What Age Did You Put $ in a Retirement Acct?

[russ_watters]

Why just government-sponsored? There are already calls for a wealth tax.

Agreed, but it is easier to alter an existing tax - even easier to eliminate an exception - than to create a brand new one.

So my fear for both types of IRAs is that the government will simply eliminate the exemptions from the income tax. For the Roth that will mean essentially a double-dip: the government gets income tax on the way in and way out (which would destroy the vehicle, so then they might as well just cancel it).

For traditional and 401k, the government could say, you know what, it was a mistake for us to not collect tax on them, so we're going to correct that with a one-time collection of those taxes.

Similarly, people are calling for elimination of the concept of "capital gains" being different from "income".

 

[russ_watters]

Well, if your retirement plans involve "making a killing" I would say that you should rethink those plans.

Here's how it works - suppose you are in a 25% bracket and you have $1000 to invest. In a traditional IRA, you invest the $1000, it grows to $10,000, and then you pay $2500 of taxes on it, for a net gain of 6500. In a Roth, you pay taxes on the $1000, invest $750, it grows to $7500, and then you pay no taxes on it. Again, the net gain is $6500. It doesn't matter which kind of IRA you use.

The difference comes about when looking at the tax rate. If you are in a low bracket now but will be in a high bracket in the future, a traditional IRA works best. If it's the reverse, a Roth works best.

Right, so where it also gets squirrley is if you contribute up to the limit. Essentially it means you can contribute more *pre-tax* money into the Roth than the Traditional: $5,500 post-tax into the Roth is $7333 pre-tax.

Of course, if you contribute to the limit in a Traditional and have $1833 left, you can invest that in your 401K...unless you also already have that maxed-out as well. There is a real, but small benefit of about 6% in maxing out a Roth vs maxing-out a Traditional and investing the rest post-tax plus later capital gains (in a scenario I ran similar to yours).

 

[jim hardy]

Well, if your retirement plans involve "making a killing" I would say that you should rethink those plans.

It's all a gamble. I opened a little $2000 Roth for speculation, played with Redhat and turned it into $5000.
My traditional IRA was ultra conservative . Utility stock.

They said i should diversify - sure wish i hadn't !

 

[Vanadium 50]

hey said i should diversify - sure wish i hadn't !

Why? Because you picked one winning stock?

There is a real, but small benefit of about 6% in maxing out a Roth vs maxing-out a Traditional and investing the rest post-tax plus later capital gains

And that's where things get complicated. For example, my 403(B) is ultra conservative - so much so that I get periodic nastygrams from the company. It's 42% stock, 48% bonds and 9% real estate. That looks crazy - it's conservative even for people who are a few years into their retirement. But what they don't know is that I have other, non-403(b) retirement accounts, and those are stock-heavy. The reason for that is taxes - these don't grow tax-free, but they do grow at the capital gains rate.

 

[jim hardy]

Why? Because you picked one winning stock?

Yeah but look where i got out...

 

[russ_watters]

Yeah but look where i got out...

I bought AMD at 18 in around 1998 and sold around 2000 for 85. The problem is I also bought 3dfx around the same time. Doesn't matter what I paid; I lost 100%.

If we only knew which gambles not to take, we wouldn't need to work as scientists/engineers!

...am sitting pretty with my FB, bought right after the ipo tho...

 

[Greg Bernhardt]

...am sitting pretty with my FB, bought right after the ipo tho...

I remember when Google IPO'd at like $70 and most analysts said it was too expensive. 1800% later analysts are idiots and I should have known better!

 

[russ_watters]

I remember when Google IPO'd at like $70 and most analysts said it was too expensive. 1800% later analysts are idiots and I should have known better!

I don't think anyone knew at the time what Google was...maybe not even Google.

FB was a nice buy because they criminally botched the ipo and the stock dropped by half in short order. I bought around 20 and now it's around 175.

I do think there is a gamble for companies with a disconnect between users and customers though. People will need cars for the foreseeable future, so if you build a good car at a good price, people will buy it. But facebook is always going to be a wind shift away from becoming MySpace, unless they can exist more as a tech holding company, buying their own replacement (Which they are trying to do).

 

[Vanadium 50]

Yeah but look where i got out...

But why is that the fault of diversification?

I could have/did buy stock XXX at $Y, and it rose/fell to $Z"

Since this is a discussion about retirements, I would say single stocks are usually a worse choice than an inexpensive mutual fund. You are taking on a lot of risk, and it is difficult to generate enough yield to compensate you for that risk. Suppose I had a fund that consisted of N stocks. It's risk is 1/sqrt(N) that of a single stock, and you have to be a pretty good picker of stocks to ensure a yield large enough to make up for that. I believe that as an amateur, I am no better at picking stocks than a professional, and the data shows that few (likely zero) professionals do better than low-fee index funds.

 

[jim hardy]

But why is that the fault of diversification?

It's my fault, not the fault of diversification.

That was my ultra- conservative traditional 401 , 100% company stock. I'd been told for literally twenty years "all your eggs in one basket is bad."
I'd watched it 'blip' up and down while Disney and Walmart went up, split, went up over and over.
So when it finally doubled i figured "here's another blip" and got out.
What i thought 'just another blip' turned into a fifteen year runup.

I laugh at my so called luck. While above sounds like a 'cosmic whine' I'm quite happy with what i have. Just think , it could have been Enron !

I am no better at picking stocks than a professional, and the data shows that few (likely zero) professionals do better than low-fee index funds.

I believe that's very true. Certainly my record is not stellar .

I'm 90% cash which I'm told is an awful place to be. But it sure looked good in 2008. And at my age i shouldn't be in high risk stuff..

After the 2008 bailouts it was obvious there'd be lots of inflation to dilute that debt. So i put 10% into what i thought had intrinsic value - some mining and steel production. We'll see how it fares in the next crash.

old jim

 

[kyphysics]

Btw, guys, USA Today had this little article a few days ago:
https://www.usatoday.com/story/mone...debt-the-average-us-household-owes/107651700/

It's a snapshot of Americans' finances. I was surprised that 25% of Americans make less than $10.00 a hour! Also, I hope that's a short-term credit card balance vs. some long-term unpaid debt.

The average American household carries $137,063 in debt, according to the Federal Reserve's latest numbers.

Yet the U.S. Census Bureau reports that the median household income was just $59,039 last year, suggesting that many Americans are living beyond their means.

Here's how much debt the average U.S. household owes in credit cards, auto loans, student loans, and mortgages.

Those numbers are unlikely to shrink anytime soon, according to NerdWallet. That's because the cost of living in the U.S. rose 30% over the past 13 years, yet household incomes only grew 28%. As a result, more Americans are using credit cards to cover basic needs like food and clothing.

Medical expenses have grown 57% since 2003, while food and housing costs climbed 36% and 32%, respectively. Those surging basic expenses could widen the inequality gap in America, as a quarter of Americans make less than $10 per hour.

On the bright side, education costs rose 26% during that period, and growth in student loan balances has slowed, so the picture could be improving for financially disciplined Millennials.

No figures for people's assets, including investments. If anyone wants to Google some figures, that'd be neat to know.

 

[jtbell]

I wonder how they get the $137K average for total debt, when the average mortgage debt alone is more than $182K.

Perhaps the averages for individual categories are for people who actually have that kind of debt (i.e. they exclude people who don't have that kind of debt), and the average for total debt is for people who have any debt (i.e. excludes people who are debt-free).

 

[russ_watters]

It's a snapshot of Americans' finances. I was surprised that 25% of Americans make less than $10.00 a hour!

Well, bear in mind, that includes all workers, including kids, not just heads of households.

No figures for people's assets, including investments. If anyone wants to Google some figures, that'd be neat to know.

...and very relevant to the thread. Americans save shockingly little toward retirement. I've seen articles recently and will post one if I can find it.

I wonder how they get the $137K average for total debt, when the average mortgage debt alone is more than $182K.

Perhaps the averages for individual categories are for people who actually have that kind of debt (i.e. they exclude people who don't have that kind of debt), and the average for total debt is for people who have any debt (i.e. excludes people who are debt-free).

Could be. I found the article a little disorganized, doing things like mixing and matching individual and household stats.

 

[kyphysics]

Well, bear in mind, that includes all workers, including kids, not just heads of households.

...and very relevant to the thread. Americans save shockingly little toward retirement. I've seen articles recently and will post one if I can find it.

Could be. I found the article a little disorganized, doing things like mixing and matching individual and household stats.

Sure. Post it when you get a chance. It's kind of interesting to know. I try to avoid a "keeping up with the Jones'" mentality, as I think that's not healthy and even harmful. So, it's not so much that I want to know how much everyone else makes or has in investments to compare myself to others and try to compete or anything like that, but I just want to know as a point of curiosity and interest.

As for the 25% $10/hour figure, I agree that it's a bit more complicated than that, since there's no disaggregation of teens versus prime-aged and older/senior workers. Definitely, if you're 40-ish and your primary income is from a $10/hour or lower job, then that's pretty depressing. Not so much if you're a high school or college kid.

 

[kyphysics]

Also...a quick question:

Do you all know of people who've had to withdraw from their retirement funds early and gotten penalized? How common is this?

It makes me wonder about the 3-6 months of life expenses saved up "rule," because with the economy so fragile, I can see it being easy to lose one's job and having to take a year maybe to find another one. This happened to a family friend of ours who had a BS/MS/MBA. It took about a full year for her to get another job and that was with heavy, disciplined searching (not like she was lazy or anything). Very anecdotal, I know, but still...makes me wonder.

Would 12 months be more of a better idea? I know one of the biggest "killers" of growth is to destroy your investments' compounding capabilities by taking money out unexpectedly. You should invest and leave it there for decades without having to touch it.

3-months just seems way too little to have saved before I would feel comfortable...

 

[kyphysics]

Here's a hypothetical:

If you had a chance to save $200-300/month in rent, but live in a more "rundown" and higher crime area, would you do it?

I paid more for my last apartment, because it was a nicer neighborhood and I felt I had a better chance of having peaceful nights to do my school work. I liked my apartment complex. It wasn't dingy, it was well-maintained, it was safe, and the management was responsive and very professional. I lived in a peaceful area and never had any issues.

I had a friend who paid about $300 less and lived in a more sketchy area and it was like a party community. It was rundown (their bathroom was really gross...ehhhck), noisier/busier at nights, and visually just looked unsafe. There are days I wonder if I'm a housing snob, because I see the value in paying more. My friend's housing wasn't in the worst neighborhood or anything like that. But it was still quite run down. I obviously wouldn't stay in some drug war zone or anything like that if I could avoid it. But there are degrees of safety, peacefulness, and beauty after that when it comes to housing options.

It's going to be a choice I have to make next year post-graduation. ...I think I know what Dave Ramsey might say: "Suck it up! Stop being a whiney, spoiled brat and ask yourself if you'd be happier living temporarily in a dump and building greater long-term wealth or living it up now and possibly broke later."



I'm usually pretty good with avoiding unnecessary spending (thanks to Dave Ramsey's tough love lectures in this area - apologies to Russ and company who dislike Dave ). But I feel like housing in one thing that I can be "snobby" about. I remember having these "tough" decisions twice and going with the higher rent both times. But now that I'm more serious about money management, man, it's going to be a tough one.

And for those who think it may not matter, there are horror stories from poorly run apartment communities you can read online. Just really disgusting stuff...completely molded out or cockroach/bug infested places where management doesn't care or is very slow to do anything. Situations where people have leaks in the piping coming through their roofs and mold developing, etc. I've seen these sorts of really dingy places w/ shady management who try to cheat you - yet, they're not the worst of the worst places by a long-shot - that can be a few hundred dollars less a month.

Housing is the one thing I feel I've spent more on that I may not have had to. But it comes with trade-offs.

 

[Vanadium 50]

I found the article a little disorganized, doing things like mixing and matching individual and household stats.

Which makes me question the $10/hr number. It may be that the authors have "saved the reader some time and effort" and have converted "less than $20,000 per year" to "less than $10/hour". Given that only about 3% of jobs pay the minimum wage, the $10/hr number means a lot of effort - a lot- is crammed in between $7.25 and $10.

If you had a chance to save $200-300/month in rent, but live in a more "rundown" and higher crime area, would you do it?

Depends on how much higher the crime rate is. I've moved from an area where the crime rate was 10 per thousand to 11 per thousand, and didn't think much of it. But I wouldn't move to South Central LA or Altgeld Gardens, Chicago.

 

[russ_watters]

Which makes me question the $10/hr number. It may be that the authors have "saved the reader some time and effort" and have converted "less than $20,000 per year" to "less than $10/hour". Given that only about 3% of jobs pay the minimum wage, the $10/hr number means a lot of effort - a lot- is crammed in between $7.25 and $10.

Perhaps surprisingly, the naked stat appears to me to be true:
http://fortune.com/2015/04/13/who-makes-15-per-hour/

I think the "a lot of effort" between $7.25 and $10 reflects that the minimum wage is, in effect, a hyperbolic asymtote. And that isn't just a matter of worker effort, but supply and demand, and driven in part by cost of living. I live in southeastern PA and even in the early '90s when I was looking for my first job in high school (when the minimum wage was historically higher) there was just no such thing as a [federal] minimum wage job. Walmart greeters and burger flippers made quite a bit more than minimum wage.

That, to me, is the actual myth of the minmium wage: that it even really exists. It is actually really hard to make minimum wage. You have to live in the right area and work hard to be a not quite bad enough to fire. But if it serves as an asymptote, it has at least some relevance -- it's just that focusing on it as a common case when it is really an outlier is misleading.

------------------------------------

Something else I noticed about the article that came up in another discussion was that all debt is treated the same, when it isn't. Some debts are "sunk costs" that are totally not recoverable (a vacation charged to a credit card), but your car and house have value and are relatively easy to sell to recover it. You could pay the same amount a month to rent your home and as presented by the article, having less debt would look good, but in reality it is almost always a much better deal to buy.

 

[russ_watters]

If you had a chance to save $200-300/month in rent, but live in a more "rundown" and higher crime area, would you do it?

I paid more for my last apartment, because it was a nicer neighborhood and I felt I had a better chance of having peaceful nights to do my school work. I liked my apartment complex. It wasn't dingy, it was well-maintained, it was safe, and the management was responsive and very professional. I lived in a peaceful area and never had any issues.

I had a friend who paid about $300 less and lived in a more sketchy area and it was like a party community. It was rundown (their bathroom was really gross...ehhhck), noisier/busier at nights, and visually just looked unsafe. There are days I wonder if I'm a housing snob, because I see the value in paying more. My friend's housing wasn't in the worst neighborhood or anything like that. But it was still quite run down. I obviously wouldn't stay in some drug war zone or anything like that if I could avoid it. But there are degrees of safety, peacefulness, and beauty after that when it comes to housing options.

It's going to be a choice I have to make next year post-graduation. ...I think I know what Dave Ramsey might say: "Suck it up! Stop being a whiney, spoiled brat and ask yourself if you'd be happier living temporarily in a dump and building greater long-term wealth or living it up now and possibly broke later."



I'm usually pretty good with avoiding unnecessary spending (thanks to Dave Ramsey's tough love lectures in this area - apologies to Russ and company who dislike Dave ). But I feel like housing in one thing that I can be "snobby" about.

...But it comes with trade-offs.

No need to apologize about basic, sensible, bias-free advice.

You're learning the important lesson that everything you do - in everything, not just about money - carries trade-offs. Being able to delay gratification is valuable, but not if it gets you killed. So what do you do? Put thought into it and pick a trajectory that gives you the balance you want between current and future happiness.

And stop worrying about looking like a "snob". Being a snob isn't about what you have, it is about what you do. Having nice things doesn't make a person a snob; treating others like you are better than they are does. And I think if you look hard at those people who appear to have nice things because they like others to see them have nice things, you will often find problems not far below the surface. Like a couple with his-and-hers Jaguars who complain about not having enough money for vacation. On both sides of the coin, it is better to act well and do what makes you happy than attempt to present yourself in a way to shape others' judgement of you.

 

[Vanadium 50]

I'm looking at the cover of the CBO Reporthttp://www.cbo.gov/ftpdocs/120xx/doc12051/02-16-WageDispersion.pdf and it has the 10th percentile just under $10/hr. Granted, $15/hr is the 50th percentile, so it's not mathematically impossible that the 25% point is $10/hr. But the distribution needs to be weird - 3% at $7.50. 7% between $7.50 and $9.50. 15% between $9.50 or so and $10, and then 25% between $10 and $15. It could be, as you say, a "market minimum wage" around $10, but even so I would expect geographic variations would make this less spiky. Much less spiky.

 

[russ_watters]

This one has more percentiles:
https://www.bls.gov/oes/oes_perc.htm

[It appears that's 2010 data]

Edit: this one has a graph and newer data:
https://dqydj.com/income-percentile-calculator/

 

[StoneTemplePython]

Also...a quick question:

Do you all know of people who've had to withdraw from their retirement funds early and gotten penalized? How common is this?

It makes me wonder about the 3-6 months of life expenses saved up "rule," because with the economy so fragile

A couple thoughts.

1.) Something that isn't well appreciated: if you run the numbers, in the case of contributing to a 401(k) up to the maximum company match --- I assume the match is cash not stock--- if you run the numbers, you should still come out ahead even after numerous early withdrawal penalties. The math is simple but this is not widely appreciated. The idea is that penalties are high but a 100% match is higher. You of course have to run the numbers yourself for your specific situation and do your own homework. (Note: there are potentially some issues, though, if your company goes bankrupt and has been cutting corners with the 401k.)

2.) I don't think the staff at USA today are numerate enough to do a basic thing on personal finance correctly. Better sources are things like 538, The Economist, and the 'More or Less' podcast (though there is a very British orientation).

 

[Vanadium 50]

Hi Russ,

Those sites say the 25% point is $15/hr (1st site) and $20,000/year (2nd site). So I am going to stick to my guns: 'It may be that the authors have "saved the reader some time and effort" and have converted "less than $20,000 per year" to "less than $10/hour".'

 

[russ_watters]

Hi Russ,

Those sites say the 25% point is $15/hr (1st site) and $20,000/year (2nd site). So I am going to stick to my guns: 'It may be that the authors have "saved the reader some time and effort" and have converted "less than $20,000 per year" to "less than $10/hour".'

Ooops -- I might have lost track of what value we were trying to verify. It was $10, not $15 ($10 at 25%). So that means my two links contradict each other.

The BLS says *10%* is $11 or $22,880, but the other link says (roughly) *25%* is $20,000.

However, either way I think the BLS is still giving bad info because the link I provided also gives values of income for an assumed 40 hr work week(11*40*52). So unless the average hours worked were exactly 40 (unlikely: it's 38.6 overall and probably lower at the lower end of the pay scale), one of the numbers has to be wrong. If the annual wage is correct, the hourly wage is too low and if the hourly wage is correct, the annual wage is too high.

 

[WWGD]

I've seen compelling research that suggests managed stock funds are almost criminally bad, so you should pretty much never put your high yield/long term money in anything but an index fund.

Sorry if this is OT, but why do people keep paying for these for so long after knowing how they barely, if at all, beat the market?

 

[CWatters]

For UK readers... If you put money into a pension scheme the government will give you tax back of 20 - 40%. Even if you aren't earning and so not paying tax they will give you money "back". So it can pay for parents and or grandparents can set up a pension scheme for kids from birth. The most they can put in is currently about £2880 a year and the government will add another £700 or so a few months later. I might have the exact figures wrong they are something like that. In recent years they have made it easier to withdraw your money early but there are tax penalties that may apply.

At the other end of the age range... The elderly/ retired can still pay into a pension if they don't need to draw money from one to live on. This pension can be inherited by their children or grandchildren children on favaroble tax terms.

Seek advice from an IFA which I am not.

 

[jtbell]

why do people keep paying for [actively managed mutual funds] for so long after knowing how they barely, if at all, beat the market?

Most people really don't know this, or else they've been convinced that their fund has some "special sauce" that makes it better than the average actively-managed fund.

 

[CWatters]

Buying something that passively tracks an index isn't always a good idea either. For example the FTSE 100 is dominated by companies in the finance and retail sectors.

 

[jtbell]

Sure, you want something that tracks an index that is appropriate for your goals. For me that means an index that is broad enough to cover most or "all" of the market, because I don't want to try to guess which sectors are going to do better than the others.

 

[kyphysics]

I'm looking at the cover of the CBO Reporthttp://www.cbo.gov/ftpdocs/120xx/doc12051/02-16-WageDispersion.pdf and it has the 10th percentile just under $10/hr. Granted, $15/hr is the 50th percentile, so it's not mathematically impossible that the 25% point is $10/hr. But the distribution needs to be weird - 3% at $7.50. 7% between $7.50 and $9.50. 15% between $9.50 or so and $10, and then 25% between $10 and $15. It could be, as you say, a "market minimum wage" around $10, but even so I would expect geographic variations would make this less spiky. Much less spiky.

We can try to continue to parse out the specifics of how many people earn less than $10.00/hour, but a non-controversial figure is that half of working Americans make less than $30,000.

This is been reported on ad nauseum in recent years. At $30,000 or less a year, if you're young or of prime age, saving anything (let alone investing) is going to be tough. After basic necessities: rent & utilities/transportation/food/insurance (auto and health) ...you're pretty much done for.