JoeTaxpayer

A regular reader of my blog kindly pointed me to an article in Smart Money titled “401(k) Debit Cards Can Put Retirement at Risk” in which we are introduced to a debit-card like product which taps your 401(k) instead of your checking account. Although I wrote back in May’s “401(k) Loan bad for your (financial) health?” that loans were not absolutely bad, it depended on many factors, I think that such easy access is the flip side of the coin, almost certainly a bad thing. There are times I walk the fine line between wanting ‘big brother’ to establish just enough regulations to protect people from their own irresponsibility and wanting no such laws at all, caveat emptor still applying. Here, I’ll make the distinction between a one-time 401(k) loan used to help with the purchase of a first home, bridge the gap of income for an unemployed spouse, or a refinance of credit card debt combined with a change in lifestyle. Of course, paying off the cards with the loan, then charging up the cards again is no better than using a 401(k) debit card in the first place.

As the post title suggests, my feeling on this product is that it gives the consumer just enough rope to hang themselves.
Joe

written by JOE \\ tags: 401(k) loan, Credit, credit card, Finance, income, money, Retirement

Well, it’s been a month since my “Suze on Variable Annuities” post which sparked some heated debate. So much so, that I decided to take a look at a newer product, the Fidelity Growth & Guaranteed Income Annuity and analyze it in a feature article titled “Another Look at Variable Annuities” on my main web page.

I must say, I find the process interesting. I’ve been a ’spreadsheet guy’ for some time and enjoy playing with the numbers. Please read the article and comment here, if you wish. The Fidelity link above should download a PDF of a brochure for the product I analyzed. If it doesn’t, please advise of the broken link.

Joe

written by JOE \\ tags: annuity, fidelity, income, interest, spreadsheet, suze, variable annuities

From Innumeracy.com:
Innumeracy: A term meant to convey a person’s inability to make sense of the numbers that run their lives. Innumeracy was coined by cognitive scientist Douglas R Hofstadter in one of his Metamagical Thema columns for Scientific American in the early nineteen eighties. Later that decade mathematician John Allen Paulos published the book Innumeracy. In it he includes the notion of chance as well to that of numbers.

From “Money Merge Advantage“, an MMA agent’s blog:
“In FACT… The software alone could still beat the 2nd scenario (putting the $300 discretionary to the mortgage each month)… WITHOUT using that discretionary income AT ALL. Yes, SERIOUSLY!”

If you have no idea what Money Merge Accounts are, or what I am talking about, please see my Money Merge Links page for references and then read on. In the blog I reference, the example starts with $250K, 30 yr, 6.5% mortgage. Then we are told a bi-weekly will provide some $75,800 worth of interest savings. No problem there, a bi-weekly is like paying 8% higher than the required monthly payment, usually in the form of a 13th payment snuck in once a year. The examples then offer that $300 more each month will cut the mortgage down to 19 yrs 8 months, which I still follow. But then the blog writer claims that with no extra money, beyond the $300, MMA will cut the mortgage to 14 yrs 4 months! This is beyond the wildest claims I’ve seen so far, and completely beyond reason.

Lastly, came the quote above, suggesting that with no extra funds available, the HELOC shuffle alone can produce savings greater than a $300 monthly principal payment would achieve. This raises new and troubling questions. The couple in the example have a net income of $3800/mo. If their HELOC were 0%, and they borrowed this $3800 at the beginning of each month, and paid it back at month’s end, it would gain them just under $21 per month, nowhere near $300. And no HELOC offers a 0% interest rate. At best, the HELOC is a percent or two under the fixed rate mortgage. This is simple math, folks, and no “sophisticated algorithms” are going to change the fact that 1+1=2 or that the best one might squeeze out of their HELOC shuffle efforts is $20-$30 per month, certainly not $300.

Joe

written by JOE \\ tags: HELOC, income, innumeracy, interest, jferheart, mma, money merge account, Mortgage, saving, sophisticated algorithms, UFF

I recently read a post “Why I love Roth IRAs” in which the author ignores much of the math going in and coming out. Now, I love Roths myself, but only when used to take most advantage of the tax rates involved. Let me explain. From my feature article earlier this year titled “Can you save too much, pre-tax?” we see that a couple with $447,500 in their 401(k) or Traditional, Pre-Tax IRA, can take withdrawals and remain in the 0% bracket. This is due to the combination of standard deductions and exemptions. The next $401,250 will support withdrawals at the 10% rate.
If you have a defined benefit pension (a traditional pension) the numbers certainly will shift, and you need to take this income into account. Pensions are getting more scarce and those who frequently changed jobs are likely to have never vested into any one plan.
So, now I’ll ask, what percent of retirees are likely to have saved this sum, a total $848,750 from the numbers above? I cite an article from AARP titled 2004-05 Boomers which offers a forecast. One chart in this report offers that for those born in 1956-65, their mean (this means average, important distinction from median, middle) wealth is forecast to be $839K. But reading on, we find that after subtracting non-retirement wealth and present value of Social Security benefits, we are looking at a retirement account balance of just $140K. It turns out the 4th quintile (this is the second 20% from the top) is forecast to have $906K, this scales to about $151K in retirement accounts. Even the top quintile (top 20%) will average $2028K total wealth, with maybe $350K-$400K in retirement accounts. So it’s only the upper portion of that group (in addition to those with fat traditional pensions) that need to consider the Roth while working. For the rest of us, we will likely be in the 10% or if fortunate, the 15% bracket upon retiring.
I’ll close with this thought - each family has their own set of numbers. This is why if you write in to a web site or magazine and ask “Is Roth good for me?”, it’s impossible to answer without knowing many details. We know more the closer you are to retirement, but only have a series of clues the further away you are. Another blog “The Finance Buff” offers a view similar to mine. I remain surprised at how many wave the Roth flag without some level of analysis. For those who have access to a Roth 401(k) and Roth IRA, it would be a shame to load those up and find that they missed out on the tax savings that pretax savings could have provided.

Joe

written by JOE \\ tags: 401(k), Finance, income, IRA, Retirement, retirement account, roth ira, saving, Savings, Social Security, tax, tax rates, traditional pension, wealth

Consumer Reports recently offered an article titled “Your Debt; 8 Benchmarks For Borrowing“, which, for the most part, I liked and will consider adding to a List of Rules I’m assembling. Among the warning signs;

• 28% - Monthly Mortgage (including property tax and insurance) should not exceed this number. Really? That’s exactly what I suggested in my post Mortgage 101, so I’m in full agreement there.
• 80% - The first mortgage should not exceed this level. A lower debt to equity ratio is better. Interesting, I made the same comment in Mortgage 101, but that was more to benefit the bank, not the borrower. I’ll maintain that if the payments are still within the guidelines, there’s nothing magic about 80%.
• 6 - month’s worth of income as emergency money. I wrote about this as well, a couple weeks back in my controversial Emergency Funds post. This may be a worthy goal, and right for many, but not at the top of my list. I have been aggressive in retirement savings, well above average, managed the mortgage with serial refinancing to capture a low rate and an amortization that will end the mortgage well before retirement, and funded college in full for a child who is only 10, yet I’ve ignored this rule.

The CR article goes on with guidelines that are still worth reading if not following right to the letter.

Joe

written by JOE \\ tags: amortization, debt, emergency fund, Finance, income, Investing, Retirement, saving

There’s an attraction to the interactive sites suggesting you plug in your age, sex, etc, and see details related to your category peers. From CNN/Money I found;

Yes, I am 45-54. The site also offers median net worth based on your income. Click on the image to be taken to the site to see where you stand. Keep in mind, net worth figures generally include the value of one’s home and median is not the same as average. Median means half the population considered is higher, half lower.
Joe

written by JOE \\ tags: cnn money, Finance, Home, income, Investing, median, money, net worth, Retirement

From an interview with Barack Obama aired on CNBC tonight;

“We know that over the last decade or so that more than half the economic growth has been captured by the top 1% of US citizens. That means the other 99% have seen their effective incomes go down. That is not a recipe for long term economic growth.”

I’m sorry - if half the gain went to just the top 1%, the remaining gain went to the rest of the people. Let me be clear, I am not suggesting this is ‘fair’ or that I’d advocate policy that would perpetuate it. I offer the following chart, which supports Obama’s intentions;

My issue, and reason for this post is that I believe precision is important. If all (100%) of the gains had gone to the top 1% of earners, then the rest of us would have remained level. It would take for the top X% to increase more than 100% of whatever gains occurred in a given period to impact the statistics so the rest of us would have lost ground. Please, Mr. Obama, the facts are bad enough, use them to your advantage. Learn to speak about the numbers and the numbers will speak for themselves.
(Note - click on the image above to read the entire article from the CPBB)

Joe

written by JOE \\ tags: barack obama, economic growth, Finance, income, innumeracy, statistics

As a fan of Garrison Keillor’s “News from Lake Wobegone” where, “all of the children are above average,” I’m always intrigued to find some reference to an ‘average’ so off the mark it strikes me as comical. Citizens for Tax Justice (CTJ) helped me find a recent example. They quote Senators Hillary Clinton and Barrack Obama as referring to ‘wealthy’ as meaning those with incomes above $250,000. Now, according to the census bureau, the 2005 median family income was $44,389. So, maybe these two senators are a bit out of touch, but let’s see by how much. Only 15.7% of families made more than $100,000. They may not consider themselves wealthy, but the rest of the world does, and half the people back home probably do. Moving along, 5.84% make $150,000 or greater, and only 1.5% more than $250,000. Are these people so out of touch that they believe that wealthy only applies to the top 1.5%, or that a much higher number of families are making $200,000 or more?

To be fair, the same article from CTJ tells us that a Time Magazine poll found that 19 percent of those surveyed thought they were in the top 1%. Lake Wobegone, here I come.

Joe

written by JOE \\ tags: distribution of income, global rich, income, income distribution, money

A paper titled “INCOME MOBILITY IN THE U.S. FROM 1996 TO 2005” published by the Department of the Treasury this past November was recently discussed in this week’s Barron’s in an article titled “Two Americas, or One“.
One thing that has occurred to me as I’ve read any discussion of income distribution (e.g. the top 1% of earners make X% of income) is whether those people stay at the same levels, the rich getter richer, or whether people move around much. This study helped to answer that question a bit.

Above, is table one from the study. Simply put, of the lowest quintile (1/5) of the wage earners, nearly 58% moved up in income ranking, and 5.3% moved right up to the highest quintile. In a similar fashion, 31% of those in the highest quintile to start, dropped out. You can study this chart to come to your own conclusion, or you may read either of the articles linked above.
JOE

written by JOE \\ tags: Finance, income, Savings, wealth, wealth distribution