On 2006-02-14 11:51:19 -0500, "Elle" <honda.lioness[at]nospam.earthlink.net> said:

- quote -

As far as I know, it excludes assets in IRAs and 401(k)s when they
calculate the amount they expect the parents to contribute.

My main point was, and still is, from a strictly financial point of
view, it's more important to fund one's own retirement. Only after
one is reasonably taking care of that can one look to things like
one's kids educations. In a worst-case scenario, the kids can get
loans, go to public schools, go to school part time, etc. etc. I'm
not saying that these should be the preferred options (though the
prices of private schools, especially if you're not talking about
the very top-tier ones, is absurd), but I am saying that there are
alternatives for kid's educations. There aren't alternatives to
funding your own retirement.

It is *not* selfish to save for your retirement before saving for
your kids education. It's prudent.

It would be selfish, I think, to go on expensive cruises instead
of saving for your kid's education. But you can do without cruises.
You cannot do without retirement.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

"jIM" <noreplysoccer[at]hotmail.com> wrote in message
- quote -

And if you change jobs, you'll have to pay the loan back immediately.

one big picture issue to consider:

save money in 401k in lieu of child's education.

Assume at age 50 the 401k has around $500k in it. An 8% return would
give $1,000k at age 59, $2,000k at age 68. A second assumption is that
around 25-50% of the 401k after age 50 is in bonds to stablize the
account.

Instead of putting 25% into bonds, why not borrow 10% of 401k for
child's education, and put the other 15% into bonds (so allocation is
75% stock, 15% bonds, 10% 401k loan, which eventaully moves portfolio
to 85% stock and 15% bond after 4 years), This also pays student loan
interest to yourself. This assumes 50,000 could be paid back in 4
years. What would problems with this be?

If the 401k performed poorly and the 500k amount was not reached as the
assumptions stated, it wouldn't be smart to pay for kids education. If
only $250k was in 401k at age 50, for example, this person would be
behind in retirement savings, correct?

I do see some issues:

most 401k plans limit loans to 1 or 2 loans per person- all monies
needed for 4 years would be withdrawn in year 1.
taking loans from 401k has the loan payments taxed twice (once on
before deposit/repayment, once on withdraw from 401k)

I do see advantages:
this would allow more money to enter 401k plan when loan is being
repaid
the 401k plan is not included in financial aid calculations
no credit is needed

<BreadWithSpam[at]fractious.net> wrote
- quote -

Last I read, up to a certain age, federal student loan programs still ask
for details about an applicant's parents' finances (income, assets, etc.).
This has come up here before. I still think before a parent says to a kid,
"You're on your own," fairness demands the parent recognize that this is not
the way the federal government looks at the situation. Furthermore, to avoid
adding insult to injury in such situations, parents who won't help their
child with college costs should strongly consider not taking this child as a
tax deduction while s/he works his/er way through college. Or if they do,
they should at least give the child the amount of the tax benefit.

Parents who choose to toss a kid out after the age of 18 should also not
expect their child to help them in their old age.

Parents one way or another /choose/ to bring children into the world. It is
the parents who owe the children, at least up to the age of 18. The children
owe nothing financial to parents in compensation for that time. At least,
that's my view of the ethics here.

Be cheap about your kids' college education (something incredibly important,
AFAIC), but then don't blame them if they're cheap in return.

"bo peep" <cowartmisc1[at]yahoo.com> writes:

- quote -

That's not exactly how I would have phrased it, but the idea
is right. As they say, you (or your kids) can borrow money for
college. Nobody's going to lend you money for retirement.

Moreover, retirement savings which is in 401k and IRA and
other qualified plans typically don't hurt one's chances for
financial aid for college, at least not as badly as similar
savings outside of such plans (and certainly better than
savings in the kids' names).

The college financing system in our country is nearly as broken
as the health care financing system. Costs have been going
up faster than inflation, folks go deep into debt for it, etc.
(and unlike healthcare, the product isn't actually getting
vastly better).

But know that there's nothing selfish about saving for your
retirement first and the kids education second.


--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -

Comments like this reflect only on the author and are inappropriate to this
newsgroup.

- quote -

Tad, by your reasoning, it would seem all allocation guidelines are pulled
out of a hat. For example, do you truly not endorse allocating per
guidelines based on risk tolerance? Then when someone says, "I'm going to
put 30% in high grade intermediate term bonds, 70% in blue chip stocks," do
you say to him/her, "Why not 27% bonds... ? "? To which they say, "Why not
25%?"

I qualified my statement: I said it's what /I/ would do. I also subsequently
said that there might be some variation according to one's comfort zone.

snip--Just my opinion, but I think you're reading way too much into my very
mild comment.

- quote -

So people follow the herd, and that's a good thing? If I did that I'd have a
negative savings rate right now, or perhaps be among the many people
declaring bankruptcy these days.

For the OP on this point: There's not just Enron. I have acquaintances who
are employees of a major, older computer yada company traded on the NYSE,
large cap. They have been paid in large part in stock in recent years. That
stock has declined 50% in value since about 2000. And this at a reputable
company! (So reputable that I have a buy order on it right now because I
feel it's a good long-term position. I'm waiting for it to fall a bit more.)
If you're young and not experienced in the stock market, let this thread be
an introduction to you on the topic of being diversified.

snip comments that strike me as repetitive

Elle wrote:
- quote -

Hang on Elle, "there you go again". "My counsel" is for him to talk with
an accountant and, if he goes that route, an advisor, to get a handle on
all the subtleties of these questions. And that in my opinion these
alleged "rules of thumb" are basically pulled out of a hat (5%...why not
6%? or 8%? or 4.3%?)

Look - his first post, to be frank, went into so many topics that it
seemed beyond what could be addressed here on MIFP. My suggestion would
be for him to pick up a few personal finance titles like Eric Tyson's
"Dummies" book, the Wall St. Journal paperbacks, etc. - just to get his
arms around the different issues. Or meet with an advisor and pay for
the advice.

But his last post was basically "these are great ideas, I'm going to
reduce my employer stock holdings to 10%" and I don't like reading that
kind of thing. Let's say he goes in on Monday and does that, flushes out
the ESPP. We don't know what the gains on that are, or when these shares
were purchased, or when the ESPP plan was in effect. So it might be a
disqualifying disposition that could be avoided by waiting a week, or a
month, or three months, saving him unnecessary taxes. And if stock
volatility is truly a concern even over such a short period perhaps the
publicly-traded options are available for cheap insurance (Enron
examples are silly; not every company is 24 hours removed from a
bankruptcy filing).

And aside from that...if there's a gain on the ESPP sale, will it
trigger AMT, and if so, does that skew the analysis? He's in CA, and
it's 2006 (bad year so far for AMT), and he has a stock option plan
where for all we know he may be receiving a fat grant in two weeks..if
the stock goes up this year and he's in AMT he could come back to MIFP
April 2007 and say "hey thanks for the tips, but why did I just get a
$10,000 tax bill for my stock that's now back underwater?"

And this sale is based on arbitrary 5%/10% levels people are citing as
"rules" ("pay your taxes" is a rule; no such rule exists in evaluating
ESPPs & stock options, just opinions, and comfort levels with the risks
inherent to different choices). Trust me, in Silicon Valley it's
extremely common to have substantially more of your assets tied to your
employer's stock value. It's basically the routine there...it's how a
lot of people get rich. It's also how people don't get rich, of course,
but certainly no rule of thumb applies. As I said, you might suck the
life out of his comp plan by flushing out his ESPP shares and stopping
participation in the ESPP.

RE: buying ESPP vs. open market - the ESPP is by definition a bargain
purchase, and if the stock goes up during the purchase period, it can be
a substantial bargain (the 15% discount is essentially the minimum).
Even if he wants to net-reduce employer stock exposure it would still
most likely make sense to participate in ESPP and do an immediate sell
(which is a disqualifying purchase, but will still be net-gain after
taxes). Skipping that is leaving money on the table.

My fundamental point is that there are nuances to these questions that
are best addressed by someone fluent in the tax issues and operation of
these plans.


- quote -

Then you should become an advisor! His question encompasses a stock
option plan, ESPP, home purchase, education saving, retirement saving,
and all the implicit tax questions including AMT analysis (under both
the reverted system and a likely amended scenario). Then investment
selection within the taxable and qualified accounts. Hardly lends itself
to a quick answer, or at least, not a complete one.

-Tad

The keys to your plan are

1) keep debt close to ZERO. You have accomplished this.
2) set aside money every month. You are doing this (with further
discussion needed)
3) take advantage of tax deferred vehicles when possible (401k, Roth
IRA, for example).
4) prioritize the house, retirement and education expenses

4k of monthly expenses, how much monthly (take home) income?

I would advise the following:
a) Keep the 6% going to 401k
b) start a Roth IRA and/or save for house down payment
c) take the 10% being put into ESPP and put this 10% into a "house
account", which invests in TIPS, I-bonds, or another safe investment.
If you make $80k, this house fund would have $80k in 10 years. This
should be enough for a down payment. Even $16k accumumlated after 2
years might be enough for a reasonable down payment.
If the options can be excercized, add these proceeds to the house fund.
If some of the brokerage
d) get the 401k to 10% of your income
e) then consider about saving for college

Your kids could borrow for education costs. Few banks will let you
borrow for retirement costs (reverse mortgage is one of few examples).
Set this priority according to what you are comfortable with. It's
possible to do both...

For a sound retirement plan, expect to put 10% of salary into
retirement accounts.
I suggest increasing this percentage if you plan to retire in a high
cost area (such as Silcone Valley). For example, I contribute 10% to
my 401k, my wife has another 10% to hers, and I have a Roth yearly
contribution which is about 1/15th of my yearly gross salary/ 10% of my
take home pay each month. I have a brokerage account as well with
other monies in it.

"TB" <borekfm[at]pacbell.net> wrote
- quote -

Not being wiped out if a company heads south, of course.

We disagree that this is dangerous; in fact, your counsel on this point is
what strikes me as the more risky.

I'm promoting a basic tenet of diversity, though the magic max % one should
hold will vary. I assumed the original poster is aware of any tax
consequences of adjusting his stock position from the ESPP . If not, of
course read up. I also dispute that there aren't quick answers for this
situation, once one has all the facts.

TB wrote:
- quote -

I agree with your point that this rule of thumb depends on the exact
situation, but this is far from "dangerous advice". It is solid advice
that most experts agree on.

- quote -

I disagree. This is only relevant for companies that are not public
yet, or unexercised stock options. For public companies, you can always
simply buy the shares on the stock market. Once you receive the ESPP
shares or exercise options, there is no difference between an employee
holding those shares and an outsider buying the shares on the open
market. If you work for Google and receive 1000 shares of GOOG, you are
no better off holding on to those shares than an outsider buying 1000
shares of GOOG.

- quote -

The difference is not substantial. If you sell ESPP immediately, your
"gain" is simply counted as ordinary income (most likely 25-35%). The
best case scenario for holding long term is that the gain is considered
long term (15%). That's not really a significant difference when
considering the volatility of a stock over the 1.5 years (I think) that
is necessary to make it a qualifying disposition.

In article <2kPHf.29560$F_3.8566[at]newssvr29.news.prodigy.net> ,
TB <borekfm[at]pacbell.net> wrote:

- quote -

It is a concept called "diversification". Kids know it as "don't
put all your eggs in one basket". Modern day investors know it as
the "Enron Rule". This person already works at the company, so
any investment in that company just compounds the risk. A
diversified portfolio should never have more than about 5% in any
one given stock.

-john-

--
================================================== ====================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ====================

On 2006-02-12 18:15:34 -0500, TB <borekfm[at]pacbell.net> said:

- quote -

I may have been the one to toss "10%" in, though I'm sure I made it an
estimate, not a rule and pointed out *why* one doesn't want too much of
his net worth tied up in the same company which is the source of his
income. Nevertheless, my suggestion, which I'm repeating here, is not
necessarily to consider selling - as you say, that can have substantial
consequences - but rather to stop buying. He's been putting 10% of his
paycheck into company stock and now has 25% of his net worth there. If
he takes that 10% and cranks it into 401k, Roth, and maybe 529 for the
kids, his net worth will continue to grow, hopefully fairly rapidly,
and the companys stock's representation in it will naturally fall.

But, OP - as Tad said - if you do consider selling that company stock,
consult with an accountant and/or tax advisor first.



--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

Elle wrote:
- quote -

There's some very dangerous advice being thrown around here. Where did
that alleged 5% rule come from, what's it based on? Depending on where
this guy works, that could wipe out most of his incentive for working
there. This is Silicon Valley and in some firms if you pare back
employer stock ownership to 5% you should probably look for a different
kind of job/comp plan that is more salary-weighted. It's just not the
recipe for getting ahead in Silicon Valley - in some companies anyway.
We don't know - it depends on the company.

That's a complicated question, probably beyond what could be hashed out
quickly on MIFP (without ticking off the moderators anyway). But the
issue that CERTAINLY applies to this proposed paring back is that you
probably don't want a "disqualifying disposition" of your ESPP shares,
it can result in an unexpectedly large tax hit. These arbitrary 5%, 10%
rules ignores the tax consequences and they could be substantial. Good
article on the topic:
http://www.fairmark.com/execcomp/espp/dispositions.htm

I'd say, see an accountant and an advisor, there are plenty in Silicon
Valley. Potentially costly questions here, and none lend themselves to
quick answers.

-Tad

$cott wrote:
- quote -

I hope for homeowners' sake that Fortune is right. I'm not as
optimistic; a -20% or more adjustment to the median in SF and the Bay
Area wouldn't surprise me. That's not a prediction, just what I
said..."it wouldn't surprise me".

I've been tracking prices and corresponding payments for several years
and the numbers are recently started comparing these to incomes. The
bottom line is, the incomes in the bay area are not remotely high enough
to sustain the current prices. In fact a good part of this run-up
occurred while incomes actually dropped. The November buyers had the
distinction of purchasing at perhaps the highest numbers in history: the
median home cost more than 10X the median income, when historically the
number had been more like 5X-6X. That's an enormous difference - where
is the money to pay the mortgage going to come from, if not income?

-20% would be no big deal - basically that's just an 18 month rollback.
It would take something more like -40% to get these income multiples
close to historical levels. Either that, or we're in the midst of a new
trend where people never actually own homes, but instead rent them from
the bank, constantly shifting to the latest payment-minimizing mortgage
product the industry can cook up! Of course, that has to end somewhere.

-Tad (in SF)

<<The reason I have not been maxing-out my 401k is that I will not be
able to take out money without penalty until I am 59-1/2. But for my
children's education I will be needing money 10 years before my
retirement age.>
It is important to remember that your retirement is more important than
your children's education.

John Cowart

<pir_sahab[at]yahoo.com> wrote
- quote -

I would reduce this to 5%, per a popular general rule of thumb to never have
more than 5% of one's portfolio dependent on one company.

- quote -

For how much money your wife and you need to retire, start with
http://www.fincalc.com/ , click on "Consumer Calcs" on the left, then scroll
down to the Retirement section. Surf also some of the retirement calculator
sites I list in the lower part of the site
http://home.earthlink.net/~elle_navorski/id4.html . This latter site also
has links to free online portfolio allocation tools, to give you ideas about
what it means to allocate.

As for the kids, there are protected plans for college savings. Google for
{college savings 529} for one.

To clarify for others, you should max out the 401(k) only up to employee
matching. Then you should contribute to a Roth IRA, IF you're eligible to do
so.

I strongly endorse index funds for someone who doesn't have time to pick
stocks. A collection of writings on the subject is listed at
http://home.earthlink.net/~elle_navorski/id6.html .

- quote -

Figure out how much you want to save for retirement and your kids'
education, then start a new thread on this, titled "How much house can I
afford?" Include a breakdown of where your salary is going (retirement
investment, college savings, rent, taxes, monthly food & utilities, etc.)

Pir,

According to a recent Fortune Magazine article, all geographies survyed
in CA are due to correct between -0.3% ~ -3.4% (San Fran being the
exception; it is due to appreciate a modest 0.1% in 2006).

California is the land of the "option ARM" (a loan program that allows
for deferred interest or negative amortization) which allows for
increased purchasing power. This is not a loan program for the timid
or uneducated, but it is used in abundance in CA to address the
affordability issue. I am not suggesting that you go this route, I am
merely drawing your attention to the popularity of this program in CA.


Should you buy or continue to rent? Current interest rate flunctuation
is only the tip of the iceberg (particularly for an individual of your
stated networth). This decision will have an effect on your tax
deductability, networth and debt positioning. Consult with a CPA and
maybe a financial planner before rendering a decision on this matter.

When should you do it? When you can afford to and when are sick of
building equity for your landlord.

Regards,

Scott Miller
Commercial and Residential Lender

www.RealEstate-IQ.com
www.EZMortgageLoanz.com
- quote -

bo peep wrote:
- quote -

Dear All,

I would like to thank you for taking the time to respond to my earlier
request.

As far as ESPP is concerned, I agree with you that money tied in ESPP
has a lot of risk and the percentage should be reduced. I will sell
some stocks to make it around 10% of my total net worth.

Back to my earlier email. I am interested in creating a financial plan
that will help me retire early and live a decent life with my family. I
would like to get your help in figuring out how much money I would need
to retire as well as fund my children's education. Any spreadsheet that
you would like to share?

I understand that the education at Stanford / UC Berkeley is expensive.
Although I will do my level best for my kids to do well in their
elementry, middle, and high schools so that they have more chances of
getting some kind of scholarships, I don't want to include the
scholarship in my financial plan. My daughter shall, hopefully,
complete her high school in 2020 (14 years to go) and my son in 2025
(19 years to go). So by the time they are all grown-up, I want to have
enough to help them get the best education.

As someone suggested, I should max-out 401k and Roth IRA. The reason I
have not been maxing-out my 401k is that I will not be able to take out
money without penalty until I am 59-1/2. But for my children's
education I will be needing money 10 years before my retirement age.
Please correct me if I am wrong here. But I agree to max-out Roth and I
intend to do that.

Besides me working full time, I would like my money to also work for
me. I would appreciate if you can help me set up a portfolio of
different assets that can grow over time. What are the various ways, in
your opinion, I should invest my money - stocks, bonds, real-estate???,
etc.? I have done good picking stocks in short term trading but am
completely un-educated about mutual funds. Please suggest any good
reading.

I would also like to get your opinion on real estate as well. As I
mentioned in my last email, I want to buy a house in Silicon Valley
which is very expensive area. Most of the houses are priced around
million dollar that are in decent neighborhoods with good school
districts. As the interest rates are creeping up, do you believe that
the housing market could cool off and shed some price gains. When do
you think is the time to buy a house?

I would like to once again thank you for your help.

Best regards,
Pir

<<I'm sure others will point this out - that's a *lot* of your net
worth tied up in your employer's stock.>
That set off alarm bells for me too. He didn't say what type of company
he works for, but Silicon Valley might well mean computer software. If
so, the danger is even greater...

John Cowart

- quote -

I didn't catch this earlier. You should not be holding stock through
ESPP. You should max out the 10% ESPP, but then sell the stock
immediately.