MiB Smarter Money » Debt

How to Make a Flawless Retirement Plan?

Hank — Sat, 10 Jul 2010 00:14:13 +0000

With an increasing number of Americans struggling to clear off their debts and filing for bankruptcy, it has become more important than ever to chalk out a financial plan which can smoothly sail you out of the rough patches after your retirement.

Many people start planning for their retirement long before they actually retire. Yet, there are still a large number making some pretty big retirement mistakes. Read on to know if you are one of them.

Lack of proper planning: You need to have a good idea of how much you actually need to save up for your retirement. For this, you can start with a few basic steps by creating a rough estimate of your current expenses and dividing them into categories viz. fixed expenses such as home payment, utilities, taxes etc. and discretionary expenses which can cover groceries, clothing, entertainment and the like.
Based on the expenses that you know will significantly increase or decrease over the years, it becomes much easier now to estimate how much you would need for retirement lifestyle changes.
Making use of Social Security at the wrong time: Social Security benefits form a part of most people’s retirement plan resources. If you are uncertain about whether to start receiving Social Security benefits at early retirement (age 62) or waiting until full retirement (ages 65-67 or later), you can seek advice of a trusted financial advisor. He can also help you determine when to make withdrawals from other accounts.
Not saving enough money: According to a recent government report, an average U.S. household saves $60,000 for retirement. Many observers report that Americans do not save enough and that retirement savings are especially inadequate. This is said to be the case for households and workers, as well as business owners and the self-employed. Only half the work force is covered by an employer-sponsored pension plan and this share has not changed for almost three decades. Over 9 million self-employed individuals are without retirement plan coverage.
Premature use of money: Many employees making use of workplace retirement plan, cash out their 401(k) balances when they change jobs. Since borrowing and hardship withdrawals are allowed under the rules, people frequently tap into their balances. This greatly hampers the long term growth of their assets. However, rolling your 401(k) balances over to new employers or IRAs, during a job change, can be beneficial to you and help you save up for your post-retirement life.
Investment risks: Investing too much in stocks can be a risky affair. According to a report completed in 2008, most investors approaching retirement had more than 80 percent of their account balances in the wrong asset allocation. Here again, a financial advisor can help you in taking the right decision after assessing market trends so that you do not suffer any market loss.

Today it has become more important than ever to plan carefully for retirement. If you can avoid the planning mistakes, you can easily increase the long term effectiveness of your retirement savings. Make sure that you are on the right track to ensure a happy and peaceful retired life.

What Does It Mean When The Federal Reserve Cuts Interest Rates?

hank — Sun, 03 Feb 2008 08:01:39 +0000

Photo by: gerrietWe hear all this talk about how the “Feds are lowing rates again today” on the news a lot recently, and that we’re falling into a recession. But what does all that mean? How does that help me in the situation I’m in? What do I do now as far as investing?Well, to put it simply, when the feds lower federal fund rate, it reduces what it costs banks to borrow money from them. When the banks costs go down, banks typically trim rates for consumers and business borrowers. That encourages businesses to expand and households to spend. Homeowners with adjustable mortgages and consumers with credit cards linked to the prime rate often see their rates move down, which is good.

Why is The Fed pushing rates down hard and fast?

Because the government is seeing a danger that troubles them. The housing market could create a downward spiral that would do widespread damage to consumers and businesses. The main problem comes from several things that get started when home prices start the fall. When home prices fall, it inherently fosters large numbers of foreclosures. That throws a bigger supply of houses onto the market, which in turn push prices down further.

Another problem happens when falling home prices force banks and other lenders to take losses on housing-related investments. They certainly don’t want that because it takes a bite out of their capital and reduces the amount of money they have to lend. That in turn makes it harder for home buyers to borrow, and lending banks to lend. If this housing problem continued for an extended period of time, the damage to banks and consumers could become so profound that the economy plunges into a recession the likes of which we don’t want to see.

How is the government planning on fixing this?

Well, they’ve hacked the interest rate 1.25% over the last 11 days. With this drop in interest rates, combined with a stimulus package from Congress, the hope is that they can stave off the looming recession, which isn’t fun. The goal of doing this isn’t pretty in the short term, but it can significantly limit the damage and keep things from falling into the ocean.

So do I want the Feds to cut interest rates or not?

Well, if you are a homeowners with an adjustable-rate mortgages, you like it. If you have an adjustable rate home equity loans, you like it. If you are a homeowners with a good credit rating and can refinance at lower rates, you like it. If you are a business with a loan tied to the prime Fed rate, you like it. However, if you are investing in CD tied to the prime rate, you DON’T like it. If you have a money market account, which is likely tied to that rate at which banks can borrow, you DON’T like it. If you have a savings account at a bank, you DON’T like it.

Overall there are a lot of pieces to the pie, and a lot of people complain about the setup and what the government is doing, but that is what people do, they disagree a lot. You don’t have a lot of choice in the matter so make the best of it and take advantage of the lower priced stocks, and mutual funds you find when the economy is slow.

What Do I Do During a Bear Market? What Do I Invest In?

hank — Wed, 30 Jan 2008 08:19:09 +0000

Photo by: artct45If you’re between 20-40 years old, don’t do anything. Stay where you’re at, markets fluxuate. That is their nature and that should have been something you learned before you got it. If this is your first time hearing about it, don’t worry and more importantly, don’t run. Let the traders panic. That is their job. They’re pounding down 15 cups a coffee per day and enjoy the stress. Let them deal with it. You’re paying a person that the traders are relaying information to in your mutual funds. You’re 3rd tier on that – sit back and enjoy the cheap stocks you’re getting into.If you haven’t sold, you haven’t lost. Stick to your guns and don’t get scared out of the market, recessions happen. But they always come back. As long as you still have a job, you shouldn’t be worrying. If you HAVE lost your job, you should probably not be reading this blog, try this one.

Buy technology stocks and fund. They’ve done really well this year, and think about it. We’re in the technology era; people WANT technology and are willing to pay for it still. As long as you’ve got a good time horizon for investing (10+ years left till retirement) I think you’ve got a good shot to get in at the bottom floor during the recession.

There are special recession ETFs geared towards recession. Look at medical, people always need to go to the doctor. Look at Claymore Securities.

Ultimately, my recommendation is to keep your money headed towards your investments as long as you’ve got a job. Keep your portfolio on track, this is the time when many people are getting out of the game, and as long as you’ve got time on your side, a perfect time for you to capitalize on the low prices being tossed around.

Do you have any secrets you’d like to share? Anything you’ve done in the past? Advice for the future?

Do You Still Clip Coupons? Do You Ever Get Any Of Them Online?

hank — Tue, 22 Jan 2008 08:13:01 +0000

Photo by: ninjapoodlesI grew up clipping every single food coupon from every single paper we could find. We’d ping our neighbors and relatives if we saw something worth clipping that didn’t have a limit on the number of coupons. We often times walk into the grocery store with a coupon for every item. My mom was very good at frugal shopping. I actually remember, back on my first job as a paperboy, my mother even proposed I put a note in all the newspapers if there were good deals to call me back; I had to draw the line somewhere though, cause Mom would be all for it, to my embarrassment!

So it has been pretty engraved in the minds of folks for years, and seemed to have fallen off in the 90′s but rumor has it coupons are making a comeback. A recent study by comScore, an Internet information provider that tracks consumer behavior, found that 53% of consumers say they regularly visit brand Web sites to find promotions. I admit, I still have a tendency to look for the food deals when I see them – Where have I looked?

Coupons.com is the big dog I see the most ads about – I think it has the best advertising and I’m sure the domain name doesn’t hurt. It has a ton of grocery printable coupons for major household brands such as Johnson & Johnson, Unilever, Pepsi, General Mills, and Kraft. You can view available savings by category or by brand, print area-specific coupons by entering your zip code, and get an estimate of how much money they will save you.

I’ve stopped at CouponMountain.com a time or 2 specifically because they don’t require registration or a lengthy sign-up process in order to access coupons. They have coupons for all the big stores (Walmart, Toys R US, Home Depot). They also have discount codes for airfares, hotel reservations, car rentals, and online dating. And if you’re a fan of a specific store, you can subscribe for email notifications whenever special offers from that store are available.

CurrentCodes.com has a lot of well-known online stores like Barnes and Noble, Staples, and Amazon.com have a place within their shopping cart for a “coupon code” that gives a percent or dollar amount off your purchase. If you don’t know the code, you don’t get the discount, so find a coupon. A lot of times you can find these secret discount codes and coupon codes listed on in a google search, but the problem with these sites is that they’re usually personal homepages and they don’t keep the lists up to date very often.

Dealcatcher.com has a feature called SundaySaver that compiles the weekly sales circulars and Sunday ads into a similar webpage. Just enter your state to see all of the stores that had ads that week—click on a store to see the deal. You won’t find quite as many categories of coupons on Dealcatcher as on Coupons.com. Nonetheless, it has been known to cross my screen a time or two.

FatWallet.com is a big one, but it has a lot of ads, and is difficult for me to navigate. I don’t dig on it very much because of that. I like a site that has everything I want right out in the open. Check it out, but don’t spend too much time figuring it out.

All in all, I’ve got to admit, I visit them less the more my salary goes up, and time goes down; but they are very good places to find deals to live the frugal way if you’ve got the time!

Should I Hire An Accountant Or Do My Taxes On My Own?

hank — Thu, 17 Jan 2008 08:13:44 +0000

Photo by: herzogbrMy old man used to tell me, “Hank, you want to find yourself a CPA that will walk you RIGHT UP TO the door of jail, but not let you go in.” I think that’s pretty good advice – take what you can, when you can (legally) because the Government is not going to point it out if you missed it.
Tax season is quickly coming upon us, and there are a handful of things to ask yourself when drilling through this question, right? Well, not really. I think it is a pretty basic formula. It is almost like a job application that you’re hiring for. Look around, ask your friends, and keep an ear to the ground. CPA’s are NOT that expensive. I have a guy that charges $100-$150 to sort through my pages and pages of stuff I get sent in the mail, and magically comes out on the other end with a refund.

But Hank, how do you know he isn’t screwing you over and taking your money?

Well, I’m not stupid, I know the GENERAL amount that I should be getting (or paying) based on my salary, my house, and what I’ve got invested elsewhere – So maybe he is not getting all the break and discounts I can account for, but that is partially on my part. The facts are these:

– He is taking $100-$150 to do the job.
- He wants to keep me as a customer, so he wants to make me happy.
- If he makes me happy, I refer him to others.
- If I refer him to others, he makes more money.
- If he makes more money off me, he’ll continue to try to find tax breaks and benefits for me to keep ME happy so I refer more people.

That is the general outline, and how do I find this said person? Like I said above, I interviewed 5-10 potential candidates and decided if he was a good fit. I LIKE tax deductions and I will take them when I can – I want to get the most bang for my buck and put it to good use.

I used a fairly straightforward approach to interviewing the first round of CPAs that you’re welcome to use:

1. How long have you been doing this?
2. How many customers do you have?
3. Do you like your job? (If he likes numbers, he/she’ll certainly show it)
4. How long do you see yourself continuing to do this? (You want someone that will be around for a while to keep you up to date)
5. Do you email? (I LOVE email and do all 95% of ALL my communication through it)
6. How tightly do you watch the numbers? Is it just you that will see my tax return? (Usually having 2 or 3 sets of eyes helps)
7. Do I have to pay you a yearly fee to do this, or is it one time?
8. Do you give consultations through the year if I request? At a charge? (my guy doesn’t charge for these)

Those were the first basic questions I asked just to get a feel for the person I was hiring. Most of the time the H&R Block tax people aren’t that in depth with the questions; most of the people I’ve talked to (including the one I interviewed) said that the person they used from H&R Block was a 23 year old fresh out of school that had book smart, but not so much tax smart; which isn’t conducive to question #1.

Furthermore, do I even want to bother dealing with the mess? I took American Government 10+ years ago in high school and we filled out our w-2, w-4, 1099, and filed through the mail – but do I remember how to do that? Do I WANT to remember how to do it? Not really. How about stack on top of that the 100ish new laws that went into effect this year, do you know those laws? Do they apply to you? Do you want to keep up on those for $100? Is your time worth that? Not mine.

Everyone is different though, maybe $100 to you is a big deal and you want to try to tackle it yourself online at TurboTax, TaxCut, or somewhere else, and that’s fine too. But my rebuttal to that is: what if you do something wrong? The only person to blame is yourself, whereas for $100 you can have someone to dump the case on when Uncle Sam comes knocking at your door because you claimed 0 and have 12 kids.

If you own a business, there’s 1,000,000 or so more reasons to pay someone to do your taxes. You’re no longer talking about just YOUR salary or just YOUR deductions, YOUR rent, and YOUR student loans. You’re taking on everything a business owner needs to address, and everything a business owner stands to lose if you’re caught in a tax nightmare like an audit. A professional CPA, for $100-$200 could certainly be a shield between a hellacious tax audit by yourself at night, and having someone to put the burden on and you just standby and give info as needed. In my opinion, that alone is worth the $150ish bucks I pay for it.

Why Is It So Taboo To Talk About Salary And Compensation?

hank — Tue, 15 Jan 2008 09:13:54 +0000

Photo by: takashy

How is it that when we can readily see public sector and professional athletes salaries on the web and not bat an eye at it. I’m sure they discuss these things over caviar all the time and it isn’t that big of a deal; but why does middle class America think it is so taboo to discuss it? I admit it, I never ask friends and family what they make. If they make it readily available for me, I’ll certainly listen, but I have never asked about it. Is it a status thing?

It seems even more ridiculous when you can find and know the price of everything with the advent of the internet. I can find out prices of cars, prices of houses, prices of groceries, tax information, and daycare prices if I really want to online. We have a pretty good idea of how much someone is worth by these things, but still feel it is some top secret information to readily discuss the last piece of that puzzle.

Do I disclose my salary on this site? No. But could you find it out if you wanted to? Totally. Look at my balance sheet, my net worth, and see how much goes in and out. Feel free, it’s out there to find, but I still find myself reluctant, even through anonymity to release that piece of information.

I think it may fall in the way we were raised and the environment we grew up in. I think a big reason may be that some of us are always trying to “keep up with the Joneses” and don’t want to give in that those said Joneses really are kicking our butts in the income category.

Photo by: takashy

I think another big piece of it MAY be the fact that the athletes, public officials, and some celebrities salaries are posted (including the fact that Paris Hilton gets paid MILLIONS to attend parties). We realize that we’re up against some pretty big $$$ and that our measly salaries are nothing compared to those apples…

But why the mindset in the first place? I never knew what my parents made growing up. Eating hotdogs and macaroni and cheese 4 times a week though gave me a pretty good indication; but they never actually let on anything. I’d suspect that my dad (mom stayed home to take care of us) brought in no more than 20k through the 80′s and left in the 90s and I’d bet when my mom went back to work she was barely pulling in 10-12k in her first few years, nearly to 25k now, but I never knew.

Does the lower class discuss salaries openly? In tight knit families I bet they do. If you’re all working to pay for the roof over your head, I’m sure it is readily available information at the dinner table. Heck, it would have to be.

Photo by: takashy

I’m not rich, nor am I poor, but I can’t tell you the salary of any of my family members, nor do I feel I should ask. Yes, I am certainly interested; but not enough to pry and ask. I would actually probably feel pretty uncomfortable about it. I remember growing up when you’re in your teens, people older than you always asked me though, assuming that I made minimum wage, I’d be happy to pipe up that I was making WELL above the minimum wage of $4.75 and that I was paid very well at $5.15.

So how about worldwide though – Is it just an American thing? Like I said earlier, I’m even confining it to American middle-class right now – prove me wrong if you can, I’m happy to listen. Half Sigma started a post last year about it and what he makes and it has generated a pretty good list so far. These people seem willing to share, anonymously, but still willing.

Is there ever a GOOD time to ask what someone makes? Maybe a rephrase, is there ever an appropriate time to ask what someone makes? I ran across a post my MyOpenWallet and they said:

“The question isn’t one that people are used to asking, I think. It seems rude, and your motivation for asking could be questionable. In many cases, maybe people would rather not know. But more often, I’m sure people are dying to know, although they would never dream of just coming out and saying it: “How much money do you make?”

And I agree – it DOES seem rude, but is that a thing that is a mindset? Would you care as much if you knew EVERYONES salary? if you knew the salary your boss, his boss, your co-workers, your family, your friends – would it numb the subject any? I’d think it would certainly change things up, but in different facets. The newly found rich people would be hit up by charities more, the poorer people wouldn’t have to try to live up the Joneses mentality, and likely would be richer by NOT having to live up to something they weren’t.

Ultimately it sounds like the issue isn’t going anywhere anytime soon. I’m sure I’m not going to be passing on any new developments on that front because to me, it is rude, at least at this point in my life… Convince me differently?

Should I Take Out A Reverse Mortgage On My House?

hank — Tue, 08 Jan 2008 13:00:38 +0000

My brother mentioned setting my mother up with a reverse mortgage over the holiday break, so I thought I would do some research on what is was and if it was a good idea. I had heard of it before and I have a basic understanding of it, but I figured there had to be some sort of catch, as there always is, and there certainly are…

“The HECM FHA insured reverse mortgage can be used by senior homeowners age 62 and older to convert the equity in their home into monthly streams of income and/or a line of credit to be repaid when they no longer occupy the home. The loan, commonly known as HECM, is funded by a lending institution such as a mortgage lender, bank, credit union or savings and loan association. To assist the homeowner in making an informed decision of whether this program meets their needs, they are required to receive consumer education and counseling by a HUD-approved HECM counselor“

1. You need to be under the 62 year old age limit.
2. You need to own your property outright.
3. The house you’re reverse mortgaging needs to be your primary residence.
4. Needs to be a single family home, a 1-4 unit home, a manufactured home, or leased land; ( this just means that when they take your equity in your house out from under you, they need to have a good house to steal, who wants to steal a dump?
5. Reverse mortgage fees can be high, although the fees are often rolled into the loan and not paid upfront. A reverse mortgage can cost thousands more than a conventional mortgage.
6. It’s important to calculate the cost of a reverse mortgage against what you would gain, because once you enter a reverse mortgage agreement, the mortgage company essentially OWNS your home.
7. Reverse mortgages are often seen as a last resort if the homeowner needs cash and there are no other options. (Take this one the most seriously! Not only are you getting rid of the possible last piece of ground a person may own, but you’re betting their home on it.
8. What if you outlive your reverse-mortgage? I couldn’t find anything on this, but it is a valid point. What if you USE you last resort, and then you outlive it? I’d assume the bank then owns your house and kicks you out to go live elsewhere; which isn’t fun at 85 I bet.
9. To reduce their risk, lenders generally limit reverse mortgage loans to amounts that are below their estimate of the property’s full value; meaning that you’re going to get a lesser amount than your house is worth in the first place FURTHERING the idea that this should be a last resort.

Andrew Linden from Australia thinks they should be BANNED.

?Associate professor of economics at the University of Western Sydney Steve Keen, author of Debt Watch, calls them ”the most dangerous ‘innovation’ around in finance” and says any decline in house prices will see lenders and investors bearing significant risk of possible losses.

“I want them abolished. [They represent] a systemic danger to the banking system. [With reverse mortgages] the banks are building in an expectation of continued asset price inflation for the next 25 years,” Keen says.”

Can it work? Yea, I suppose it can. It sounds like most of the people don’t even qualify for them in the first place. Some people just don’t find themselves in the right position to act on it in the first place after drudging through the pre-reqs. Bottom line as with any investment, RESEARCH your options. If it IS your last option, REALIZE that it is, and take the proper steps. Bring along a trusted friend or family member to the consultation. Most of us look at the reverse mortgage as a detriment to society and squeezing of our senior citizens, but really the lenders are just targeting another audience. It may not be right for everyone, but to the select few that it is right for, the lenders have a right to advertise to them.

If you’re reading this blog and under the age of 50, well, you’re probably on the right path anyway if you’ve got a plan, at least educating yourself to get a better understanding of what is to come so you won’t make more bad decisions. It is likely we won’t have to worry about that for ourselves, but if we have parents or loved ones that ARE in that situation, at least you’ll be able to answer/help them answer many of the questions that come up in the lending process. Keep your eyes peeled and guard up and decide for yourself if it is a good decision. Prepared financial decisions are usually the best kind to make…

How Do I Plan To Reach My Investing Goals For Retirement?

hank — Sun, 23 Dec 2007 13:00:50 +0000

Photo by: emdot

Only 0 days 5 hours 2 minutes left until Hanks Holiday Handout drawing!

To make my goal of having my net worth be $1,000,000USD by 2020 I need to have a plan laid out. Yes it will change through the years, My wife and I will get raises; we won’t get the return we’re shooting for with investments in some of the years, but as a base goal if we take our current principal of $75,000 and continue to invest $21,500 per year for the next 13 and that will put us just over the 1MIL mark. That first MIL is the hardest, Pinyo lays it out here.

Where do I find $21,500 per year to invest? We’re currently contributing 10% of each our salaries for about $16,000 per year to our 401k plans, then add in $4,000 each for our ROTH IRA accounts and we’re well over the limit there. We’re planning on bumps in the road, so that’s why I’m giving the $21,500 number. There are a lot of calculations that need to taken into account, but that is the same with any investment plan. At 10% return with those calculations we’re looking at just under 840k, and at 12% that puts us over the 1MIL mark.

We could have a year where we can’t pay contributions to either our 401k or ROTH, but on the same note, there could be years where we’d contribute MORE to those accounts, For instance, we’re planning on trying to bump the 401k contributions up to 15% in 2008 and that would be $24,000 in itself; add in the ROTH IRA contributions and we’re looking at $32,000 invested per year and in 13 years, that will be worth 1.33MIL.

Numbers are numbers – sticking to the path of just getting money in is the key. In 13 years I’ll still be nowhere near retirement, but the first million is always the hardest to make, after that, it is quite ridiculous how fast it grows. In 35 years on this same $21,500 per year at 10% return we’re looking at 8.5MIL. Which is dreaming, and a lot can happen in 35 years, but there is no time like the present to start planning on it!

Time, as usual, is the key piece of this financial pie; variables are always tossed in to make it interesting. As long as we’re putting in the $21,500 we’ll be on a good pace. I’m sure there will be other investment opportunities, more job promotions, more raises, maybe more kids, but staying on this basic path is the key to our specific financial goal. What’s your path?

More Bad Decisions I’ve Made Investing

hank — Mon, 10 Dec 2007 16:48:19 +0000

I wrote last month about my bad decisions I’ve made investing, and the more I think about it, the more I have. So let’s pick up where I left off:

7. “Investing in Life Insurance” is officially a bad decision. I’ve basically had a savings account with my Universal Life Policy for the past 5 years that I’m CERTAIN could have turned better than 0% over 5 years. I’m working on canceling the policy and taking the $ out and putting it towards a different investment, more on this to come later…

8. My Edward Jones ROTH IRA has been taking a few extra $ from me by sticking me in “B” shares – I’ve turned off the juice to that account since then. I was just trying to get BACK in the ROTH IRA game after bad investing decision #4 (undercutting my ROTH by taking a loan).

9. I don’t know if ‘d call this a bad decision necessarily, but in the realm of my blog, spending $12,000+ on a month long trip to Australia for my wife and I probably wasn’t the best financial decision, but it was a lot of fun. I wouldn’t recommend it if you’re looking to save money; but we had a few extra $ when we sold our condo in 2005; which leads to bad investment decision #10.

10. Sold my condo after living in it for only 13 months. Capital gains ate up about $10,000 worth of $ I could have put in my pocket. It was small, and we had the second kid on the way so we needed more space, but really we could have stayed there for another year to maximize our profits.

11. Spent $1000-ish dollars on an invention I had in about 2002; I’ll tell you the name of the 2 companies I went through if you contact me. I don’t care to slander them publicly but if you’re truly interested, I’m more than willing to let you know. They’re easy to find, search google for “invention help” and you’re sure to see them both in the top 5. It’s funny, I had a paper route when I was 12 and I can still remember ads during the 4am paper route saying (verbatim, no kidding I still remember this): “…even if you only have an idea for improving an existing product, and don’t know where to go with it, you’ll want this FREE inventors kit. It shows you how your idea can be packaged and submitted to industry through a databank…” blah blah blah… bad idea.
Here is my one blurb on inventions (well, for now anyway). If you’ve got a good invention idea, BUILD it, make a prototype, write the schematics, do the work, put in the time, don’t tell anyone you can’t trust 100% (THIS INCLUDES THE ONLINE INVENTION “HELP” SITES). Blogging has been able to help out on that front this millenium. There are a few decent Inventor blogs out there nowadays, check out InventorSpot, NewScientist, or InventBlog.

I’m sure there’ll be follies on my way and I’ll be sure to post them here for everyone to take a gander at, but hopefully you don’t fall for the same… Fool me once, shame on me. Fool everyone else that I warned about the traps I’ve fallen in, well, shame on you…

Should I Use My 401k To Pay Off My Mortgage?

hank — Thu, 29 Nov 2007 17:23:55 +0000

I got an email from a reader yesterday that asked:

“Hello Hank, I’ve been with my company for almost 20 years and I have over $1,000,000 in my 401k. I am 45 years old and I have a house mortgage still of $295,000 for another 13 years paying about $2000 per month. Would it make sense to get out of my mortgage and have that extra $2000 per month to put towards better investments? I plan on working for 10-15 more years before retiring. What do you think? Is that a good idea?” - Neville from Mississippi

Welp, where to start. First of all Neville, GOOD JOB on putting away $1,000,000 in your 401k by 45! That’s tough to do and the first million is always the hardest! Which leads to point #1 (again, take it how you like, I’m not a professional, but this is what I’d do in this situation):
1. The first million is the hardest to get! It’s taken you 25 years to get there! Do you have another 25 to wait? Yes, I know you’ll only be taking out $295,000, but that off of $1,000,000 still knocks you down to $705,000, which isn’t bad at all, but to get back to the power of that $1,000,000 it’s going to take 6 years to get back there, and on top of that, the 705k in15 years investing 15k per year (3% inflation) is going to be a tidy $2,286,545 (click the image to enlarge)

Now that’s not too bad at all, and I’m not knocking it – I hope to be somewhere around there soon too, but think if you leave that $1,000,000 in there for the next 15 years and add 15k per year at 3% inflation you’re looking at $3,077,503 (click the image to enlarge)

Doesn’t that look better? By keeping that money there, you’re banking $790,958 MORE than by taking out the $295,000 that you “thought” you were taking out – but that’s only the beginning -

2. The 401k is set up as a RETIREMENT account – you shouldn’t be dipping into that bucket, that’s what you set it up for, RETIREMENT, not “HOUSE PAYING OFF” – You clearly make enough money to be able to put money away, so why cut the compounding interest short by hacking it into quarters? It’s for retirement, I’d leave it that way!

3. Taxes, taxes, taxes – You’re going to get raked over the coals taking out 401k $ now to pay for your house – not only are you going to have to claim the 401k money as income for the year, that’ll toss you into the highest possible IRS tax bracket at 35%!

Schedule Y-1 — Married Filing Jointly or Qualifying Widow(er)

If taxable income is over–	But not over–	The tax is:	$0	$15,650	10% of the amount over $0
$15,650	$63,700	$1,565.00 plus 15% of the amount over 15,650
$63,700	$128,500	$8,772.50 plus 25% of the amount over 63,700
$128,500	$195,850	$24,972.50 plus 28% of the amount over 128,500
$195,850	$349,700	$43,830.50 plus 33% of the amount over 195,850
$349,700	no limit	$94,601.00 plus 35% of the amount over 349,700

That’s a pretty penny to pay out, especially if you’re used to the 25% bracket you’ve been in. An additional tax on an early distribution is 10% of the taxable amount. The taxable amount is also included in your taxable income. This 10% tax is in addition to regular income taxes. So you’re giving 45% away right there to ol’ Uncle Sam.

4. Your mortgage interest is a tax write off. I don’t know how your mortgage is structured, but I DO know that when your mortgage is paid off, you won’t have that write off.

5. Even if you DID have an extra $2000 to put somewhere each month instead of paying your mortgage, your nest egg is now at $705,000 and even if you put $2k more each month or 24k more per year on top of your 15k, for a total of 39k per year, you’re going to be sucking tailpipe to your $1,000,000 you would have had making regular distributions(click the image):
vs.

By putting $39,000 per year into an investment making 10% with 3% inflation, you’re going to bank only $2,920,604, which is $156,899 less than if you would have kept that $1,000,000 in there and made standard 401k donations. If you never wanted to see that 157k extra, I guess it’s no big deal though.

So ultimately I’m saying it’s probably not a great decision. A few things you COULD do though:
1. Ask your plan administrator if you can borrow against your 401k plan; take out a loan to pay off your mortgage, the money would still be working for you, but you’d have to pay it back, but that’d be better than just taking it out -
2. Do you have a ROTH? The tax benefits might be better (I strongly suggest NOT doing this) but you can take out the PRINCIPAL that you have put in to it at no tax consequence, but suggest against it – see response #1 at the top of this page and check out this post on it here.
3. Just contribute $100-$200 more per month to your mortgage – it’s amazing what a few extra dollars per month will do to melt away the balance. Ask Money&Happiness, BuildingEquity, LivingAlmostLarge, or MyMoneyBlog.

If anyone else has any info, feel free to share, but from my perspective, I think you’d be making a bad decision to take 401k money and use it towards your mortgage, but like I said, I’m no professional financial guru.