Sgt.Sausage wrote:
- quote -

I could be wrong, but based on Chris's phrasing, "pre-tax vs. post-tax
contribution," I assumed he was speaking of a deductible IRA/401(k) vs.
a Roth IRA/401(k). If this is the case, then you either pay income
taxes now or income taxes later. Capital gains tax does not figure into
the picture.

Even if he is speaking of a taxable account for the "post-tax
contribution", one still must pay income tax on the amount contributed.
If one's tax rate is the same now as in retirement, the deductible
IRA/401(k) still always wins (unless you manage to pay negative taxes on
the gains in the taxable account).

-Will

"Will Trice" <wwtrice[at]paragondynamics.com> wrote in message
news:447FB0E9.6070702[at]paragondynamics.com...
- quote -

It's a little more complicated than that.

(a) Pay taxes up front on investment cash and earnings/gains are taxed
at current (low) cap gains rate (15% ?).

(b) Pay taxes in the end and everything is paid at income tax
rates.

May or may not make a difference depending on a lot of
factors, but it's not quite so simple.

Chris Cowles wrote:

- quote -

Er? Either they pay taxes up front, or they pay taxes in the end.
There is no amount of time required to make up the taxes.

-Will

"Elizabeth Richardson" <erichktn[at]worldnet.att.net> wrote in message
news:taJOf.508814$qk4.482298[at]bgtnsc05-news.ops.worldnet.att.net...
- quote -

Education? Financial knowledge? Comfort with the source? He certainly seems
to have developed a good plan.
--
Chris Cowles
Gainesville, FL

"Elle" <honda.lioness[at]nospam.earthlink.net> wrote in message
news:dxFOf.3019$6I.718[at]newsread3.news.pas.earthlink.net...
- quote -

They're in their mid-50s. Dad's already part-time. Nothing was written about
when they intend to retire completely. Does their current income level, and
lack of information about a time horizon, influence the relative value of
pre-tax vs. post-tax contribution? If their retirement horizon is short, it
may be difficult to recover cost of the taxes.

"Bobby_M" <rmierzej[at]telcordia.com> writes:

- quote -

Encourage them gently. As long as they are spendin no more than they
earn, they're on the right path. Ramp up the easiest, most
painless savings - payroll deductions - money never seen is money
not spent. You're young, they're younger, this is the best
time to get a good start. But be gentle and positive and
encouraging, not negative or disparaging.

There are some fun and positive and encouraging book out
there, too. Your parents aren't in a place for it, but your
sisters may be prepared for The Wealthy Barber, for example.

--
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 -


Even if there's not any old bills that are worth a premium for their
numismatic value, it's certainly worthwhile to look through them and see
what you've got -- it's part of your heritage. And it is pretty cool
when you find a silver certificate or an Indian penny or a war nickel,
or an old series $2 bill.

(You are very unlikely to find a gold certificate; I believe they were
all destroyed in 1934. The few that escaped were illegal to own from
about 1934 to 1964)

I used to spend buffalo nickel occasionally (ones with the dates worn
off so all they were worth was 5 cents) just so someone could find it in
their change. I should check my safe deposit box and see if I still
have a roll or two of buffalo nickels...

Best regards,
Bob

"Bobby_M" <rmierzej[at]telcordia.com> wrote
snip; Newbies to the thread, please look back.
- quote -

Yes. Little is sweeter than being able to support one's self
through one's own industry and do it well.

- quote -

I think that's a great explanation. To me, it suggests how
easy it is for a cycle of low income earnings to perpetuate
itself through generations of a family. Though I understand
from what you say (and the numbers) that your parents have
broken into the middle class. They're not low income
anymore. IMO that's really a great achievement. They have
come a much further way than, say, Donald Trump, who, while
he has done well actually started with great advantages. So
the distance Trump has traveled is arguably not as far as
that your parents have traveled. (Don't anyone try to do a
linear model of this, please. Linear models are overrated.
Think exponentially...) I say this despite your parents not
being in the best financial shape at the moment for
retirement. But it sounds like that can be turned around, if
they want it to be.

Maybe your parents are the way they are because they didn't
have opportunities to learn about investing. That you are
doing really well but that your siblings haven't come as far
(yet?) suggests, again, how hard it is to break into the
upper middle class or so as a permanent family situation.
Note: It would seem you're actually way beyond middle class
and bordering on the filthy rich, but you're also not being
cavalier about this. Hurrah for you!

IMO the motivation to scramble to find a way to pay for
college (for one thing)--as I suspect you did--doesn't just
happen. I don't think anyone gets well-off all by
themselves. What's involved mostly is luck--having parents
who emphasize education and/or budgeting and/or investing.
If one is not so lucky to have such parents, the chances of
success are much lower.

You might enjoy the book _The Millionaire Next Door_ to help
reinforce some of your ideas. Its studies are eminently
digestible and its anecdotes of real-life family situations
(from blue collar to while collar medical doctors) involving
personal saving, thought provoking. Plus, the little guy
often seems to win in the end. Or at least he sure as heck
does not always lose.

Good luck. Let us know if some of that cash in the safe
deposit box is actually old currency having serious value
among collectors. (Interesting how many coin collectors seem
to be coming out of the closet for that thread, if I'm
understanding it correctly.)

Elle,
I received a full scholarship for my associates, then my employer
picked up the tab for BS. My two younger sisters also received academic
scholarships, but not full rides so my parents helped them the rest of
the way. This really wasn't the full cause of their previous debt. I
think they just fell into the typical trap of earning more and more
money and looking for ways to spend it (and then some). My parents were
also the first in a long family history to earn middle-class wages so
they went overboard to provide us kids with everything they never had.

My mother was usually disappointed with me through grade school with
anything less than an A, but it's because I set the precedence early
on. There was no beating :-) Making my parents proud was enough
incentive.

Both my younger sisters are earning great livings (nurse and dental
hygienist) but they don't have much to show for it either so I may be
the exception unfortunately. The act of becoming wealthy feels really
good to me, moreso than the fleeting joy of overspending. Sorry I can't
explain it any better than that.

Bobby

"Bobby_M" <rmierzej[at]telcordia.com> wrote
- quote -

They must have done something right given all your success,
no? Like did they do anything to help you to get through
elementary and high school with good enough grades and
/motivation/ to go to college. (Or did they beat you nightly
to do your homework?;-) ) What's the secret to raising a
child this bright who is also savvy about keeping his
financial house in apparent good order?

I noticed you said they helped a sibling of yours through
college, which AFAIC certainly can be admirable and a good
investment. Did they help you, financially, through college,
too? How much dinero was that? How many siblings? :-)

This topic (raising kids to be financially responsible) is
actually treated fairly extensively in a popular book (often
mentioned here) on personal saving called _The Millionaire
Next Door_. So I'd be interested in your responses, if you
have the time.

****Just out of curiosity, why would people in their mid-50s be asking
one of
their children for financial advice? ***

Because I'm college educated and have my financial house in good order
and they don't. I've never claimed to be an authority but they look at
how much better off I am at 30 than they are at 55 and I suppose they
value my opinion because of it. Example: They have $100k in 401k and
have very little other savings prior to the inheritance. I have $129k
in 401k and another $150k in various investments. I do realize they
were the ones that were supposed to give ME advice.

Bobby

"Bobby_M" <rmierzej[at]telcordia.com> wrote in message
news:1141571660.604436.212900[at]z34g2000cwc.googlegroups.com...
- quote -

Just out of curiosity, why would people in their mid-50s be asking one of
their children for financial advice?

Elizabeth Richardson

**********************
I'd be curious about why they want to sell their
current house and buy another.
**********************
The house they're in now was bought when 3 kids lived with them. It was
a compromise, more bedrooms, less of everything else they want. Now
that all the kids are out, they want better location/kitchen/dining
room to be able to have all the kids (and our families) over for
holidays. I think this sounds like a good reason to move.



*********************
If the $100k is all your parents have for retirement
savings, and they're expecting retirement in about ten years
at an income not far from they're current income, they are
in bad shape.
**********************
I'm fully aware of their bad retirement positioning which is why I'm
getting involved. They do have other savings here and there, but as far
as tax-defered retirement investments, that $100k is it right now. They
had a LOT more debt in the last 5 years or so due to helping my sisters
out with college and yes, other bad spending habits as well. They
consolidated that debt into a mortgage refi. I'm going to strongly
recommend they do not take on a house any higher in value because it
would cut off any posibility of increased retirment savings.

Thanks for your suggestions!

Bobby

I don't see any major holes in your plan. A possible addition is a
realistic estimate of how long your folks plan to live in their new
home, and what they may want as their age encroaches upon them. If your
folks are planning on moving within 6 - 12 months, make sure you don't
have any pre-payment costs associated with the existing mortgage. I
know little about that area. As far as paying cash for the new home,
run a spreadsheet on their income and expenses to confirm your
estimates on tax consequences (tax prep software is helpful). As far as
I know, you would save 1%-2% on points and loan origination fees,
up-front, paying cash for the new house. Check with a mortgage lender
on terms of a possible - even if unlikely - home equity loan or other
means of accessing the equity value of the house, just so you have that
information and avoid any surprises later.

"Bobby_M" <rmierzej[at]telcordia.com> wrote
Snip. Interested readers, please look back.
- quote -

I think you have things pretty straight. Based on the
numbers, here are a few very important caveats.

I agree with paying off the credit card debt and the current
mortgage. I'd be curious about why they want to sell their
current house and buy another. Based on the whole picture
here, I think the only justification for that is if they
intend to buy a house much lower in value, or that somehow
results in much lower monthly home expenses (lower property
taxes, less maintenance?).

The guideline for retirement savings is, in order of
priority:

1. Max out 401(k)s //up to the employer's match//.
2. Max out Roth IRAs
3. Resume contributions to the 401(k)

If the $100k is all your parents have for retirement
savings, and they're expecting retirement in about ten years
at an income not far from they're current income, they are
in bad shape. This uses the assumptions of calculators like
that at http://www.fincalc.com/ (click on "Consumer Calcs"
on the left; go to the Retirement section; then click on the
two "how much" links and run some numbers). This calculator
includes Social Security (estimated), assumes retirement at
75% of current income, and a life expectancy of 85 years.
Your parents have to save around $9,000 a year starting now
to be in good shape.

Make sure your parents use the Roth IRA catchup provision,
designed for people 50 and over. For 2005, they can
contribute (up until April 15, 2006) $4500 each. For 2006,
$5000 each.

How did your parents accumulate $6k of credit card debt? If
they pull stuff like this, that's even more of an argument
to pay off the house so they don't otherwise have an
opportunity to squander their retirement savings.

IMO your best bet is to get them to start looking at these
numbers and compel them to drastically re-make their monthly
budgets.

Remember we're not really factoring in the cost of long-term
care here.

My parents, in their mid-50's, have just come upon inheritance due to
the death of my grandmother.

Combined income of about $75k per year (dad is part time now).

401k savings at about $100k.

Primary residence, single family home worth about $350k, carrying a
$125k mortgage at 5% (13 years of a 15 yr mortgage left).

$6000 credit card balance at 7%.

The inheritance consisted of $200k in the form of bank account balances
and another $70k in cash (yes, that's cash in a safe deposit box ugh!)

They plan on selling this house and moving to a similarly valued home
within 6-12 months from now. My initial ideas have been to immediatly
pay off credit cards and the mortgage. I figure that even though the
mortgage rate is so low, it's a pretty good short term investment that
would be similar to a high-yield money manager account (4.5% APR).
Their effective tax rate over the last 5 years has averaged about 10%
so I don't think the interest deduction is that substantial. I also
think buying the next house in cash, no mortgage, is a good idea for
them because money typically burns a hole in their pocket. My goal is
to get them setup for a comfortable retirement without any debt. I plan
to also suggest maxing out 401k contribution and add an IRA if their
monthly expenses permit.

Are the any major holes in this plan?

Bobby