Entries Tagged 'Retirement' ↓

My schoolmate Anna asked the following in a comment:

What is your stance on saving for retirement vs saving for house? I’ve been reading some advice that says only save for house first (putting into high-yield savings account) and save for retirement once you have a house. Other advice says always save 10% of gross income to retirement even when you’re saving for a house.

Well, first I have to say that everyone’s priorities are different, but my husband and I are saving for both. We are both contributing 17% of our income to our 401ks and we have gotten used to that deduction so we don’t miss the money at all. We don’t totally max out our 401k but 17% is a good amount that we’re both comfortable with. We’re keeping most of what we save outside of our 401ks in a Vanguard money market fund and a Vanguard index fund and we do intend to use the money to purchase a home sometime in the future.

Personally I think that saving for a house shouldn’t be put ahead of saving for retirement. The reason is that money grows exponentially in a retirement fund with time. Generally the earlier you start contributing the larger a nest egg you would have in the end. Diverting your money from a retirement fund to purchase a home would require much larger retirement contributions in the future to achieve the same nest egg. Lets use some real numbers to see what I mean.

Scenario 1: 24 Year Old Saving for Retirement for 35 Years

Suppose that I put $1200 a month into a 401k. Since this money is contributed pre-tax, I am actually seeing a deduction of about $800 from my paycheck due to my fairly high tax rate in California. I can withdraw from my 401k at the age of 59.5 without penalty, so I can keep on contributing for at least 35 years. Assuming a fairly conservative average annual growth rate of 7% a year, my nest egg will grow to approximately $1,990,611 at age 59.5. Meanwhile I can still save whatever money I have left for a home.

Scenario 2: 24 Year Old Saving for a Home Before Saving for Retirement

Suppose that I need a downpayment of $75,000 for a below median price Californian home and I am saving what I would have put into my 401k into a money market account. I would have to save after-tax money so I could only contribute about $800 per month and lets assume that I use a money market fund that pays 4% per year after tax. At this rate, it would take me just about seven years to save for the downpayment. The $75,000 is good for a 20% downpayment on a $375,000 home. Usually there are other closing costs so actually I need more money to buy a $375,000 home. Just to make this example simple, I will say that $75,000 is adequate for me to buy a $375,000 home and the entire $75k is applied to the price of the home. Suppose that I take a regular fixed 30 year loan on the remaining balance of $300,000 and I get a fairly good rate of 6% I would now have a mortgage payment of 1798.65 per month.

This scenario means that I would lose seven years on my retirement contributions. If I contribute $1200 a month to my retirement for only 28 years I would have only 1,599,377 at age 59.5.  To reach the same nest egg of scenario 1 at age 59.5, I would have to contribute about $2055 per month to my 401k for 28 years. This is not even possible without company matching because the IRS limit on 401k contributions is $15500 a year right now.

Now, some may argue that  savings are going into the home that I bought. Historically, home prices have only risen 2 to 4% over long periods of time. Additionally, there is a 1.1% property tax in California on the value of my home every year even if I have paid it off. In other states the property tax can be very high and completely wipe out the gains on a home. So, suppose that I take an extremely optimistic growth rate of 4% on my home then the home is worth about $1,216,274 after 30 years. However, I am not accounting for the effects of inflation and maintenance costs so I think I would break even at best.  If I put the mortgage money in an investment account instead I would have more than $2,000,000 after 30 years assuming a growth rate of 7%.  In that case, I could use my $2 million and buy a better house with cash.

With all of that said, I realize that not everyone live in a place with ridiculous real estate prices and in some places of the country it still makes sense to buy a home because the house payments are less than rents. In those less crazy parts of the country it doesn’t take seven years to save a reasonable downpayment so the potential time loss on a retirement account isn’t as severe. Saving for a home first could make sense for some people. However, it really would take young people years to save an adequate downpayment here in California. In fact, there is nothing decent for $375,000 here in San Mateo and a 20% downpayment on an average home is more likely to be $120000 to $140000. My stance on the subject is to save for retirement as much as you can and as soon as possible. You can still save for a home as much as you can, but you should clearly understand that a home is a cost center, and not a savings vehicle. I still want a house of my own, but I do not expect it to feed me and pay for my health insurance when I retire. I would approach buying a home as I would approach buying any other item, such as a car or a stick of gum. I want a quality home at a reasonable price, and I don’t mind waiting a while for a sale. While I wait to buy a home, I am building up a strong retirement nest egg. I hope I answered your question Anna!

Share This

Welcome to the 32nd Carnival of Money Stories. On this foggy and ghastly eve of Halloween The Baglady brings you a creepy collection of money horrors. This edition includes 21 stories about mooching relatives, timeshares, and giant wallops of debt. If you want to have a relaxing day please stop reading here, but if you want to be shocked, titillated, and inspired, please read on!

Editor’s Picks of True Financial Horror Shows:

Eric presents When Saying No Helps Your Family posted at A Penny Closer. This is a well written story about a truly horrible situation. You have to read this article to see why I found this story to be the most upsetting and scary. People really just have to say no to family members that mooch continuously and that is why I say parents should make their adult children pay rent.

Ana presents Stupid Tax on Wheels (But not mine!) posted at DebtFREE-Revolution. I fear debt so much that when I read this story I felt like I was being run over with the kid’s truck. He should really be feeling the weight of his monster truck debt but .

Repugnant Real Estate:

Millionaire Mommy Next Door presents Can Renting Play A Part In The American Dream? posted at Millionaire Mommy Next Door. Honestly, the picture insert on this post gave me quite a fright, but I agree with the Millionaire Mommy that renting makes sense for a lot of people.

Silicon Valley Blogger presents Don’t Let Real Estate Clean You Out posted at The Digerati Life. SVB’s dry cleaner turned into a real estate agent! I hope that guy will be okay, but the fact of the matter is that real estate is softening quite a bit here.

Terrible and Terrific Timeshares

Maria Fernandez presents Have an enemy? Buy him a timeshare! posted at Learn a foreign language. I am so glad that my parents didn’t buy any timeshares and just took the free gifts and ran.

Betsy Teutsch presents A True Tale: Making Lemonade out of a Lemon-Sized Inheritance posted at Money Changes Things. This is a great story about a couple quite scary things: a timeshare and a golddigging stepmom.

Triumphs Over Life and Death

Brip Blap presents follow the white rabbit to financial freedom posted at brip blap. I actually really liked this story and voted for it over at Millionaire Mommy’s Carnival of Personal Finance Contest. It begs the question “have you used your real eyes before?”

Raymond presents Life Comes At You Fast – Be Organized and Financially Prepared posted at Money Blue Book. Raymond shows us that being organized and financially prepared could really help in a situation where a family member’s health turns for the worst.

Scary Shopping Trips

JvW presents Shopping Extravaganza posted at The Good Life on a Budget. Group shopping can be pretty dangerous and you can end up with things you don’t really want. JvW shows us how she planned for a group outing.

freefrombroke presents EMOTIONS GOT THE BEST OF US AT THE PICTURE PEOPLE posted at Free From Broke. Marketing people really sell us a lot of things by playing on our emotions. This story shows us a prime example of this manipulation.

A Ferocious Fire

FIRE Finance presents Wild Fire Disaster! posted at FIRE Finance. I have survived a rather large hurricane and quite a few floods, but I think I am still most afraid of fires. FIRE Finance writes about the on going disaster in Southern California.

Repulsive Jobs and the Wonders of Unemployment

FMF presents Get Rich by Doing Something No One Else Wants to Do posted at Free Money Finance. My hubby’s ex-coworker went mountain biking with a sewer cleaner, and that’s when I first found out that they made so much money. We pay money to take care of tasks we find disgusting to do, and those with the guts to do these dirty jobs really really deserve the money.

Lynnae presents The Benefits of Unemployment posted at beingfrugal.net. Losing your job can be a traumatic experience, but Lynnae seems to see the good parts of being unemployed.

Hideous Health Insurance:

paidtwice presents The Ominous HR Letter posted at I’ve Paid For This Twice Already. I must say paidtwice’s family pays quite a bundle on their health insurance and this post made Brip Blap’s blood boil! Read the article and comments for details.

Ghoulish Greed and Feral Fees:

caw presents How petty greed translates to more fees posted at Money $ Liberty. This is a story of an App-o-rama gone wrong. I guess it could have been a lot worse.

ispf presents Bank “Upgraded” The Account and Started Charging Fees without Authorization! posted at Grad Money Matters. Ispf shows us that we need to check for things that are anomalous on our bank statements. If you’re not careful the sneaky bankers may take your money without your consent!

The Investor’s Journal presents The Temptations of the Stock Market posted at The Investor’s Journal. This blogger reminds us that investing shouldn’t be like gambling, but sometimes it really tempts us to act like gamblers.

Magnificent Miscellaneous Money Stories

cashmoneylife presents What Is Your Magic Number? posted at Cash Money Life. This story made me feel warm and fuzzy. It wasn’t scary, but it was certainly magical.

Pinyo B. presents Why Do You Work So Hard? posted at Moolanomy. A story that has floated around the net. Very sweet though.

Kyle James presents What My Dad Taught Me About Money posted at Rather-Be-Shopping.com Blog. I think I would get along with Kyle’s dad.

Lazy Man presents My experience as a member of CNBC’s Fast Money live audience – Part 1 posted at Lazy Man and Money. I must say, Lazy Man seems to be enjoying his unemployment.

This concludes the 32nd edition of Carnival of Money Stories. Please submit your story next week if it wasn’t included in this edition! Have a safe and delicious Halloween tomorrow everyone!

Share This

Many of my friends ask me, “why are you worried about retirement already? You’re only 24 and you have more than forty years until your retire!” The truth is that I don’t think we have forty years until retirement and a lot of us will be forced to retire early. In fact, a recent article in Newsweek stated that the current average retirement age is 57. That only gives me 33 years, which still seems like a long time. However, I think in the future the average retirement age will only get lower and here are my reasons.

1. No Job Security — Our generation no longer work at a company for life. I don’t think it means that we are less loyal, but it’s more of a reaction to the profit seeking inhumanity of corporations. There are often mass layoffs and good benefits such as pensions are mostly eliminated. Basically there are no advantages to being an employee for life. I think the only people in the Silicon Valley who have worked for a private company their entire lives are all at Lockheed Martin, and they’re relics of the old economy waiting to cash in on their pensions. The new world order means that we have no job security and one day we may not be able to find a job and be forced to retire.

2. A Growing Population — The United States population is growing fairly slowly right now, but it is expected to increase to around 392 million by 2050. Why does this affect our retirement age? Well, basically in 15 to 20 years our children will enter the work force and compete for the same limited pool of resources and positions. In China many baby boomers are forced to retire at age 50 so that their jobs can be passed down to younger people. You may say that it’s ageism, but I think it actually makes sense because you can’t let millions of young people run around without a purpose. Our skills need to be passed down to our children, and we need to step aside at some point. I think forty five years is way too long for us to hold on to a job because two generations of people will enter the workforce in that time period.

3. Technology Eliminates Jobs — We live in an age where so many things are automated and simplified so that it takes much less people to do a job. For example, my parents are accountants, and they all use software like Excel and Quicken to balance their books these days. However, before these software packages existed people had to do everything by hand. It definitely took many more accountants to run a billion dollar enterprise sixty years ago. I imagine that technology advancements will eliminate a lot more jobs in the future. It’s possible that technology related positions will increase, but if you’ve ever worked in the Silicon Valley you’d know that these jobs are dominated by the under 40 crowd. Additionally, not all of us work in the tech industry so as technology phases out more and more jobs some of us will be forced to retire.

4. Global Competition — Globalization is something a lot of people fight against. Right now, a lot of manufacturing jobs in America have already been outsourced to other countries. Since technology has expedited the delivery of goods and services around the world Americans are competing with the global workforce for business. High end professional jobs are also being outsourced to other countries because their workforces are cheaper. This all means that wages will probably decrease for Americans in the future. In fact, our generation is the first generation where our wages have decreased compared to our parents. This means that we should save as much as we can now before our earning power is further eroded.

5. The Bottom Line of Corporations — Corporations outsource because it is cheaper, and they also hire younger workers because they are cheaper. I have heard of stories of where senior engineers are laid off and replaced with cheaper college grads. Ageism is rampant, and in some cases it’s reasonable. For example, an 80 year old probably isn’t as good of a physical laborer than a 23 year old. However, most of the time corporations want younger workers to pad their own bottomline.

6. The Zenith of a Career – The proverbial “glass ceiling” is reached much quicker by our generation because our parents’ generation is still in charge of the current state of the world well into our middle ages. Generally people work so that they can reach higher places in their career, and if the peak is reached so quickly then work may become meaningless.

This post may seem pessimistic and paint sort of a grim future, but I think it’s what my mom calls “cautious pessimism”. I think it’s highly likely that our generation will need to or be forced to retire as early as 45 to 50 and that only leaves me 20 to 25 years to save for the rest of my life. A lower retirement age coupled with longer life spans mean that our generation needs to save as much as we can during our working years. I am not really worried about retirement because I am taking steps to prepare for it. It’s much better to start preparing for the second half of your life now and not worry about it when you get there. I am also very optimistic about our generation because we may be able to enjoy our lives more if we plan well and retire early. So to my friends, if you haven’t started contributing to your retirement plan you should do it now before it’s too late.

Share This

This week The Baglady was selected for a few different blog carnivals. Here they are:

The Carnival of Personal Finance #119 at Blunt Money — In this edition I wrote about my current lame 401k program. It wasn’t a very fun article. The following are articles that I really liked from this week

• Mrs. Micah’s dilemma with charitable giving — I have also been meaning to write an article on charitable giving and debt. I feel like she is on the right track. Sometimes I feel like I’m copping out just by giving away money, because giving time and effort is sometimes much more personal and helpful.
• Four Pillars writes about Canadians working in America — I’ve always been a fan of Four Pillars because I actually have a lot of Canadian relatives. My mom’s cousin is actually a Canadian working in Tennessee. The recent monetary decline of the US dollar really hurt her because she sends her money to her family in Vancouver and she’s basically gotten a 30% pay cut in the last few years.
• Moolanomy calculates our true earning powers for luxuries — I thought this article was great because it really breaks it down that after taxes and expenses we don’t really have much money left. That’s why I limit our entertainment budget to 2% of what we earn.

The next place The Baglady showed up is the Festival of Frugality #93 at Money and Values. The featured article is “My Super Cheap Ex-boyfriend”. I made a note that my boyfriend is really cheap, and it goes beyond frugality, and this article was appropriately featured under “Being Frugal vs. Being Cheap”. Additionally I really enjoyed the following articles:

• The Latte Factor at Mr. Cheap Stuff – I know full well what the latte factor is. My hubby is sort of addicted to a drink called “boba”, which is an Asian milk tea drink with tapioca balls in it. When I first started dating him I calculated how much he spent on boba, and it worked out to be a quite large number. Now we moved rather far away from accessible boba shops so he is not getting his fix very often. Sometimes I bring home a treat for him because I work fairly close to a boba shop, but I only buy the special which is a dollar or two cheaper than everything else.
• A Penny Closer writes about When Frugality Becomes an Excuse — If my hubby read this he’d laugh and say, “That’s so you!!”

Next, we have the All Women Blogging Carnival at SultanaBlog. The Baglady’s article on the “mommy wars” has been included. This article has attracted some very thoughtful and detailed comments that I recommend reading. This carnival also had a fairly disturbing but thought provoking article titled Corporate Pedophilia.

Anyway, I hope all of you enjoyed reading these carnivals. If you’re new to The Baglady feel free to subscribe to my full feed!

Share This

When I graduated from college and got my first job my mom said to me, “if you want to live at home it’s fine, but you’d have to pay rent.” I didn’t want to live at home at all because it would take a 1.5 hour trek across the Bay Bridge to get to work. If you’ve ever been on the “MacArthur Maze” you’d know why I do not want to drive through that deathtrap everyday. So I packed my suitcase and moved to San Mateo and my parents breathed a sigh of relief.

I have met quite a few “boomerang kids” since then. They are mostly young adults who have well paying jobs. Most of the ones I know that do not pay room and board to their parents are young Chinese men. This may be a cultural thing because in China sons are especially coddled. One woman read my story about my “Super Cheap Ex-boyfriend” and said that she’s very afraid that her child will return home and mooch off of her. My answer to this is that these parents need to grow a backbone and ask their kids for compensation or ask them to move out.

Here’s an example of a family that’s got it figured out. At work I met a girl who happened to be the same age as me and also attended the same school as me. We became good friends and I found out that she lives at home, but her mom takes a bank draft of $1000 from her account every month. She says that she doesn’t want to move out because her parents cleans and cooks, and they no longer give her a curfew. Her parents have sort of become her roommates and landlords. Her other reason for not moving out is that she’s keeping the money in the family. Since she’s an only child her parents’ assets will eventually be hers.

If I had kids with good jobs that wanted to move back in with me I would ask them for rent at market price. If they really can’t afford it then I would rent to them at the Section 8 rate or 30% of their gross income, whichever is lower. I may ask them for a bit over the market price if they are paid very well just so that I encourage them to find a place themselves. If they don’t have a job then I will make them get one as soon as possible and then repay the rent they owe as soon as they are able. I probably don’t need the money, but a lot of parents nearing retirement do need the money. The point is that so many people my age need to learn what the real costs of living are and budget and save accordingly. Children cannot depend on their parents forever, and parents need to learn to let go and give their kids a little nudge out the door.

Share This