there won't be a monthly deduction from my paycheck for social security or medicare.  Also, although SS income will also be taxable, only up to 85% of retirement income is taxable and the dollars that I am contributing are dollars that are being taxed at the top end of my tax bracket, whereas a good amount of the income earned in retirement will be at the lower ends of my tax bracket.  I am currently 25 years out from retirement and have my 403b contributions going into a higher risk index fund, so it seems like to go Roth on these contributions misses out on compound growth -- especially if I am able to contribute my current tax savings into the fund as opposed to spending it now.  However, there does seem to be a benefit of having at least some funds in Roth since they allow zero-penalty early withdraw...  which is something I would only use if we were in a financial hardship.  The other consideration is that you cannot contribute to the Roth if you make more than $140k, so in later years I may or may not have the option to contribute.  And there are likely other factors to consider too.

It seems like the mantra of going Roth is the best advice for the average person who will likely be short on funds in retirement.  I'm not sure it's the right for me.  Does anyone have a good strategy or resources to help tackle this?

Quote from: AJ_Katz on November 03, 2019, 09:53:10 AM
Okay folks, I've increased contributions to my 403b for this month and noticed immediately in my paycheck how the extra $1200 deducted did not result in $1200 off my paycheck, it was only about $900 less, because they were pre-tax dollars.  It really drove home to me how the Traditional vs. Roth makes a difference and means I could up that contribution to $1500 per month.

But now I'm struggling to understand which choice is better for my 403b contributions...  Roth or Traditional.  I understand the general mantra is to calculate your estimated tax bracket at retirement and if you'll be at a higher tax bracket at retirement you should go Roth and if at a lower bracket go Traditional.  Despite that, I see a lot of information online pushing the Roth, saying things like "go Roth if you have the option." 

But I simply don't think it's as simple as that.  In retirement, I won't need as much in income because there won't be a monthly deduction from my paycheck for social security or medicare.  Also, although SS income will also be taxable, only up to 85% of retirement income is taxable and the dollars that I am contributing are dollars that are being taxed at the top end of my tax bracket, whereas a good amount of the income earned in retirement will be at the lower ends of my tax bracket.  I am currently 25 years out from retirement and have my 403b contributions going into a higher risk index fund, so it seems like to go Roth on these contributions misses out on compound growth -- especially if I am able to contribute my current tax savings into the fund as opposed to spending it now.  However, there does seem to be a benefit of having at least some funds in Roth since they allow zero-penalty early withdraw...  which is something I would only use if we were in a financial hardship.  The other consideration is that you cannot contribute to the Roth if you make more than $140k, so in later years I may or may not have the option to contribute.  And there are likely other factors to consider too.

It seems like the mantra of going Roth is the best advice for the average person who will likely be short on funds in retirement.  I'm not sure it's the right for me.  Does anyone have a good strategy or resources to help tackle this?

If you are already traditional, remember that the only way to go to Roth is to convert all your current accounts. That means paying taxes on ALL the balances when you make the conversion.

Husband and I have a healthy balances in our traditionals - enough that the bath we would have to take on taxes now makes it pretty much unthinkable to convert to Roth accounts now.

Quote from: ciao_yall on November 03, 2019, 10:52:41 AM
If you are already traditional, remember that the only way to go to Roth is to convert all your current accounts. That means paying taxes on ALL the balances when you make the conversion.

Husband and I have a healthy balances in our traditionals - enough that the bath we would have to take on taxes now makes it pretty much unthinkable to convert to Roth accounts now.

Hmm...I hadn't thought about conversions.  I was only thinking about monthly contributions to my 403b, which provides the option to make the contribution either as Traditional and/or Roth.

Quote from: AJ_Katz on November 03, 2019, 11:11:06 AM

Quote from: ciao_yall on November 03, 2019, 10:52:41 AM
If you are already traditional, remember that the only way to go to Roth is to convert all your current accounts. That means paying taxes on ALL the balances when you make the conversion.

Husband and I have a healthy balances in our traditionals - enough that the bath we would have to take on taxes now makes it pretty much unthinkable to convert to Roth accounts now.

Hmm...I hadn't thought about conversions.  I was only thinking about monthly contributions to my 403b, which provides the option to make the contribution either as Traditional and/or Roth.

I believe, if you have anything in an IRA or similar account, you have to be 100% Roth or 100% Traditional.

We decided to elect Traditional early on figuring our earnings would be higher while working than in retirement.

The other consideration is if you want to leave money to heirs - IRAs are a taxable part of your estate, but I don't believe Roth ones are.

Quote from: ciao_yall on November 03, 2019, 12:06:05 PM

Quote from: AJ_Katz on November 03, 2019, 11:11:06 AM

Quote from: ciao_yall on November 03, 2019, 10:52:41 AM
If you are already traditional, remember that the only way to go to Roth is to convert all your current accounts. That means paying taxes on ALL the balances when you make the conversion.

Husband and I have a healthy balances in our traditionals - enough that the bath we would have to take on taxes now makes it pretty much unthinkable to convert to Roth accounts now.

Hmm...I hadn't thought about conversions.  I was only thinking about monthly contributions to my 403b, which provides the option to make the contribution either as Traditional and/or Roth.

I believe, if you have anything in an IRA or similar account, you have to be 100% Roth or 100% Traditional.

I am fairly sure this is not the case. For example at this page  (https://www.irs.gov/retirement-plans/traditional-and-roth-iras) the statement "The most you can contribute to all of your traditional and Roth IRAs is the smaller of" suggests you can simultaneously have both.

This page (https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts) suggests the same is true for traditional and Roth 403b.

QuoteI believe, if you have anything in an IRA or similar account, you have to be 100% Roth or 100% Traditional.

This is NOT true.  There is a limit to your total IRA (and 403/401) contributions, but you can contribute to both as long as the total is within the limit.

Here are some questions to consider for the retirement contribution Roth/traditional questions:

1.  Do you pay a state income tax now?  If so, you may be better off using a traditional 403, especially if you plan to move to a  state that does not charge a state income tax.  that way you are not paying state income tax on your Roth retirement contributions and if you move to a state with no income tax, you wont pay taxes on the distributions, either.

2.  Up to 85% of your social security distributions will be taxed as regular income if your retirement income is above a certain (rather low) limit.  However, roth distributions are not included in the calculation to determine if your social security benefits are taxed.  Ideally, if All of your income was from a roth account and social security, then the limit would not be breached, and your social security benefits would escape being taxed.

3.  A Roth 401/403 is not more accessible than a traditional  401/403.... "here does seem to be a benefit of having at least some funds in Roth since they allow zero-penalty early withdraw."  This is true if this is referring to an IRA, though.  (just wanted to be sure that no one is confusing the term 'Roth')

4.  Consider that distributions from traditional IRAs and 401/403 accounts will be taxed as regular/ordinary income.  However, much of the gains will be earned from investments, which would usually be taxed at capital gains rates.  Im not sure where to take the logic on this, but to the extent that you use up your contributions limits, saving/investing in a traditional investment brokerage account may have some slight advantages as that money has already been taxed and the earnings will be taxed at a lower rate, but that is probably an issue for later on.

5.  In equilibrium,  (if the tax rates are the same in retirement and while working), then it wont make any difference if you have a limited income.  The difference matters when the tax rates are different.  The question is really whether your tax rate will be higher or lower? 
In as much as social security will be taxed as income, and the traditional 401/403 and IRAs have Required Minimum Distribution (RMD) requirements (Roth accounts do not), then there is some question in my mind that people will actually be in a lower tax bracket.... and that is before the political risk that tax rates will not have to go up to deal with the past deficiet spending and everything else! 

For me, on this idea, I think that I have more ability to control my tax liability TODAY and will have much less ability to shield money from taxes. 

(One coworker retired at 70 with quite a nest egg.  His RMD  is more than he earned in the last years he worked.  HIS tax rate is NOT going to be lower!!

For what it is worth, I hope to be ABLE to retire at 60.  Im not sure I will be WILLING, but I want to be able.  I have been contributing significant amounts into retirement accounts for just about as long as I have worked.  When I started working, there was no ROTH option.  I am currently contributing 25K a year (19K plus the 6k over 50 catch up).  I am considering beginning conversions in my IRA accounts (from Traditional to Roth) and pay more taxes now.  My employer match must go in pretax, so I am still increasing my traditional 403b account. 

The final consideration is about future inheritances from parents (not spouses) and the proposed legislation.  Under the current law, if you inherit a retirement account, you can take it out over your expected life .  The new legislation proposals will change that to a 10 year max. So IF you are likely to inherit in retirement, you will have even more income expected to be taxed.

Good luck.  (and for what it is worth, Im fully funding my retirement with ROTH accounts, but i do not pay state income tax here).

In addition to clean's excellent points, a cute upside of Roth accounts is that they have the same nominal limits as traditional accounts. But $6,000 in a Roth account is worth more when you withdraw it than $6,000 in a traditional IRA, since the latter is pre-tax.

But, correct me if I'm wrong, it's not just a straight comparison of tax brackets before and after retirement. 

Contributions to my Traditional 403b are going to be the income that is at the top part of my tax bracket (32%) because any dollars earned over $84,200 is taxed at 32%, dollars earned between $39,475 to 84,200 is taxed at 22%, dollars earned between $9,700 and $39,475 are taxed 12%, and dollars earned up to $9,700 taxed 10%.  When I take retirement, dollars earned will again be taxed at different rates depending on total income. 

Taxes for Traditional:
Let's make a simple example and say I earn $85k now and at retirement earn the same monthly income from my Traditional 403.  Not all of my $85k income in retirement is going to be subjected to the 32% tax rate, $9,700 will be taxed at 10%, $29,775 taxed at 12%, $44,725 taxed at 22%, and $800 taxed at 32%.  The total amount of income tax paid on that money paid in retirement would be $14,385.

Taxes for Roth:
Again, let's say that I earn $85k now and receive the same amount in retirement.  Since taxes are paid at the time of contribution, and these dollars are at the top of my annual income, it would either be taxed at the 22 or 32% rate.  So, let's say all of my contributions were at the top rate.  That means that I would have paid 32% tax rate on the $85k, which is equal to $27,200.

@ clean -- I appreciate the idea on where to live for tax purposes. My partner and I will not have ties to our location and would be willing to move, especially to some place that has lower property taxes, those are killing us here.  We're also considering the idea of living on the road in an RV for a number of years, which would allow us to set up residence in one of the states without income tax.  I also appreciate the lack of certainty about future tax rates.  I presently do not stand to inherit anything of significance and am not currently able to meet the maximum contribution rate for the 403b ... at least not this year when I've only been able to contribute for a couple of months.  I am considering switching to Roth contributions for 2020, which is why I'm contemplating this issue at the moment.

First, I think that your tax brackets are wrong.

http://money.com/money/5456041/tax-brackets-2019/

1   10%   0 to $9,700           $0 to $19,400
2   12%   $9,701 to $39,475   $19,401 to $78,950
3   22%   $39,476 to $84,200   $78,951 to $168,400
4   24%   $84,201 to $160,725   $168,401 to $321,450
5   32%   $160,726 to $204,100   $321, 451 to $408,200
6   35%   $204,101 to $510,300   $408,201 to $612,350

Im not sure that my copy paste of a table will come out, but at 85k and single, your marginal tax rate is 24% (and only 799 is taxed at 24%)


Second issue is about taxes. These brackets are based on your taxable income, not your gross income. You get a standard deduction of about 12,000 to start with, so if you made 85K gross, then your taxable income would be no more than 73000.

IF you contributed to a Roth account you would pay a total of 11918 (no matter what you contributed because you pay taxes on the income when earned). 
To 73K taxable income:
$9,700 will be taxed at 10%, $29,775 taxed at 12%, $33,525 taxed at 22%

970+3573+7375= 11918

If you contributed the full allowance to the Traditional 403 (19000, which may not be easy on an 85K gross income) and are less than 50 years old, then your tax bill would be
$9,700 will be taxed at 10%, $29,775 taxed at 12%, $14525 taxed at 22%

970+3573+3196= 7739

A difference of 4180, but you would never pay taxes on any of the  Roth distributions, but you would pay income taxes on the full 19000 plus earnings when the Traditional contributions are withdrawn.

Let me ask the question in   a different way.  Assume that you contribute 50K a year in an account and pay taxes on the income that is deposited.  What are the taxes on that 50K?  On the other hand, consider that the money grew to $2 Million?  What are the taxes on the 2Mil?  would you rather pay taxes on 50K today or 2 Mil in 30 years (at whatever rates are then in effect?)

QuoteThat means that I would have paid 32% tax rate on the $85k, which is equal to $27,200.

Note that this is wrong because you are still being charged the rate for each bracket, not the marginal rate on the full amount, and not just because the 32% bracket applies to income over 160K

Simple question generated by the preceding discussion: I am currently maxing out on my annual 403b contributions -- $25,000 ($19,000 + $6,000 as someone over 50). Can I still contribute to my Roth IRA (which I set up decades ago and haven't made a contribution to in nearly that long)?

I got a late start with retirement savings but I also am considering some extra income with rentals or a part time side business.  Right now I sell items online and the beauty of it is that it does not feel like work.

Quote from: spork on November 04, 2019, 02:03:43 PM
Simple question generated by the preceding discussion: I am currently maxing out on my annual 403b contributions -- $25,000 ($19,000 + $6,000 as someone over 50). Can I still contribute to my Roth IRA (which I set up decades ago and haven't made a contribution to in nearly that long)?

Yes, you can contribute to your Roth IRA.  For 2019, $7,000 max for age 50 and up.

Contribution rules are separate from your 403b.

Quote from: clean on November 04, 2019, 01:15:22 PM

Let me ask the question in   a different way.  Assume that you contribute 50K a year in an account and pay taxes on the income that is deposited.  What are the taxes on that 50K?  On the other hand, consider that the money grew to $2 Million?  What are the taxes on the 2Mil?  would you rather pay taxes on 50K today or 2 Mil in 30 years (at whatever rates are then in effect?)

But in my present budget, I can either invest $14,400 per year as a Roth contribution or $18,000 as Traditional.  So, presumably by going Traditional, I am able to gain interest on an additional $3,600.  Neither is reaching the maximum allowed. 

QuoteSimple question generated by the preceding discussion: I am currently maxing out on my annual 403b contributions -- $25,000 ($19,000 + $6,000 as someone over 50). Can I still contribute to my Roth IRA (which I set up decades ago and haven't made a contribution to in nearly that long)?

the answer isnt a clear Yes, or No.  It is a function of your income and marital status.

https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019

IF you are single and make less than 122K, then you can contribute the full amount.  If married, you can contribute the full amount if your household earns less than 192K

Either way, if you make slightly more, you can contribute a lesser amount. If you make 'too much' then you can not contribute at all.  (however, there is a 'trick' called a 'backdoor IRA' where you make a non deductible IRA contribution and then immediately convert it to a roth.  I think that there are some additional record keeping issues with this, so I have not attempted it).

QuoteBut in my present budget, I can either invest $14,400 per year as a Roth contribution or $18,000 as Traditional.  So, presumably by going Traditional, I am able to gain interest on an additional $3,600.  Neither is reaching the maximum allowed.

Just making up some numbers...
Deposit 14400 a year for 30 years from age 40 to 70 and earn 8%.  You will amass $1,631,278 and owe no taxes and none of the money will count against social security for taxes there either.  No minimum distributions are required.  Anything left to spouse or children will pass tax free. (for the financial calculator:
n =30  i= 8  pv=0  pmt = -14400 FV = 1631278.24)

Deposit 18000 for 30 years from age 40 to 70 and earn 8%. You will amass 2,039,097.  Required minimum distribution at 70 1/2 will be about 74420  (see irs pub link below). Even if Tax Rates do NOT change, your tax bill on this will be about 12000 PLUS 85% of your social security would also be subject to taxation.
(for the financial calculator:n =30  i= 8  pv=0  pmt = -18000 FV = 2039097.8)

So while you would save an additional 400K, your tax bill from the RMD would be at least 12K PLUS the taxes on 85% of your social security benefit.

https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

Let's make another assumption. 
Assume that you will invest a little safer in retirement so you earn 5% and plan to distribute the money over a 25 year period.
From the Roth you could withdraw 115743 and pay NO Taxes on the withdrawls and likely none on your social security because only your social security check would be used to determine the taxable income.  Even IF you pay taxes on social security, it will not be at either the 24% or 32% bracket!!

For the traditional you could withdraw 144679.  However, IF taxes stay the same,
$9,700 will be taxed at 10%, $29,775 taxed at 12%, $44725 taxed at 22% , $60478 taxed at 24%  (Further, the bracket for the 32% tax rate is only 16 K over this amount, so much of your social security payment will be taxed at 32%!!)

970+3573+9839.5+14515=28897  (PLUS The taxes on your social Security!!)

So the first pass (before taxes on social security), you net (144679-28897 =) 115,782 - again, before you pay taxes on social security.


The bottom line IF TAXES STAY THE SAME, you would get just about the same amount either way in retirement, BUT with a traditional IRA/403b, you definately pay taxes on your social security benefits, so your after tax retirement income is LOWER! 
AND IF TAX RATES GO UP???? You are screwed even more  You will pay even more in taxes and have even less after taxes in retirement.

@ clean -- okay, I'm convinced!  So how did you end up getting all of your accounts converted to Roth?  We don't have the option for 401a Roth, which I assume is dependent upon the employer offering that option.  So, is it somehow possible to convert existing 401a to Roth in my situation.  Or what about my 403b investments, is it possible to convert those to Roth?

Your employer has to offer the Roth version for you to take advantage of this now.  IF you work for a state organization your employer may indeed offer a 403B Roth or a Roth version of a 457 plan.

If your employer does not offer them, then I would suggest that you contribute enough in the plan that they DO offer to get the full amount of the match, and then contribute $6000 to the Roth IRA. IF you are married, you can also contribute $6000 for your spouse as well.  As you indicated that you want to contribute a total of 14400, IF married, then you can get 12000 of that done with the Roth IRA.  IF not married, then you can still contribute $6K to the Roth.  I assume from your numbers indicate that your income is 85K, and often the match is 6%, so that is 5100.  SO IF you are single, you still have a bit more that you can contribute, so for anything that is left, perhaps consider a regular trading account.  You will have to pay taxes on any realized gains, but you wont have to pay taxes on any gains you do not realize, and you wont have to pay taxes on the principle in retirement.

Quote from: AJ_Katz on November 04, 2019, 03:15:54 PM
But in my present budget, I can either invest $14,400 per year as a Roth contribution or $18,000 as Traditional.  So, presumably by going Traditional, I am able to gain interest on an additional $3,600.  Neither is reaching the maximum allowed.

If you're not hitting any limits and tax rates are unchanged, then there's no difference between the two.

If you have an investment "I," a tax rate "t," a rate of return "r," and you invest for "n" years, you get:

Traditional: [I * (1 + r)^n] * (1 - t)
Roth: [I * (1 - t)] * (1 + r)^n

And because multiplication is commutative, these are equivalent.

About two weeks ago I moved half of my retirement account assets into bond funds, after a 28 percent return during calendar year 2019. I don't think today's market drop is a temporary blip.

Quote from: spork on February 24, 2020, 09:59:06 AM
I don't think today's market drop is a temporary blip.

Jack Bogle:  "Nobody knows nothing."

Per Boglehead philosophy, I have an asset allocation plan and I try to stay with it.

Well, when the market drops, time to buy stocks — on discount.

Quote from: Hegemony on February 24, 2020, 03:27:30 PM
Well, when the market drops, time to buy stocks — on discount.

Depends on when your retirement timeline is, your net assets, and what's in your portfolio. Today the FTSE index is down 2.5% since opening and Dow/S&P futures are down. The U.S. market is going to have another big drop today. I would not be surprised if we see a drop of 10-20% in the stock market for 2020 given the global slowdown in economic growth before COVID-19 ever made headlines. If you're 75 years old with all your investments in stocks then you will probably never recoup the lost value.

So . . . the S & P has lost more than 12% in six trading days. The media is fixated on COVID-19 as the cause, but I still think we're seeing a bubble pop because of a pre-virus economic slowdown. 

Quote from: spork on February 27, 2020, 04:50:15 AM
If you're 75 years old with all your investments in stocks then you will probably never recoup the lost value.

That seems pretty unlikely. Let's see if this is a short-term correction related to worries about how governments will respond to the virus vs. whether there really is something fundamental underlying it.

If countries in Europe start to close borders and/or flights between Europe and the US get canceled, that's when we'll see massive economic damage. I think there's a growing concern that this could happen, because politicians are responsive to people panicking -- especially in an election year. Plus, the US president is tweeting conspiracy theories and, coming at absolutely no surprise, nobody is reassured by having Pence in charge of the US response either.

While it's impossible to say what's causing market adjustments, it'd be one hell of a coincidence if this were not related to the spread in Europe.  Plus, we now have countries closing schools for no good reason... the economic damage coming from bad policy is probably going to cause more deaths than the virus.

In addition to the virus, (with news today of someone in California with no known ties to the illness, indicating that it has already spread to the US) I think that the strength of Bernie Sanders in the recent elections is not conducive to market confidence. 

Lots of paper losses have been felt, especially this week. I expect that Friday  (2/28) will have a big bounce as few will want to go into a weekend with the potential for more bad news from the SC elections and more days of potential news of the virus spread. 

IF you are a long term buyer, some of these prices are looking pretty good. However, be careful how you measure them!  Many use the P/E ratio to judge how 'expensive' a stock is. However, the E in that equation is now in great question!

Quote
If you're 75 years old with all your investments in stocks then you will probably never recoup the lost value.

IF you ARE 75 years old with all of your investments in stocks, then you have probably been ill advised.  IF, on the other hand, your 'investments' are in stocks, but you have 5 years of projected expenses in cash, then it is not likely that it matters much.  Alternatively, IF your 'investments' total a few million dollars, then even losing 10 or even 20% may not have much of a factor in your lifestyle. 

For what it is worth, I just adjusted my 403B contributions, increasing them so that I will invest more starting April 1 (as I missed the deadline to get more deducted 3/1).  I contribute the maximum I am allowed so this simply moves the contributions forward. 

Once again we are seeing a black swan event in the economy -- no one thought seriously about the possibility of the stock market and Treasury market crashing at the same time.

Looks like I'm going to be working for another few extra years now.
Assuming of course I survive the virus.

Quote from: downer on March 12, 2020, 10:13:44 AM
Looks like I'm going to be working for another few extra years now.
Assuming of course I survive the virus.

And . . . the Fed's stimulus attempt just tanked.

Be interesting if we keep moving into a liquidity crisis with an illiterate narcissist and boot-licking toadies at the helm.

Quote from: spork on March 12, 2020, 11:43:39 AM

Quote from: downer on March 12, 2020, 10:13:44 AM
Looks like I'm going to be working for another few extra years now.
Assuming of course I survive the virus.

And . . . the Fed's stimulus attempt just tanked.

Be interesting if we keep moving into a liquidity crisis with an illiterate narcissist and boot-licking toadies at the helm.

Is interesting the best word here? I'd call it a nightmare, except that I'm sitting on my couch eating almonds listening to Beethoven, while preparing all those online classes.

Quote from: downer on March 12, 2020, 12:27:43 PM

Quote from: spork on March 12, 2020, 11:43:39 AM

Quote from: downer on March 12, 2020, 10:13:44 AM
Looks like I'm going to be working for another few extra years now.
Assuming of course I survive the virus.

And . . . the Fed's stimulus attempt just tanked.

Be interesting if we keep moving into a liquidity crisis with an illiterate narcissist and boot-licking toadies at the helm.

Is interesting the best word here? I'd call it a nightmare, except that I'm sitting on my couch eating almonds listening to Beethoven, while preparing all those online classes.

ibid.

Except for the Beethoven. I'm trying to filter out Minecraft soundtracks, from my now-homebound progeny.

Oh, sweet, quiet campus. How I miss you.

As I mentioned upthread, five weeks ago I moved half of my retirement account assets from stock index funds to bond funds because I was worried about what to me looked like a global economic slowdown and possible recession. For example, Turkey's estimated economic growth for 2019 was zero, after its currency collapsed in 2018. The 2019 growth rate for the USA kept getting revised downward. It was obvious that growth was slowing in China before Covid-19 appeared. Etc.

But as of today I think we might now also be seeing in the stock markets an effect from margin calls on massively leveraged buys, which will lead to the collapse of the most heavily-indebted investment firms. But I have no data to back up this hunch.

Pigou? Dismalist? Any thoughts?

No worries. You did good.

No US government, ever again, will let any financial intermediary of any kind whatsoever, fail. No more Lehman Brothers.

[That's outside Dodd-Frank. :-)]

Best of luck to all.

Fed cuts its rate to zero and expands the money supply, and stock market futures tank. Again. Maybe the markets have finally figured out that a pathological narcissist as President is not good for the economy.

Alright folks, I need some points of input on what term to refinance my mortgage versus investing for retirement. 

My goals include retiring at 60 and I also do not foresee that my partner and I will stay in our current location to retire.  We could move in 5 years or maybe in 10-15.  Anyhow, we're approaching our 40's, so planning over the next 20 years right now. Currently, we have a 20 year mortgage, set to be paid off in 18 years.  I could refinance into a 15-year loan at 2.86% that would increase our payment by roughly $50/mo, thus decreasing the total cost of the mortgage by about $35k.  Sounds great....  except when you consider what the value of refinancing to a longer-term loan and investing that money instead.  Let's say that instead I refinanced to a 30-year loan at 3.38%, I could invest an additional $400/mo into my high stock portfolio that might get an inflation adjusted 5.5% return.  Doing that math for 15 years down the road of making lower payments and investing the difference, this choice could amount to a $40k difference in the investment.  However, once you take into account how much is paid in interest during those 15 years, the difference decreases to just $5.5k (but still in favor of longer term loan).  However, let's say we project the future value of that investment to when I am 60, compound interest wins....  increasing the benefit to a difference of about $60k (in today's dollars). 

So, in my scenario, investing more money earlier on always wins over being able to pay off the mortgage faster with a shorter term (which make sense just looking at the interest rate comparison -- 3.38% in mortgage vs. 5.5% for stocks).  BUT... I would really love to have our house paid off!  Despite that desire, I see that there could be a lost opportunity if I am not able to max out my contributions to the 403b and 457b.  Presently, it's a struggle just to max out the 403b and I have never invested so much that I was able to create the 457b (only allows pre-tax contributions).  Any advice on what other factors to consider? 

Quote from: AJ_Katz on June 04, 2020, 05:32:04 PM
Alright folks, I need some points of input on what term to refinance my mortgage versus investing for retirement. 

You didn't mention costs associated with re-financing. Unless you need to re-finance, it may make more sense just to pay extra on your monthly mortgage payment. An extra $50 a month can cut several years off mortgage for a modest home.

Paying down debt has a guaranteed return. Buying stocks/stock funds doesn't. Plus, there's an emotional component to consider. How will you feel knowing that your mortgage payments will last until you're 70-ish?

If you can handle an extra $50 a month in mortgage payments, you can pay an extra $50 a month on mortgage, start your 457 with $50 a month, or start funding a Roth IRA with $50 a month. Ten years ago, I'd have paid more on house. Today, I'd drop money in savings until I had enough to open a Roth IRA at Vanguard.

Quote from: Vkw10 on June 04, 2020, 06:53:52 PM
Paying down debt has a guaranteed return. Buying stocks/stock funds doesn't. Plus, there's an emotional component to consider. How will you feel knowing that your mortgage payments will last until you're 70-ish?

If you can handle an extra $50 a month in mortgage payments, you can pay an extra $50 a month on mortgage, start your 457 with $50 a month, or start funding a Roth IRA with $50 a month. Ten years ago, I'd have paid more on house. Today, I'd drop money in savings until I had enough to open a Roth IRA at Vanguard.

I agree with Vkw10.  While the math often appears to favor investments, there is a fallacy in the assumptions: you are not guaranteed any particular rate of return in stocks/bonds. Yes, the historical average is positive growth, but there are definitely long periods of low or negative returns.

Another thing to consider: our lives are not solely a cost-benefit analysis based on net-worth. The psychological benefits of being debt-free (my house is paid off!!!) are non-negligible.  I, personally, am glad that I chose to put my extra dollars into my mortgage early on. I now know that I have a place to live with the only expenses being property taxes (low in my state) and utilities.  That peace of mind is "priceless."

However, as Vkw10 notes, investing in a Roth IRA is also important. If you haven't done that, or if you do not have an emergency fund, I would put money toward either of those over paying additional dollars on the mortgage.

AJ_Katz, you don't say what rate your current mortgage has. The rule of thumb is that it only pays to refinance if you are going down at least one percentage point and staying in the house longterm, which might not happen. It doesn't sound as if you quite have that situation. I think you'd be better off paying down the current mortgage with extra payments. One thing to know is that the interest is not evenly distributed along the length of the mortgage. Most of it is front-weighted, so that in early years you are paying a lot of the interest, and as it comes to the final years, you are paying mostly the principal. So if you devote extra money to the principal in early years, you save a lot more in interest than if you devoted the same amount to the principal in the later years. 

So to my mind, you should devote some extra to the principal right now, but also follow Vkw10's wise words and fund your tax-advantaged accounts as fully as you can. That would be an IRA or a 403(b) or 401(k) and the like. That reduces your tax burden, which is an extra boost probably at least equal to the boost of saving interest on the mortgage. Plus that money will grow without being taxed, which is also advantageous. You can invest as prudently or as recklessly as you like. Nowadays people make fun of investors who stick to safe investments like CDs. But my mother had seen her family lose everything in the Depression, and she was very risk-averse. She never invested in anything but guaranteed-rate CDs in her whole life, but she amassed a tidy sum. If she had risked the stock market, she might have ended up even more affluent. But she was affluent enough for her taste, and she never had a sleepless night over her investments.

Hi everyone!  Some great suggestions here... 

Quote from: Vkw10 on June 04, 2020, 06:53:52 PM
You didn't mention costs associated with re-financing. Unless you need to re-finance, it may make more sense just to pay extra on your monthly mortgage payment. An extra $50 a month can cut several years off mortgage for a modest home.

Closing costs are already included in my estimates.  Refinancing from my current 20-year to a new 15-year would produce a total savings of $36k and pay off the loan 3 years sooner.  So if we only consider the mortgage cost, that option is a no-brainer.  Refinancing to a 30-year loan would not reduce the cost of our mortgage, but it would free up more of our present monthly income to increase investments. 

Quote from: Vkw10 on June 04, 2020, 06:53:52 PM
Paying down debt has a guaranteed return. Buying stocks/stock funds doesn't. Plus, there's an emotional component to consider. How will you feel knowing that your mortgage payments will last until you're 70-ish?

I likely won't be paying when I'm 70, even if I do refinance to a 30-year today. I would just be re-financing to the 30-year to increase investment ability in the next 10-15 years.  We'll either move before then to a new house and/or have more income to be able to pay off the mortgage more quickly at that time.  But what I won't be able to do is go back in time and make investments into retirement accounts that have annual caps, nor take advantage of the compound interest that an additional 15 years would provide.

Quote from: Vkw10 on June 04, 2020, 06:53:52 PM
If you can handle an extra $50 a month in mortgage payments, you can pay an extra $50 a month on mortgage, start your 457 with $50 a month, or start funding a Roth IRA with $50 a month. Ten years ago, I'd have paid more on house. Today, I'd drop money in savings until I had enough to open a Roth IRA at Vanguard.

Paying an extra $50 per month would result in approx. $5,000 in savings and pay off our house 1 year sooner.  Investing $50 per month that has a net interest rate of greater than 3.5% results in more value over the life of the mortgage, which does not include compound interest generated after the life of mortgage. 

Quote from: Vkw10 on June 04, 2020, 06:53:52 PM
...start your 457 with $50 a month, or start funding a Roth IRA with $50 a month. Ten years ago, I'd have paid more on house. Today, I'd drop money in savings until I had enough to open a Roth IRA at Vanguard.

Yep, I'm leaning the same way regarding the investment opportunity.  It would be different if the mortgage interest rates were higher, but with them being so low at the moment, it seems to make sense to get a long-term mortgage and invest the additional money instead.  This would also provide me with greater financial flexibility because if something happens that affects my finances, I could always decrease the amount that I am contributing to the investments.  Whereas if I've committed myself to a very high mortgage payment, a financial hardship would mean that I would need to refinance to get a lower payment, which, in some situations can be difficult (for example, someone loses their job). 

Quote from: arcturus on June 04, 2020, 07:30:09 PM
I agree with Vkw10.  While the math often appears to favor investments, there is a fallacy in the assumptions: you are not guaranteed any particular rate of return in stocks/bonds. Yes, the historical average is positive growth, but there are definitely long periods of low or negative returns.

I'm not sure if I'd call it "fallacy" in assumptions, however, they are assumptions nonetheless!  Because we have 20-25 years to retirement, my strategy is to invest in high risk stocks and not touch them as they ride the waves.  As we get closer, those can be transferred to lower risk options. 

Quote from: arcturus on June 04, 2020, 07:30:09 PM
Another thing to consider: our lives are not solely a cost-benefit analysis based on net-worth. The psychological benefits of being debt-free (my house is paid off!!!) are non-negligible.  I, personally, am glad that I chose to put my extra dollars into my mortgage early on. I now know that I have a place to live with the only expenses being property taxes (low in my state) and utilities.  That peace of mind is "priceless."

Yes, I think it is this element that persuades me to go for the shorter term loans.  It would be glorious to pay off the house in even 10-years... which we could do...  but I also wouldn't see my investment accounts get as large!

Quote from: arcturus on June 04, 2020, 07:30:09 PM
However, as Vkw10 notes, investing in a Roth IRA is also important. If you haven't done that, or if you do not have an emergency fund, I would put money toward either of those over paying additional dollars on the mortgage.

I have a 401a (pre-tax), 403b (Roth), but no separate Roth IRA.  For emergencies, we have savings to cover several months of expenses and credit cards as an option as well.  If more funds are needed, we could even take a loan from our 403b contributions, though that's certainly a last resort emergency option.

Quote from: Hegemony on June 04, 2020, 08:22:19 PM
AJ_Katz, you don't say what rate your current mortgage has. The rule of thumb is that it only pays to refinance if you are going down at least one percentage point and staying in the house longterm, which might not happen. It doesn't sound as if you quite have that situation. I think you'd be better off paying down the current mortgage with extra payments. One thing to know is that the interest is not evenly distributed along the length of the mortgage. Most of it is front-weighted, so that in early years you are paying a lot of the interest, and as it comes to the final years, you are paying mostly the principal. So if you devote extra money to the principal in early years, you save a lot more in interest than if you devoted the same amount to the principal in the later years. 

Current rate is 4.25 @ 20 yrs with 18 yrs to go, ReFi options I'm considering are 2.75% @ 10 yrs, 2.88% @ 15 yrs, and 3.85 @ 30 years.

Refinancing to the 10 year saves $53k, to the 15 year saves $36k, and in the first 15 years the 30 year saves $1,500k and over the life of the 30 year loan it costs $67k more.  All savings include closing costs etc.

We currently do not have room in our budget to make extra payments to the principal because I am using any extra money to try to max out our 403b Roth option.

Quote from: Hegemony on June 04, 2020, 08:22:19 PM
So to my mind, you should devote some extra to the principal right now, but also follow Vkw10's wise words and fund your tax-advantaged accounts as fully as you can. That would be an IRA or a 403(b) or 401(k) and the like. That reduces your tax burden, which is an extra boost probably at least equal to the boost of saving interest on the mortgage. Plus that money will grow without being taxed, which is also advantageous. You can invest as prudently or as recklessly as you like. Nowadays people make fun of investors who stick to safe investments like CDs. But my mother had seen her family lose everything in the Depression, and she was very risk-averse. She never invested in anything but guaranteed-rate CDs in her whole life, but she amassed a tidy sum. If she had risked the stock market, she might have ended up even more affluent. But she was affluent enough for her taste, and she never had a sleepless night over her investments.

Our goal is to achieve financial independence, where our investments income is sufficient to fund our current standard of living for the rest of our lives.  There are a lot of variables in this calculation, so although my rudimentary calculations suggest we are on track, my preference is to be more conservative and over-save.

Quote from: AJ_Katz on June 04, 2020, 08:47:08 PM

Yes, I think it is this element that persuades me to go for the shorter term loans.  It would be glorious to pay off the house in even 10-years... which we could do...  but I also wouldn't see my investment accounts get as large!

[...]

I have a 401a (pre-tax), 403b (Roth), but no separate Roth IRA.  For emergencies, we have savings to cover several months of expenses and credit cards as an option as well.  If more funds are needed, we could even take a loan from our 403b contributions, though that's certainly a last resort emergency option.

I am biased due to my own personal experiences. I paid off my mortgage at a time when the stock market was severely down. So I was able to buy stocks "on sale" and also be debt free. Had I put that money into the market, I would have been at a (significant!) net loss at that time, rather than being debt free and buying.

Regarding the Roth IRA: This is one of my financial regrets. I did not start to invest outside of my 403(b) contributions until significantly later in life. That means that I cannot retroactively invest that money in this tax-advantaged style of account, since those years of potential contributions are past. By my own projections, my RMDs from non-Roth 403(b)s etc will be significantly higher than my current salary. That's a nice problem to have, but it means that my tax liability will almost certainly be higher than my current tax rate. Thus, the more I can put into Roth retirement accounts the better (since I expect that my current tax rate will be lower than my future tax rate). My institution only recently offered a Roth 403(b) option, so I have just recently done this analysis for my own financial future. I think whether you contribute to an IRA or to your 403(b) may not make a difference if you are not yet maxing-out the Roth 403(b), but I also like having some of my retirement funds outside of the University system.

IF you had a paid off house, would you refinance it to invest in the stock market?

IF the answer is "yes" then do what you want.  There is no bad decision.  Your tolerance for risk is great and that is fine, and whatever comes will be a satisfactory (risk adjusted) answer.

IF you answer is 'no' then do what you can to pay off the house earlier.  The 10 year plan sounds pretty good, especially if you can still contribute some into your retirement accounts.

Concerning your rate discussion, you mentioned a 5.5% return for stocks. However, those involve a lot of risk!  The standard deviation of that 5.5% number is pretty high and there will be times that you could (and will) lose A Lot! The 3.x% on the mortgage is a risk free value.  So be sure that you are considering the risks!

Long ago, in the other forum, (think 2007-2008) I was advocating paying down the mortgage (which I did) and I was told I was crazy not to be borrowing MORE to invest in the market!  Remember what happened to the market shortly after that period?  IF I had followed that 'sage advice', I would have owed twice the value of my investments and also faced a huge mortgage! 

Again... Think back to 2018 between September and December.  My account values went down more than the value of my house.  I didnt worry about it because my house was paid off and my contributions were buying cheaper priced financial assets (they were on sale).  What happened just a few months ago?  From a Dow Jones perspective the market went from over 30K to just over 18K in weeks!  How would you feel IF you Could Have had a Paid OFF house, but instead invested in the market only to have all of those investments disappear (for how long) And STILL be staring at debt on the house?


You have to decide how you feel about debt.  Is debt on your house a bigger mental issue, or is it the Fear of Missing Out of a potential return in the market a bigger concern?  Understanding what bothers you more (which makes you lose more sleep) will help answer your questions.

I will end by telling you part of my story. (If you PM me, I ll give you a more detailed version).  The bottom line is that when I was young and handsome and about 40, I decided to pay off my house.  I was already debt free otherwise, and I sent all my extra money to the bank to pay down the mortgage.  Only a few years later (in less time than I had expected) I was debt free and I took what was a mortgage payment and put that into my 403 B (by then the Roth version was available).  I am still saving about $44K  a year by maxing out my 403B contributions, plus the required contributions and the university matching contributions (and being over 50 now the additional contribution limits kick in too).  My retirement accounts dropped over $200K in six weeks.  Fortunately, they have recovered almost all of that loss in the last few days.  However, if China issues flare, if N. Korea or Iran, or who knows what hot spot flares, or if the CV19 resumes its threat soon, that could disappear again.  However, as long as I can pay my taxes, I have my house!  That is a nice feeling!

I have always taught as many summer classes as I am allowed (or that make) but I live on less than my 9 month wage. The extra money that once paid down my mortgage now goes to pad my retirement accounts, or my investment accounts. 

If you are debt free, have an emergency fund, have a car replacement fund, and if you have children have begun to prepare for their college, then by all means it it time to pay off the house and boost your retirement savings.  At only 40, you are on track to retire at a reasonable age.  (IF you want to retire at 50, then you have some work to do. If you want to retire at 60, again, you may have to do more). 

For what it is worth, and in closing, I hope to be ABLE to retire in about 5 years.  I may not be WILLING, but to have a paid for house and the ability to retire will be a really good mental place to be!  Imagine not being dependent on your screwy administration to decide your teaching schedule!  Imagine choosing to do whatever you think that you want to do because money is no longer an issue!  (You can not do that IF you owe on your house).

For me, it comes down to how long you plan to stay in your house.  And your age. I didn't really start saving in earnest into my 403b and 457b until I was 55. That was late, but I've done a good job catching up. So... if you start your contributions (in earnest) after your house is paid off, you'll also be just fine. (Even though contributing a little more while you're young is the more standard recommended approach)

Over the life of your loan, you say you'll save $35K. But then you say you might move in 5 years. How much would you save in your refinance  then?

If you really won't move until 10-15 years, then the 15 year loan is a good deal. Or even the 10 year.
Last summer, we refinanced to a 12 year loan, at 2.99%, with $149 total closing costs. The rate for those 12 year "rapid refinances" now is 2.75% at our credit union. We also have set up a HELOC, in case we feel like we need a large chunk of money out. Those rates are also fantastically low. Those usually cost nothing to set up, and offer a reservoir of low interest cash that's easy to pay down on your own schedule.

Do what you can to max your tax advantaged accounts, but I'm risk averse, and I would not put any "extra" into the market now. The prices are still too over-inflated for my taste. If the market goes 'on sale' again for a more extended period,  I might change my mind. I haven't changed my monthly contribution since the onset of Covid.

There's quite a bit of detailed discussion along these lines on the Mr. Money Mustache forums, if you are not familiar with the boards over there.

Quote from: monarda on June 05, 2020, 08:27:37 AM
Over the life of your loan, you say you'll save $35K. But then you say you might move in 5 years. How much would you save in your refinance  then?

Refinancing will cost us $1,893, but we will receive a $1,483 credit from the lender == $410 net cost to refinance
Total interest paid on new 15 year loan at 2.875% will be approx. $23,300
Total interest paid in the existing 20 year loan over the coming 5 years if we do not refinance is approx. $42,150

So, over 5 the next five years, if we refinance into the 15 year loan, we would save $18,440.

Quote from: monarda on June 05, 2020, 08:27:37 AM
Do what you can to max your tax advantaged accounts, but I'm risk averse, and I would not put any "extra" into the market now. The prices are still too over-inflated for my taste. If the market goes 'on sale' again for a more extended period,  I might change my mind. I haven't changed my monthly contribution since the onset of Covid.

There's quite a bit of detailed discussion along these lines on the Mr. Money Mustache forums, if you are not familiar with the boards over there.

I think that your recommendation aligns with my own thoughts on this decision, that I don't want to compromise my ability to max out my tax advantaged Roth 403b, which is what would happen if I refinanced into the 10 year loan.  By going with the lower payment, it also provides greater flexibility in managing our monthly income because if we have an unexpected expense, I could always reduce my contributions to the 403b to manage the expense (not using it as an emergency fund strategy, but using that to recoup my emergency fund if we need to use it).  However, refinancing into the longer-term loan and putting more into retirement accounts might not be necessary if we're already saving enough to meet our early retirement goal.   

I am familiar with the MMM forums.  I tried to create an account and they apparently have it locked so new accounts can't be created because of a problem with too many fake accounts.  Nevertheless, the existing information and resources has some value.  For example, I found this nice FIRE calculator  (http://"https://www.firecalc.com/")that has provided some indication about the amount that I am contributing into retirement and whether it may be enough to meet my goal to have financial independence at 60.  I've also previously found information and resources from Get Rich Slowly (http://"https://www.getrichslowly.org/") to be helpful.  But there are a lot of variables in planning for early retirement, so I'm back to work on crunching my numbers. 

Quote from: AJ_Katz on June 06, 2020, 11:26:55 AM

Quote from: monarda on June 05, 2020, 08:27:37 AM
Over the life of your loan, you say you'll save $35K. But then you say you might move in 5 years. How much would you save in your refinance  then?

Refinancing will cost us $1,893, but we will receive a $1,483 credit from the lender == $410 net cost to refinance
Total interest paid on new 15 year loan at 2.875% will be approx. $23,300
Total interest paid in the existing 20 year loan over the coming 5 years if we do not refinance is approx. $42,150

So, over 5 the next five years, if we refinance into the 15 year loan, we would save $18,440.

I would go for the 15 year loan, then. 
Do ask your bank if you can also set up a HELOC for no cost at the same time. You don't have to use it. But they're nice to have. Then you might not need to mess around with your 403b contributions, in case of need of funds.

Quote from: monarda on June 06, 2020, 07:47:27 PM

Quote from: AJ_Katz on June 06, 2020, 11:26:55 AM

Quote from: monarda on June 05, 2020, 08:27:37 AM
Over the life of your loan, you say you'll save $35K. But then you say you might move in 5 years. How much would you save in your refinance  then?

Refinancing will cost us $1,893, but we will receive a $1,483 credit from the lender == $410 net cost to refinance
Total interest paid on new 15 year loan at 2.875% will be approx. $23,300
Total interest paid in the existing 20 year loan over the coming 5 years if we do not refinance is approx. $42,150

So, over 5 the next five years, if we refinance into the 15 year loan, we would save $18,440.

I would go for the 15 year loan, then. 
Do ask your bank if you can also set up a HELOC for no cost at the same time. You don't have to use it. But they're nice to have. Then you might not need to mess around with your 403b contributions, in case of need of funds.

I read about HELOCs when we were selling and buying a new house a couple of years ago....  I heard a lot of negatives about them (sorry, too long ago for me to recall), so have not gone down that route further.  That said, in an emergency situation, having a line of credit like that could be valuable and would likely be better than some other options.

Along those lines of emergency funding though....  have you heard of Health Savings Accounts?  I just learned about them and it's blown my mind...  https://www.youtube.com/watch?v=B05OtAHXuJI

From what I understand so far, you can make tax advantaged contributions to the account and withdraw tax-free at anytime to pay for out-of-pocket medical costs.  The amounts in the account roll-over and if you don't spend them by the time you're retirement age, you can use them without tax for other expenses.  Also, you can use these accounts to "go back in time" and reimburse yourself for a past out-of-pocket medical expense.  My university just started offering the HSA for high-deductible health insurance policy holders, so definitely need to take advantage of this!

AJ_Katz, are you familiar with the Bogleheads fora?  Informative, helpful communities on Personal Investments, Personal Finance, and Personal Consumer Issues.  Named after Jack Bogle, Vanguard founder.

https://www.bogleheads.org/forum/viewforum.php?f=1

If you post your investment/finance questions there, you'll likely get prompt responses.  The community includes some academics.  Mortgages and HSAs are often discussed.  TIAA Traditional comes up every so often, and much more.

They have a google search function that yields relevant Bogleheads posts.

Quote from: AJ_Katz on June 07, 2020, 08:35:18 AM

Quote from: monarda on June 06, 2020, 07:47:27 PM
I would go for the 15 year loan, then. 
Do ask your bank if you can also set up a HELOC for no cost at the same time. You don't have to use it. But they're nice to have. Then you might not need to mess around with your 403b contributions, in case of need of funds.

I read about HELOCs when we were selling and buying a new house a couple of years ago....  I heard a lot of negatives about them (sorry, too long ago for me to recall), so have not gone down that route further.  That said, in an emergency situation, having a line of credit like that could be valuable and would likely be better than some other options.

Along those lines of emergency funding though....  have you heard of Health Savings Accounts?  I just learned about them and it's blown my mind...  https://www.youtube.com/watch?v=B05OtAHXuJI

From what I understand so far, you can make tax advantaged contributions to the account and withdraw tax-free at anytime to pay for out-of-pocket medical costs.  The amounts in the account roll-over and if you don't spend them by the time you're retirement age, you can use them without tax for other expenses.  Also, you can use these accounts to "go back in time" and reimburse yourself for a past out-of-pocket medical expense.  My university just started offering the HSA for high-deductible health insurance policy holders, so definitely need to take advantage of this!

Yes, I have an HSA. Your understandings about them are correct. You can roll them over. (As opposed to an FSA, which you can't)
I don't really understand FSAs.

Our university has only been offering HDHP with HSA options just for the past few years. I've had one for two years. The neat thing is that my plan fills the HSA with $750 per year, and I can add (through pretax payroll deduction) up to ~$4000 annually on top of that (not sure of the exact amount, I'm not sure I will be able to look it up before the editing window on posts ends, but I know that I contribute $300 per month, and I wasn't quite at the max). My premium is only $35 per month. It's really great if you don't go to the doctor much.  Beyond the first ~$2000 in the account which must be kept in cash, I can invest in a mutual fund - I've chosen a Vanguard target date retirement fund. And everything else you said makes it great. Accessible, tax free medical OOP costs.  Since I'm older than 59.5,  all my IRAs are accessible at this point, too.  I've only used my HSA.

We used our HELOC to buy solar panels last fall. The balance is still on a 1.99% promotional rate (since it's still the first year). We might use it to buy our next car a few years from now. It's just so easy to have it all set up and ready to go.

I plan to use the HELOC as well as 0% credit card balance transfer promotions (which are typically actually 2% per year, or 3% for 18 months) in case of emergency expenses beyond the cash I have on hand (which isn't as much as some people's emergency funds).

Or if we want to buy another rental property, we can use our HELOC for that.

The point of an FSA is for those of us who know we'll use our health insurance this year and will still use all the pretax FSA to fill the gaps.  There's seldom an ability to rollover the money when our medical bills including glasses, dental work, and copays average more than the couple thousand we can put in the FSA.

Taking the high-deductible medical plan is bad idea for those of us who regularly use our health insurance.

Quote from: Cheerful on June 07, 2020, 03:44:30 PM
AJ_Katz, are you familiar with the Bogleheads fora?  Informative, helpful communities on Personal Investments, Personal Finance, and Personal Consumer Issues.  Named after Jack Bogle, Vanguard founder.

https://www.bogleheads.org/forum/viewforum.php?f=1

If you post your investment/finance questions there, you'll likely get prompt responses.  The community includes some academics.  Mortgages and HSAs are often discussed.  TIAA Traditional comes up every so often, and much more.

They have a google search function that yields relevant Bogleheads posts.

Ooo..  no, I had not seen bogleheads forum.  A lot of the topics look interesting.  There's even one topic in alignment with my original question "pay off house or invest?"   Thank you!

Mortgage questions come up frequently there, AJ_Katz.  Click on "Board Index" at top left of link I posted and you'll find the other two main fora:  Personal Finance and Personal Consumer Issues.  Enjoy and good luck!

The thing that bothers me about this kind of thread, found on just about every financial forum, is that folks making posts on these threads often see it as a black and white issue, either you pay off your mortgage, or you are mortgaged for as long as possible.  There's plenty of gray area middle ground for your comfort zone.  It's certainly a good mental exercise to read through these threads while you're defining your attitude toward debt and risk. On the MMM forums, there's a long one "Don't pay off your mortgage club". Search with the text  "don't pay off"  or "mortgage pay off" you'll see  the variety of opinions.

The 15 year loan (with no extra prepayments) is in that middle ground

That's why I said it depends on your age (or the number of years until you plan to retire). The closer you are to your retirement date, the better it is (in general) to be debt-free.

And clean's initial point,  whether you'd refinance to invest in the market if you'd have a paid off house really is a simple way to define your attitude.

The people posting on these financial forums are all about more more more more more more.
Rarely if ever is the concept of enough brought up.

Quote from: polly_mer on June 07, 2020, 06:50:40 PM
Taking the high-deductible medical plan is bad idea for those of us who regularly use our health insurance.

Absolutely!  And taking a low-deductible medical plan is bad for those us who rarely use it too.  So, the HSA (when available) is a good option to try to offset unexpected heavy out-of-pocket costs.

What investments will be safest when collateralized loan obligations collapse?

"when collateralized loan obligations collapse?"

Which particular type?  So many things are collateralized... Student loans and home loans are for sure.
The 2008/9 'Great Recession' was exacerbated by the CLO issues of mortgages.  In part, the demand for CLO products meant that there was a great search for mortgages and in order to make mortgages, almost anyone qualified, and the resulting housing booms in resort cities like Vegas and Miami lead to the subsequent collapse of those markets. 

Federal student loans are insured by the federal government, though private ones are not insured, but still have protections against bankruptcy. 

For definition purposes, here is how a CLO works.  The 'simple' kind may have 3 main parties  (banks/borrowers, the company that bundles and repackages the loans, and the people/parties/institutions that buy the rebundled assets) .  A bank makes a student loan for instance. These loans are then bundled together. The bundle is then purchased by a 'Wall Street company' (WSC).  The WSC then takes that bundle and sells it to investors. SO let's say that this bundle is $10M. Some investors buy just the first part, say the payments for the first $3M of principle.  These investors get all of the principle and interest for the first $3M.  The other investors dont get any payments until the first traunch is completely paid off.  Then the payments start on the second $3M traunch, the third one not getting paid until the other 2 have been paid off.  This traunch would take the most risk in this set up any defaults would be born by this group as the first 2 get all the payments until after $6M in face value is paid out.

Who would want this?  The A traunch investor is looking for shorter term, current income (like a car insurance company).  The other groups may be retirement accounts/pension plans/life insurers. They have money today but need an income stream later to pay out to beneficiaries later.

So how would the CLO market collapse? 
These instruments are sold to investors (or institutions like insurance companies or retirement plans).  Would market conditions change so that this is a risk of investing?
IS the worry that the payments to the underlying assets (the student loans or mortgages) will stop?  (Because those particular assets are backed by assets that are supported by assets like the Government guarantee or the house)

IF we are worried that people, en masse,  will stop making payments on their houses, then we already know the fallout.  Look to 2008/2009.

However, Im not too sure that is going to be a problem, Especially IF we do have "a 'V' Shaped recovery".  Only if we move into another long recession, a jobless recovery, or things get worse will these issues really develop.

(Id be more concerned with the future tax implications of the bailouts we made in March, and the potential inflation from the Fed's actions to support the economy.)

Anyway, this is likely too much typing to ask, What specifically concerns you?

If the concern is that, for instance, federally insured student loan payments are deferred, I dont think that will cause any problems the government payment guarantee will kick in and the government will pay as promised, so the investor is protected.

I have two specific concerns:

First, the huge share of the economy composed of financial services, much of which consists of exotic and opaque (in my opinion) debt-based derivative instruments.

Second, the underlying creditworthiness of such instruments and the firms that trade in them.

For example, if I look at the consolidated balance sheet of Wells Fargo (https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/annual-reports/2019-annual-report.pdf) (on page 123), I see about half of its total assets -- roughly $950 billion -- described as loans, with another $410 billion in debt securities. A law professor at Berkeley says at least $38 billion of this is in the form of CLOs (https://www.theatlantic.com/magazine/archive/2020/07/coronavirus-banks-collapse/612247/). Ok, $38 billion is a small chunk of ~ $1.3 trillion. But all these financial firms are wired into each other -- they trade in each other's instruments, have each other's debts listed as assets on their own balance sheets, etc. The main point of The Atlantic article is that to a large degree the CLOs are based on corporate debt from companies that were already in serious financial trouble before the pandemic. In other words, the collateral the instruments are based on and the ratings are crap. We know from 2007-2008 what all this can lead to.

Slightly related note: I managed to visit Turkey in mid-2018, when its currency value had collapsed by about 40 percent. The country's estimated economic growth for 2019 is zero. Economic performance like this in emerging markets, the reported slowing down of China's economy, and Trump's dumbass handling of foreign trade looked like an incipient global economic downturn. So I moved half my retirement assets from equity to bond funds on February 3 of this year. And now we have the economic effects of the pandemic to deal with. Retailers that were already having problems, with a lot of debt, seem to be the first firms to be going bankrupt. My guess is that this debt represents a small share of CLOs. But what's next?

I remember reading (maybe written by someone on the fora) a statement about how pre-2008 the economy was addicted to cheap individual credit (home mortgages), and since 2008 it's been addicted to cheap corporate credit.

QuoteWhat investments will be safest when collateralized loan obligations collapse?

With the additional information, I think that we have already seen the playbook.  What performed best after 2008/2009?

Banks are (hopefully) in a better situation than they were 12 years ago. They undergo stress tests and have more of their own money in the game as a result of the higher capital requirements.  As long as the government and Fed are willing to bail them out, (as the Fed can print as much money as they need, they are always able to... the value of that money (ie inflation issues) is another issue).

The good news is that while the Great Recession had some long lasting problems, none were necessarily permanent.  Investments recovered.  Most housing markets recovered ( and more) .

My own thinking on the issue leads to a first pass answer of residential real estate as a solution.  IF paid for, then the cash flow from the rental will be inflation protected as the land lord can raise rents annually or so to keep up with inflation.  However, I would worry about the financial situation of the state and county or city that it is located.  IF they have to raise money, they will raise property taxes.  If there are no jobs (high unemployment in the area) then it is harder to rent the houses for a market rent (and collect it !) . 

Paid for, at least eliminates the risk that the tenants default will lead to the landlord's default.  However, IF there WERE inflation, then it would have been better to have borrowed the money as the money repaid would have a lower value than the money borrowed.   

another important caveat is whether one really wants to be a landlord?  Do you want a new career as a land baron/slum lord/ property manager in retirement?  Do you want to keep track of rent payments and deal with maintenance issues in your Golden Years? 

Still, I have a friend that has 8 rental houses.  She has a property manager for the rent and other issues, but when it is repair time, she does as many things as she can to save money.  (They property manager doesnt exactly economize on finding contractors to do the work... Off topic, but I recall her saying that her property manager's best price to repaint the inside of a house was $8000.  I lent her my Wagner Power Roller and she did it herself over a week.  It took longer than a professional crew but was no less quality a job, especially given the price range/neighborhood of the house).   So hiring a manager is a partial solution, but you will pay for that service in more ways than one!! 
Anyway, with 8 houses, there is enough cash flow to keep the mortgages paid and provide her enough to support her frugal lifestyle.  Once the mortgages are paid off, even more cash flow will come her way.

Perhaps the pros and cons of rental properties would be called for.

The bottom line answer to the question at hand, I think is to review the results of the 2008/2009 period and see what worked best and see if those outcomes will or will not come again.  (It is different now in a lot of ways!)

Quote from: monarda on June 08, 2020, 08:40:52 AM
The thing that bothers me about this kind of thread, found on just about every financial forum, is that folks making posts on these threads often see it as a black and white issue, either you pay off your mortgage, or you are mortgaged for as long as possible.  There's plenty of gray area middle ground for your comfort zone.  It's certainly a good mental exercise to read through these threads while you're defining your attitude toward debt and risk. On the MMM forums, there's a long one "Don't pay off your mortgage club". Search with the text  "don't pay off"  or "mortgage pay off" you'll see  the variety of opinions.

This isn't unreasonable: for optimization questions like this, you often end up with corner solutions. E.g. if you have a credit card that has a 10% APY and one that has a 15% APY, the optimal thing to do is to pay off the 15% card first (if you can rule out late and missed payment fees). People may prefer mixing for psychological reasons, but that's not what financial forums are generally set up for. If people want to do what feels good, they can just go with their gut. Usually, forums like this are very much about optimization and squeezing out an extra percentage point in returns -- because over 30 years, that can make a substantial difference in your assets.

Quote
The people posting on these financial forums are all about more more more more more more.
Rarely if ever is the concept of enough brought up.

Some people enjoy optimizing, while others need to do it to retire comfortably. Personally, I don't really get the concept of "enough" for finances, because more money lets me re-allocate my time or expand the things I can do.

Suppose I had an extra million dollars in investments that I didn't need. I could draw down an additional $40,000 per year. Great: that's a couple small grant applications I don't have to write. Maybe I want to eat healthier, and an extra $10,000 per year let's me hire someone to come to my apartment twice a week and prepare fresh food for me. An extra $50,000/year lets me organize a workshop and do whatever I want, without having to report back to a funding agency. An extra $100,000/year means I can spend my summer months working out of a Four Seasons hotel. Or I could set up a summer residency program to connect the field's leading junior scholars.

None of these things are by any stretch necessary, but all of them would make my life more pleasant or interesting. Some would probably be a good contribution to my field of research, too. And if you gave me an extra million a year, I'm sure I could figure out something to do with that, too. Finding things to spend money on is generally pretty easy.

Quote from: clean on June 14, 2020, 10:37:26 AM

QuoteWhat investments will be safest when collateralized loan obligations collapse?

With the additional information, I think that we have already seen the playbook.  What performed best after 2008/2009?

Banks are (hopefully) in a better situation than they were 12 years ago. They undergo stress tests and have more of their own money in the game as a result of the higher capital requirements.  As long as the government and Fed are willing to bail them out, (as the Fed can print as much money as they need, they are always able to... the value of that money (ie inflation issues) is another issue).

The good news is that while the Great Recession had some long lasting problems, none were necessarily permanent.  Investments recovered.  Most housing markets recovered ( and more) .

My own thinking on the issue leads to a first pass answer of residential real estate as a solution.  IF paid for, then the cash flow from the rental will be inflation protected as the land lord can raise rents annually or so to keep up with inflation.  However, I would worry about the financial situation of the state and county or city that it is located.  IF they have to raise money, they will raise property taxes.  If there are no jobs (high unemployment in the area) then it is harder to rent the houses for a market rent (and collect it !) . 

Paid for, at least eliminates the risk that the tenants default will lead to the landlord's default.  However, IF there WERE inflation, then it would have been better to have borrowed the money as the money repaid would have a lower value than the money borrowed.   

[. . . ]

The real estate example reminds me of a couple of my in-laws -- starry-eyed immigrant siblings who purchased a 3-unit apartment building at the height of the real estate market in 2006. One had a fantasy of life on easy street as a landlord occupying one of the three units and the rent on the other two paying the mortgage. The other sibling was the one with the savings and credit rating required by the lender(s). The latter sibling didn't exercise good judgment over the former's desires, they got suckered into a set of mortgages that equated to 100% adjustable-rate financing, and the building lost a third of its value in the 2008 recession. The latter sibling ended up spending $100K on a house she doesn't live in and that will only start building equity when the now-refinanced mortgage is paid off in twenty years. By then she could be dead.

Is this going to be a problem as well?

   https://www.forbes.com/sites/edwardsiedle/2020/06/13/dol-throws-401k-investors-to-the-wolves/

Or is it more of an upper-level fund management issue?

M.

Unless I'm misreading this, the new regulation just allows private equity funds to be offered as part of 401k plans. Much like you can already put money in those funds through a traditional brokerage account, your employer's plan manager could include such funds. Unless you decide to invest in them, this shouldn't change your risk or your fees.

QuoteIs this going to be a problem as well?

   https://www.forbes.com/sites/edwardsiedle/2020/06/13/dol-throws-401k-investors-to-the-wolves/

Or is it more of an upper-level fund management issue?

I dont think that it is an exaggeration to say that the typical 401k participant is not a sophisticated investor.  I think that they could be easily swayed to move some of their retirement investments/savings toward these accounts.  The article, as I recall, indicated that the fees and risk vs return issues are not in favor of the average investor, but 'the wolves' that run the funds.  (The wolves get the profits and sheep take the risks and the losses).  But there is a 'shit ton' (a metric unit) of money in retirement accounts so those that are pushing to make these investments available to 401k participants are looking for a small percentage of it. 

So, I dont see it being a problem to a well informed populace, but I dont think that the average 401k participant is well informed and would understand the investments that would be involved in these plans. 

Frankly, I thought that someone had to be a 'Accredited Investor'   to be able to invest in such things, but that seems not to be the case.
"(In the United States, to be considered an accredited investor, one must have a net worth of at least $1,000,000, excluding the value of one's primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount ...") 

I wont be putting my money in such funds. 

There are private equity ETFs even -- so the average person with a non-retirement investment account can already do some of these investments. They're not my cup of tea (I do index investing only), but they can have a place in a portfolio for some investors.

Some people have 401(k) balances in the 7-digits and even for people with less, they may have more of their savings in traditional brokerage accounts. It may then be advisable to have the PE fund in a tax-advantaged account and hold index funds in a taxable account. The law doesn't have to ban everything that isn't perfectly suited for the average or the least-informed investor.

Almost more importantly, though, I really don't like investment restrictions to "accredited investors" as a policy. Yes, some investments are complex and there's an argument to be made that they shouldn't be actively marketed to small investors. But we're getting to a place where the average investor is de facto barred from investing in the next Google. That undermines market credibility, making it appear like a rigged insider game, and can also impede the functioning of markets: it reduces how much capital is available to boost new companies that could significantly change how we do business and how we live.

It's worth keeping in mind that if everyone puts their money in index funds, index funds stop working. They're sort-of parasitic in that they don't actually provide information about the relative value of companies. They just allow investors with no information to easily benefit from long-term market trends. That's great (and also why I do it), but that's not actually the purpose of the stock market. That is primarily to provide real-time information about the expected future revenue/value of companies, which index funds simply don't do. Neither do any of the "values funds" that ostensibly promote people's ideological values... those profit from a misunderstanding of how stock prices are determined, as people incorrectly think less "demand" for the stock will drive down the price.