Posted: February 24th, 2011 | Author: Joe | Filed under: Real Estate, Retirement, spending | Tags: Auto loans, Car loans, childcare, college tuition, Housing, Mortgages, Retirement, spending, Student Loans | No Comments »
I came across this article on Yahoo! finance that details the 5 things that consume 50% of your lifetime earnings and thought I’d share it with my readers.
It’s kind of a catchy headline, right? I know anytime I see something about spending 50% of my income, I tend to take notice. But it’s more or less the big ticket items you’d expect. Here’s the list, and what I think about each. Feel free to add your thoughts in a comment.
1. House.
This makes sense since it’s ultimately what led to the collapse of the subprime housing market and implosion of the all those risky mortgages. Too many people simply bought too much house, and could no longer delay the inevitable with ever cheaper credit.
How much is too much?
Experts recommend no more than a third of your annual income should be spent on your housing payments. It’s important to keep in mind that this includes school and property taxes, which are often taken out of your monthly payment. You should also include homeowner’s insurance and upkeep and maintenance costs. An easy way to get a general idea of how much this should be is to assume 2-3% of the home cost. It also pays to shop around for the best mortgage before you start looking at houses.
photo by asianjournalusa.
2. Car Payments.
The fact that a person’s home is a large chunk of their income makes a lot of sense, but too many people spend just as much on their car. Sometimes, they even spend more! In fact, according to the article, most people can “comfortably afford” to spend 1/3rd of their income on car payments – no wonder some many are so deep in debt!
As with buying a home, a car has many additional costs that people often forget – car insurance, maintenance, gas, parking and other transportation costs. Buying a used car that’s 1-3 years old with low mileage is a much better choice.
photo by A. Belani
3. Children
It will cost $220,000 to raise a child from diapers to age 18.
If this statistic is true, I’m in a lot of trouble! 
I have 3 children, so that’s pretty much my retirement we’re talking about. My feeling on this is that raising a child costs more than it should. For example, there are so many little things I see parents buy for their infants that are simply non-sensical. A baby (who isn’t even walking yet) doesn’t need a pair of $40 designer shoes!
My wife and I get many hand-me-downs and second hand baby items – strollers, clothes, toys, etc..- that keeps the cost down, and the kids don’t know or care. Obvisouly there is a point at which the child becomes aware that they don’t have the latest gizmo, gadget or toy but that’s where we step in as parents and teach them that being materialistic isn’t so good anyway. BEsides, kids today just aren’t tought the value of a dollar anymore.
Also, I see a lot of stories and know a few personally, of parents who mortgage everything – including their house, several times – to make sure that junior never goes without. i understand the desire of a parent to ensure the best possible everything for their kids, but many time this backfires and they simply end up spending more than they should.
photo by seanmcgrath
4. Education
My parents helped out a little with my tuition to community college, but I paid most of my way myself. But parents today seem to think a free ride to college is a right these days. At the same time, the cost of higher education just keeps going higher , even outpacing inflation incomes and seemingly everything but the U.S. deficit.
How much is too much?
The recommendation is that you don’t borrow more than you can pay back in 10 years. For example, if your dream job pays a median income of $50,000, don’t borrow more than $50,000 in student loans. The problem I see with this is that most kids have no idea what they want to do when they graduate, and even the ones who do aren’t likely to have an idea of how much the profession would pay. But this is where the parents come in.
photo by m00by
5. Retirement
I think is is one of those cases of wishful thinking. Most people probably should spend as much, if not more, on their retirement savings as they do on their car and student loan payments but I think for most people, retirement savings isn’t on the top 10 list of expenses, much less the top 5.
photo by quadriman
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Posted: February 23rd, 2011 | Author: Joe | Filed under: Investing, Retirement, Saving | Tags: 401(k), IRA, Retirement, ROTH IRA, Saving | 1 Comment »
I switched jobs last year and along with a better position and bigger salary came a host of benefit changes. One of these changes was my 401(k) plan.
Regular readers know that I’ve been a steady contributor to my 401(k) at every job I’ve had since I started work professionally about 12 years ago.
Consistent contributions (even through employer match cut-backs and the recent Great Recession) an good plans have allowed me to watch my savings cross the 6-figure mark at the end of last year. But I realize now how lucky I have been to have had such good options in my 401(k) plans to date.
I realize this because I’ve hit a problem with my current plan, and I bet I’m not alone.
The problem
The problem is this: The investment options in my current employer 401k plan stink.
The plan is administered through a well known insurance company with a catchy jingle and fees that top the range of what is considered average for the funds.
I’m a big believer in low fees. Research has shown that most portfolios have a greater chance of outperforming their peers and the benchmarks averages when they invest in lower cost mutual funds or ETFs. It’s just common sense that when all other things are equal, the fund that charges less with leave you with more money in the end.
Of course, some funds out perform their peers and have higher fees. That’s OK too, but the key is that you’re getting a demonstrated track record of out performance for that extra cost.
My problem is that few of the funds in my 401(k) out perform their peers, but still have higher fees.
So, I have a few options and if you’re in the same situation, you do too!
Retirement plan options
The 3 basic retirement plans available to me in my career are:
- Traditional IRA
- Roth IRA
- Employer’s (lousy) 401(k) plan
Each one has benefits and drawbacks, but the Traditional IRA and Roth IRA are slightly different beasts given that the Roth contributions are after tax, while the tradition are pre tax.
I don’t want to roll over my 401(k) to a Roth, because I don’t want to pay the taxes on the conversion. I’m considering opening up a Roth in addition to pre-tax retirement plans in the future, but the Roth is not being considered by me at this time.
That leaves the Traditional IRA and the crappy 401(k).
Rolling over my 401(k) to a traditional IRA seemed liked a no brainer – I would be able to invest in a wider range of funds, stocks and bonds – but then I realized this startling discrepancy:
The contribution limit for a traditional IRA is only $5,000!
By contrast, the limit on a company sponsored 401(k) plan is a whopping $16,500!
With all the talk of financial reform in Washington D.C. over the past two years, and all the discussion about ending the 401(k) plan in favor of another social security style plan, I wish Congress would just make the contribution limit of the IRA as large as the 401(k)!
The total solution
Well, this left me with the choice of saving less in my IRA but paying less fees, or paying higher fees and potentially saving more by using my 401(k).
After much pondering, and poking around the Internet (to no avail), my solution is this…
I will rollover my old 401(k) to a new IRA. I will make the maximum contributions per year ($5,000) to that plan and any remainder I will contribute to the least offensive options in my 401(k).
For example, I’m used to contributing about $7,000 a year to retirement. I will be splitting up that amount like so:
- $5,000 to funds in my IRA
- $2,000 to funds in my 401(k)
I call this the “total solution” because it reminds me to consider the total holding in these two accounts as my portfolio – I have 1 unified portfolio instead of 2 portfolios.
The trick is determining which holding to keep in my 401(k) considering that an future increase in contributions will need to go into those funds. I’m tempted to hold my bond allocations in my 401(k). That way I will automatically increase my bond exposure over time as my contributions increase and I get closer to retirement age.
It’s not an ideal solution by far, but it’s the best I could come up with and I couldn’t find a better one. If you have any suggestions, I would gladly welcome them!
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Posted: February 17th, 2011 | Author: Joe | Filed under: Investing | Tags: Investing, IRA, IRA Conversion, Retirement, ROTH IRA, Tips | No Comments »
This is a
guest post from Debbie Dragon. Debbie is a writer for RothIRA.com, a site which strives to educate it’s readers on the pros and cons of
Roth IRA products.
While 2010 is already wrapped up, there are still financial considerations you need to make about the previous year in the near future when it comes to Roth IRAs. In 2010, the conversion rules have changed regarding converted Traditional IRA accounts and Roth IRAs. The government made it effective in 2010 that account holders could spread the income tax payments owed on the conversion over the following two years – 2011 and 2012.
This rule change would allow you to keep half of the income tax amount you owe still in the account, earning compound interest until the tax deadline for the following year. It is currently too late to take advantage of that tax incentive if you have not already made the conversion. But there is still good news for those wanting to convert to a Roth IRA in 2011.
Making the Change
In the past, there were strict limitations on who could make the conversion from a Traditional IRA account to a Roth IRA based on income. For now those laws have changed and are beneficial to anyone. Since you can still convert tax deductible investments as permitted by the government, making the switch in 2011 is a good investment strategy.
To make the conversion, you will have to pay the taxes you will owe later now but once the funds are converted, you will not have to pay income taxes on the amount you save ever again. For those who can afford to pay the income tax due out of there own funds rather than their investment funds, the conversion will be that much more beneficial.
When You Shouldn’t Switch
There are certain circumstances that may not prove to be beneficial to convert to a Roth IRA. First, if you know for sure that the rate of your income taxes will be lower in your retirement years than where they stand today, making the conversion does not really benefit you financially.
Secondly, if you don’t have the cash necessary to pay the income taxes you will owe from making the conversion, it is not wise to use your investment funds as a payment source as you will be required to pay a penalty on those funds as well as the tax.
Retirement Power
The most beneficial aspect of converting from a Traditional IRA account to a Roth IRA in 2011 is the investment power you are using towards your retirement years. Retiring with tax-free funds available later in life is a strategic move anyone can accomplish. For those who do not qualify for a Roth IRA account because of the income limitations, consider opening a Traditional IRA account and converting to a Roth IRA in the future.
Choosing your investments wisely for an easier, more comfortable retirement is part of your overall good financial health. If you have not taking the steps to plan for a financially healthy retirement, it is never too late to start investing, though it is always best to being when you are young. Not all financial strategies meet the needs of every future retiree but it is worth your time and money to explore what works for you. The Roth IRA account definitely has many advantages and it may be the ideal starting point for your retirement investment planning.
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Posted: January 5th, 2011 | Author: Joe | Filed under: Debt, Retirement | Tags: government, news, Retirement, Saving, social security, welfare state | 1 Comment »
What happens when the welfare state begins to collapse, and the government can no longer print its way out of fiscal irresponsibility? Well, in the case of five European nations, you start confiscating the citizens’ savings!
Apparently, the politicians in Hungary, Poland, Bulgaria, Ireland and France view private savings accounts as their own personal piggy banks. I can’t begin to express how disgusting (and frightening) I think this is.
In Hungry, the government is resulting to extortion to gain access to over $14 billion in individual retirement savings:
“The most striking example is Hungary, where last month the government made the citizens an offer they could not refuse. They could either remit their individual retirement savings to the state, or lose the right to the basic state pension (but still have an obligation to pay contributions for it). “
In Bulgaria, the government seized $60 million in private accounts. The Polish government wants to transfer a “1/3 of future contributions from individual retirement accounts to thestate-run social security system.” Ireland and France are a bit less dramatic in that they have thusfar only raided the public pension funds to bail out the rest of the government, and not yet confiscated any current savings plans.
Beside the outrage of outright theft of private property (i.e. retirement savings) of the Bulgarian, Hungarian and Polish people, even the Irish and French governments raid on public pension plans must lead its citizenry to wonder if there is even any point in saving or planning for the future.
Once the people lose hope and the ability to plan their own destiny, the system collapses.
Could this happen in the United States?
It probably won’t reach the level of depravity of the Hungarian and Bulgarian governments, but the current administration and the 111th Congress racked up record deficits and created the largest new entitlement (heathcare) in generations.. And some have already hinted at back door methods of the kind of confiscation seen in Bulgarian (see how George Miller, Teresa Ghilarducci and the End of Your 401k. ) . And the Social Security “trust fund” has long since been raided, resulting in the system we have today – people paying into the program are essentially supporting those collecting from it today.
I would argue that this is no different than forcing people to pay into the system even though they are not going to benefit from it when they retire. This is likely true for younger generations of worker, though no public official would dare to state this.
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