JoeTaxpayer

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

A great political / finance cartoon from last week’s Denver Post, it really speaks for itself.

Enjoy the weekend,
Joe

written by JOE \\ tags: Finance, interest, Investing, money, Retirement, stocks, Taxes, wealth

First, a link to The Simple Dollar’s blog post on MMA, which generated more comments than I’ve ever seen on one posting. (Careful, this can take some time to load)

Get Rich Slowly also had a discussion that generated much interest.

WiseBread also gave a review of MMA with a similar conclusion to the one I reached.

United First Financial, who created the MMA concept, offers a video to explain the approach.

For some interesting hyperbole Vision Force 21 is an agent selling MMA.

Mortgage Acceleration LLC also an agent for MMA.

Integra Mortgage and Investment has another series of links with MMA comments and observations.

BankRate.com’s article on MMA

MSNBC’s “What’s a ‘mortgage accelerator’?”

CNBC’s interview with author Rick Edelman

Clark Howard fields a question on MMA

Dave Ramsey’s reaction to MMA

Another Dave Ramsey conversation (transcript)

An article by ActiveRain

Travis Mitchell kindly offers a years’ example of MMA in action, and in response I offer my own money merge account spreadsheet. I would be happy to entertain any intelligent dialog on the numbers presented by the two of us.

A page containing a summary MMA example which many agents link to.

The web site Money Merge Advantage, which inspired my post Money Merge Innumeracy.

The Age (an Australian site) has a great article, “Smoke and Mirrors“.

Kiplinger’s “Don’t Fall for This Mortgage Pitch”

(Please send a comment if you have more links to suggest or if you’d like a copy of my MMA spreadsheet. The sheet will let you see your own numbers, and will help you decide for yourself.)

JOE

written by JOE \\ tags: Finance, interest, Investing, investment, mma, money, money merge account, Mortgage, mortgage acceleration, mortgage accelerator, Retirement, spreadsheet, wealth

Making the rounds on the internet, a friend sent me this piece;

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until on e day, the owner threw them a curve. “Since you are all such good customers, he said, I’m going to reduce the cost of your daily beer by $20. Drinks for the ten now cost just $80.”

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share’? They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

‘I only got a dollar out of the $20,’declared the sixth man. He pointed to the tenth man,’ but he got $10!’

‘Yeah, that’s right,’ exclaimed the fifth man. ‘I only saved a dollar, too. It’s unfair that he got ten times more than I!’

‘That’s true!!’ shouted the seventh man. ‘Why should he get $10 back when I got only two? The wealthy get all the breaks!’

‘Wait a minute,’ yelled the first four men in unison. ‘We didn’t get anything at all. The system exploits the poor!’

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.

It seems the original Author is not known.

JOE

written by JOE \\ tags: Finance, money, richishan, Taxes, wealth

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

A few days ago, in You Are Rich, I observe the median income of all the people in world is about $850. Now, that thought led a Forbes author to go one step further, in the Forbes 400 issue, writing an article The Forbes One Billion, in which he notes the combined wealth of tho top 400 people in the US is $3.5 trillion. On this, you’d expect an annual gain of $350 billion or so. He then states that the bottom One Billion people average $350 per year in income. The $350 billion dollars of annual gain of our top 400 fellow Americans can double the income of One Billion of the world’s poor. I don’t have more to say on this, to me, it’s something to ponder.
JOE

written by JOE \\ tags: Forbes 400, Investing, money, rich, wealth

Sometime back, I read a blurb on Andrew Tobias’ website titled as above, I added the congratulations. The article linked to Global Rich List a site that allows you to enter your income and see where you stand, ranked against everyone else on the planet. What I found so shocking is that the median income of the world is $850. Per year. The allowance I give my 9 year old ($9/wk) is an income greater than 16.8% of the world’s population.

On the other side, you have household US income data that show median household income at $48,201, which if plugged into the Global Rich List put you in the top 99%. This is worth repeating. Half the people in this country live better than 99% of the rest of the world.

Next time I look at this data, I’ll discuss “why do we feel so poor?”

JOE

written by JOE \\ tags: distribution of wealth, income data, Investing, money, wealth

I wrote about a zero interest credit card offer I accepted, and received some feedback and a couple questions from a reader:

Besides possibly affecting your credit score (by having too much available credit), presumably you’ll want to cancel the account(s) at some point… right?

I’ve read canceling too many accounts in too short a time period also negatively impacts your credit score.

Then there’s the impact on your score from new repeated credit inquiries, etc.

Indeed the answer to the above is yes, mostly. Let’s look at what impacts your FICO score;

By the way, the above is from a PBS special, “Secret History of the Credit Card.” Mrs. Taxpayer is still kidding me how a show with such a title can get my interest.

FICO formulas are still a bit of a secret, but the above is a good start. As I’ve read more about each of these criteria, I understand that ‘amounts owed’ are a ‘percent available credit used’ more than total dollars. So accepting a new card and instantly using the entire line may have a bit of an impact, but this is where unused credit on other cards actually helps bring down the total percent used. Of course, applying for too many cards in a short timespan also will impact your score. Canceling cards can hurt you in two ways, raising the ‘percent credit used’, and reducing average age of accounts, so you are correct, these are concerns.

Now assuming all that doesn’t scare one away from accepting free money, what about the tax impact on the earnings you’ll receive? Once you subtract the income tax, the $50 transfer fee, and the temporary possible credit score damage, do you think it’s still worth it?

As I posted, I will gross $450 in profit. With median (household) income at $48K or just over $24 an hour, I do think it’s worth it. I dropped off the cash advance check along with other business I had, so no wasted time there. I set up 5 payments of $200 on my automatic bill pay through my bank, and marked my calendar to make that last payment in full. Maybe 15 minutes effort. I’m not planning to spend time scouting out these deals, but I won’t turn them away. I am 45 years old and remember when $450 was the pay for 150 hours of work. Would I do this to gain $50? No. $250? Sure.

To wrap up, I’ll say that if you are in the market for a mortgage, you’ll want to check your credit report and be very careful not to do anything that might hurt your chance of getting the best rate you can. I wouldn’t want to trash my credit rating, but I can afford a small hit. My fixed mortgage was closed at the bottom of the last cycle and so I doubt a refinance is in my near future. Thank-you JAL for reading my blog, and being the first to comment on one of my posts. I hope I answered the questions you raised.

Edit - I recently found an article “Five Mistakes That Hurt Your Credit Score” by Jeffrey Strain of TheStreet.com which adds to the thoughts I presented here.
JOE

written by JOE \\ tags: Credit, fico, interest, loan, money, wealth