On May 9, 5:05 pm, Paul Michael Brown <p...[at]his.com> wrote:
- quote -

Considering that the appraisal for the house we're building came back
at $150K more than we're paying for the whole project, I have to take
issue with this statement. I think a nearly-immediate $150K return on
roughly $13K in closing costs is not just an investment, it's a steal.

--Bill

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"Default User" <defaultuserbr[at]yahoo.com> wrote
E wrote
- quote -

Automatic enrollment is up not because companies want to
look out for their employees. It is up because of pressure
from lawmakers.

Notable is that, at the start circa 1980, 401(k)s were
intended only for executives. Then 401(k)s became all the
rage because companies, suffering the capriciousness of
pension budgeting, sought a cheaper way to offer retirement
benefits to all. The main reason companies offer 401(k)s is,
as has been stated repeatedly here, to stay competitive when
hiring employees. Everything else is an afterthought. Tad's
explanation denotes the same: If a corporation wants good
upper management, then it has to offer a good retirement
package, which means it has to follow laws (created for
goodness sake not by companies but by Congress) to try to
boost 401(k) bennies for lower income employees.

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Elle wrote:
- quote -


It's not as simple as that -- the match often allows that same
management to contribute more to their own plans.

This is getting a little far afield for MIFP but it might help people
understand why matching percentages are set where they are. 401k plans
must pass "nondiscrimination tests," because the plans are supposed to
benefit all employees, not just highly compensated ones. Tests look at
contributions and balances among all employees, sorted by compensation
levels. If only senior executives are contributing it will cause some
problems -- perhaps some MIFP readers have encountered this, where they
needed to undo a contribution.

By adopting a "safe harbor" 401k plan, an employer can avoid some of
these tests. One safe harbor involves offer matching contributions of at
least some minimal levels. So this is one reason a plan might offer "3%
match on the first 3%," that's part of one of the safe harbor plans.

So to the OP -- in effect this is another benefit to the company for
matching, it has to do with IRS rules about nondiscrimination testing
and "safe harbor" 401k plans. Without the match the plan could be out of
compliance, and the senior execs couldn't contribute as much.

-Tad

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Elle wrote:

- quote -

My company started automatically enrolling new employees in the plan at
a rate to capture full match. They can opt out, of course.




Brian

--
If televison's a babysitter, the Internet is a drunk librarian who
won't shut up.
-- Dorothy Gambrell (http://catandgirl.com)

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"Marco Polo" <Marco[at]Polo.com> wrote
Re taking the match in 401(k) plans:
- quote -

Fair point. I will raise you that management likes not
having to match and likes even more having an automaton who
just takes orders.

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<BreadWithSpam[at]fractious.net> wrote in message
news:yob4p98hqkr.fsf[at]panix2.panix.com...
- quote -

$15.5K is not the legal max that can be put into a 401K. I see this
mistakenly stated in many places.
That is the max that can be put in Pre-tax.
The total limit for 2008 is $46K combined Employee/Employer.

This year, I will put in $23K, my generous employer matches with $23K, total
of $46K goes in to 401K.
The amount above the Pre-tax limit of $15.5K is taxed, but grows tax
deferred, kind of like contributing to a non-deductible Traditional IRA,
plus i get the 100% match.

While this is good to capture all the free money, it can lead to imbalance
in the Retirement vs. Non-Retirement savings. Particularly if you plan to
retire early, but can not touch the over-weighted "retirement" saving.
There is Rule 72t, but that is a discussion for another day.

As an aside, every year i get a piece of these contributions (both mine and
employer match) paid back to me out of the 401K because we fail the
"fairness" test for HCEs. I am always amazed that people do not take
advantage of 100% matching on 10% of income. It is like saying "No Thanks"
to a 10% raise!
I have jokingly advocated identifying those that do not max out enough to
get all the matching, and firing them for excersizing such poor judgement.
If they are making such bad financial decisions in their own lives, what
kind of decisions are they making regarding company matters?

Best regards,
Marco Polo

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Paul Michael Brown <pmb[at]his.com> wrote:
- quote -

I built a custom house at 27. It was fairly modest, about 1500 sq ft. (Just
above median size for the time). It was just over 2x my annual income (also
fairly modest). Just because it is custom does not mean it is extravagant.

- quote -

The appliances were Kenmore.

- quote -

Absolute truth, but not often told by the real estate industry.

-- Doug

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On May 7, 10:26*pm, Sandra Loosemore <nore...[at]frogsonice.com> wrote:
- quote -

I agree with the layering approach in taxable accounts. Some money
has a general purpose, and watching that general purpose account only
return 1-2% before taxes is not a good way to get or stay rich.

When general purpose moves to specific purpose, I would strongly
advise raising cash.

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Bill Woessner <woessner[at]gmail.com> wrote:

- quote -

I know it's tough to get a handle on somebody's situation based upon a
single post, but it seems to me the original poster and his wife were
diligent about funding their tax advantaged accounts and built up a nice
balance. But now they're building a house and at least thinking about a
new car and they realize they don't have enough cash on hand in their
taxable account to pay for that and keep up the retirment savings too.

The debate over "save for the future" vs. "live well now" is almost as
eternal as "tastes great" vs. "less filling." Just my two cents worth,
but building a custom house at age 30 is pretty ambitous. In my value
system that's the kind of thing you do later in life. (Unless you're an
Internet prodigy or a pro athelete.) Ditto for replacing a perfectly
good used car with a new one.

So I'll support the consensus. Max out on the retirement accounts and
put off those Viking appliances in the kitchen under construction.
Houses are CONSUMPTION, not an investment.

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Elizabeth Richardson wrote:

- quote -

It's easy to find data that supports Elizabeth's statement above. Last I
read, less than 25% of retirees have saved more than $25,000 for
retirement. So, while there are some out there who are fortunate enough
to have actually over-saved, there numbers are pretty small.

Bill, there's no magic formula. You seem to be asking a combination of a
few questions. There's the risk of 'saving yourself into the next tax
bracket." You don't mention any pension plans. A pension replacing a
chunk of your income at retirement can make the 401(k) and IRA
withdrawals heavily taxed. If no pension, only your own savings and
social security, it's a bit tougher to do. Look at Fairmark
http://www.fairmark.com/refrence/index.htm and you can see that for a
couple, the standard deduction is $10,900, plus 2 exemptions, $3500
each. This totals $17,900 that a retiree can withdraw each year tax
free. Using the 4% initial withdrawal rate, that's $447,000 gross pretax
savings needed to generate. The next $16,500 is taxed at 10%. Another
$412,500 needed to support that withdrawal rate. With about $75K in
pretax accounts, you have a way to go, even adding the $31K to the
401(k) and $10K to the IRA. In the dozen years it would take, the
brackets will creep up as will the standard deduction and exemptions. I
doubt there will be any huge jump that would catch you by surprise. Tied
into all this - if you ae in the 28% or higher bracket now, I'd not use
Roths, just pretax. If you have a baby and the missus takes some time,
you can convert while in a lower bracket.

(mixed in to this is the Social Security tax trap that needs to be
monitored. When half your social security plus other income exceeds $32K
joint, the SS becomes taxable. A high earner, and high saver will blow
through this. My study shows that it's only an issue for those
straddling the line, where the next $1,000 is taxed at a high phantom rate)

Your real question seems to be how much non-retirement funds need to be
available for the high ticket things you mention. I'd suggest that's
more a function of how steady your income is and how predictable the
expenses are. I'd go back to the 'emergency fund' conversations, so when
the furnace fails you don't need to panic to replace it. Of course a
homeowner has more potential unexpected repairs than a renter.
If you wish to pay cash for the cars, start saving now.

But I'll close with this - run the numbers to see if you are on track to
your retirement goals. Not knowing your income, I can't guess whether
you are on on your way or falling short.

Joe
www.blog.joetaxpayer.com

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"Bill Woessner" <woessner[at]gmail.com> wrote in message
news:2518fe6a-1fd0-464e-bbc5-

- quote -

The reason it is usually said that you can't have contributed too much at a
young age is because something might happen to you at, say age 50, when you
could no longer contribute at all. We simply can't predict the future. If
you do a good job now while you're able, then you can re-evaluate everything
at increments nearer retirement itself.

Most folks don't find they've saved too much for retirement. Most folks wish
they'd saved more when they were younger. If you put it off now, when you're
in your 50s the amount you'd have to save will be overwhelming.

It is very difficult to balance all the demands on one's finances. Only you
can decide which demands should have a priority. It might be a good idea to
just write down all those things for which you expect some future expense.
Put some real numbers with them, then try to divide up what funds you have
available to see how you come out.

Maybe you'll decide to back off retirement savings from 10% to 6% and
temporarily forego any IRA contributions in order to build up a cash
reserve. Maybe you'll decide that you can't pay cash for a car in 2 years,
but that you could do it in 4.

You don't mention children. Will you have some future need to be saving for
college? How will that fit into the picture? Will your wife's income be
reduced in order to have these children, or the cost of raising them affect
your discretionary income? And, Bill, it's these future demands on your
finances that tell me your $95k in current retirement savings have been
excellently deferred.

Elizabeth Richardson

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50-50 might be good rule then in your case, assuming you've
sucked up any "free" money in terms of retirement matching
or low-inocme savers-credits.

There has been talk of a "universal" tax-advantaged savings account
that would combine retirement, health, college, house, etc. That
would
simplify the situation. Not much progress yet. I guess the political
thinking is if a new account is created, it sound like its giving back
more money than expanding an exisiting account.

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Bill Woessner <woessner[at]gmail.com> writes:

- quote -

That's not actually what I said. I did, however, suggest that
whatever else you do, you make sure to continue to put at least
10% of your income into your retirement accounts. More's better,
sure, but less than 10% makes it awfully difficult to picture
one managing to save enough to ever actually retire.

(And not everyone can put the legal max into retirement accounts -
even if one can put the full $15.5k into a 401k *and* maxes out
an IRA (Roth or Trad), that's still only $20.5k (more for those
over 50, though.) The difference would have to come from employer
matches + other employer contributions - and most folks' employers
are not quite that generous)

- quote -

Again, you're missing a lot here. I don't expect anyone making
less than $200k to reasonably expect to put $41k into retirement
accounts.


Now, you've said you'd saved $95k into retirement plans - with
your wife - by the time you're both about 30. If we assume that
you both started earning enough to really save money at about
25 years and put 10%/yr away, I'll guess that your combined
income is on the order of $100k now. Keep putting 10%/yr away
and assume your 6.5% return (and if we assume everything is
after inflation and that your income goes up at inflation + 2%),
then after 30 more years of working, you have a retirement
balance of about $1.72 million. Which is enough to draw an
annual retirement income of about $69k.

Saving 10% it'll *still* take you 30 years to build up that
moderate retirement dream. And at that point you'll be 60
and probably live another 30 years.

So 10%. Do it. Do no less. If you want a safety net, or
an earlier retirement, or be able to invest a little less
aggressively and with less risk - save more. Assuming a 6.5%
*real* return is very aggressive, and a portfolio which can
generate that much is likely to have dips of 20% or more
along the way. Can you handle that kind of volatility?

- quote -

Not "all retirement all the time". 10%. After that, non-retirement
savings. After *that*, spending. If the spending's too high, there
are only two options. Earn more or spend less.

And if by "real estate" you mean directly owning rental property,
bear in mind that that's *not* an investment per se, but more the
owning and management of a business. I'm all for it, but *not*
at the expense of that 10% in the retirement accounts. If you
can put 20% of your income away, then 10% in retirement accounts
and 10% into the "start a business; buy rental housing; etc"
account. But still - 10% into the retirement accounts, unless
those accounts are already well funded - the best way to do that
is to fund them *early*. If you put more than 10% into the
retirement funds early, then sure, at some point, stop. But
at $95k at the age of 30, it's not enough.

Anyway, there are plenty of real-estate and other non-stock-assets
one can buy in an IRA quite easily, from REITs to RE management
companies to other commodity-tied companies which own land and/or
other assets.

- quote -

All well and good. But NOT with the retirement accounts. You may
have to stop contributing to them at some point, but the retirement
accounts are your safety net.

- quote -

If you save 20% - half in retirement accounts and half outside of
them, then no, the vast majority of your savings won't be "tied up".

I'm not really sure what you're looking for here. If you think
anyone's going to tell you "oh, sure, don't worry about saving
for retirement in IRAs and 401ks" you might get that advice,
but you'd likely be taking a bigger risk with your own future.
Even if you invest identically (ie. funds rather than a business
or real estate), the tax drag lowers your long-term return and
to make up for that you have to either save more or invest in
a more risky asset mix.

You really didn't give us enough information about your situation
to make fully drawn out advice. Knowing what little I know,
though, you clearly haven't made a "mistake" in putting away
the $95k you already have, and stopping your contributions to
that (rather than, say, cutting down other spending) may be
necessary for a short time, but any more than a couple of years
would be the real mistake.

--
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

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On May 7, 9:27*pm, Bill Woessner <woess...[at]gmail.com> wrote:
- quote -

Using a 4% withdrawal rate, $3.8M gives an income of $155K. For
someone who could save $41K per year, $155K may not be enough for a
"comfortable" lifestyle.

Here's another way to look at it: If you want to retire at the same
standard of living you had prior to retirement, you will need
retirement savings of between 15 and 20 times your final pre-
retirement income. Using a 4% withdrawal rate, this savings will
replace 60% to 80% of your previous income. Add Social Security to
that and you should be able to replace 80% to 100% of your previous
income. If you think Social Security will not be around for you, then
aim for 20x to 25x your pre-retirement income.

One way to achieve 15 to 20 times final income is to start saving 10%
of your income in your mid-20s. If raises average 3% and your
investments average 8%, by age 67 you will have accumulated about 15x.
If your investments average 9%, you will have about 20x.

Dave

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On May 7, 6:57*pm, "Elizabeth Richardson" <erich...[at]worldnet.att.netwrote:
- quote -

Yeah, that certainly seems to be the case. It strikes me as
unnecessarily extreme. For example, Bread suggested that if you can't
contribute the maximum to your retirement accounts ($41K for 2008),
you're spending too much. Given that the median household income in
the United States is $48K, well... you do the math.

Plus, what's the point of contributing so much to your retirement
accounts? Ensuring your children never have to work a day in their
lives? Suppose you do invest $41K per year for 30 years with a 6.5%
real return. You'll end up with $3.8M. That's enough to generate
$255K income per year. Is that really the goal? Is it really worth
it to deprive during your working years so that you can have more
money that you know what to do with during retirement?

Another thing I'm concerned about with the "all retirement all the
time" approach is diversity of investments. What if we want to invest
in real estate? Admittedly, it's possible with a self-directed IRA,
but I've heard it's a real headache. What if my wife's practice
offers to buy her in as a partner? Or she wants to buy a practice or
start a new one? Heck, what if > I< want to start a business? If the
vast majority of our savings is tied up in retirement accounts, we'll
have to pay a hefty premium to invest outside the box, as it were.

--Bill

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jIM <noreplysoccer[at]hotmail.com> writes:

- quote -

I do something similar with dividing my "emergency fund" into layers.
I routinely keep enough in my checking account to cover an extra
month's expenses, and another $5000 or so in a money market account to
cover unexpected home repairs and the like. Beyond that, I have money
in a muni bond fund that I could tap into in case of a longer-term
emergency. I consider it part of my retirement savings and count it
towards the bond part of my asset allocation, but since I know it's
there I don't feel like I have to keep huge piles of cash around.

Anyway, I agree with the general advice others have given to the OP: do
try to continue to take advantage of any employer match on the 401K, don't
cash in existing retirement accounts, do watch expenses until you build up
your savings again.

-Sandra

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On May 7, 9:43*am, Bill Woessner <woess...[at]gmail.com> wrote:

- quote -

Keep up the Roth IRA contributions and 401K up to the level of
matching funds.

I don't think that you have enough to build a new house, can you
postpone it?

- quote -

There's nothing wrong with a loan, just don't buy luxury cars or all
the options.

- quote -

You can convert your standard IRA to a Roth IRA, eliminating two of
your accounts. When you leave your job, you can convert your 401K
accounts to standard IRA accounts.

--
Ron

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On May 7, 10:43*am, Bill Woessner <woess...[at]gmail.com> wrote:
- quote -

95k at age 30 is good for retirement, but far from excellent or more
than needed. That 95k is only 4k in income in retirement (4% withdraw
rate). If you make more than 4k per year, you need to have more saved
to retire.

Here are the guidelines I think you asked for (which I used for my
family):

1) save 10% of gross pay for retirement to 401k
2) max out Roths (for wife and me).
3) keep 3 months expenses in a cash account
4) keep 3 months expenses in a mid term investment
5) contribute to HSA enough to cover estimated yearly medical
expenses.

3 and 4 defy some convention- here is my logic:

6 months expenses are suggested in cash. This is to cover
emergencies. I have a hard time watching 6 months expenses (25k+ for
me) earning 2-4%.

So I took a 3 and 3 approach.
3 months expenses in 90 day CDs (laddered to mature every 30 days)
3 months expenses in a moderate mutual fund (I use PRPFX).

I am working on a new household budget. That budget will add to
PRPFX. $500/month for car. $20/month for new roof for house ($5000
every 20 years), $10/month for new hot water heater ($2500 every 10
years). Any money I would use to pay down mortgage (5.75%) will be
added to this same account. Money for kids education gets added to
this same account.

The account is liquid, grows faster than cash (7% yearly return
expected), grows faster than inflation, has little risk (it invests in
4-5 asset classes with low correlation to each other), and can be used
for many reasons.

The tough part in your situation is that when you start, you need
everything (3 months expenses, money for new car, maybe house
repairs). But once you get the system implemented for around 2 years,
it will have more than enough liquid cash to fund current expenses.

Of course if I knew when my hot water heater would go, I would stop
contributions for a month or two or six, then use the cash to get a
new one.

The idea is to have money grow while I wait for something bad to
happen.

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"Bill Woessner" <woessner[at]gmail.com> wrote in message
news:b7e9629a-f93f-49f2-84e7-5ad098cf5d05[at]v26g2000prm.googlegroups.com...
- quote -

Bill, I think you'll find the general consensus is that at your age you
cannot have saved too much for retirement. You and your wife have done well
to this point. One cannot predict the future and, while we always believe
things will continue pretty much as they are, life occasionally takes a
turn. Be thankful that you have established a good and solid foundation for
your older age. Withdrawing any of it now is likely a mistake.

Without more information it is difficult to truly answer your question as to
the best way to balance present and future needs. It isn't clear that you
should stop all retirement savings, but I agree that cutting back for a time
may be prudent so that your emergency fund is built back up and that you
have the sort of cushion for non-retirement purchases that you need.

As Dave pointed out, contribute enough to your workplace retirement plan to
get any employer match. You can temporarily suspend IRA contributions to
build your emergency fund. If one of you has only an IRA and not a workplace
plan, however, you should continue those IRA contributions.

Dave suggested that you start making car "payments" now in anticipation of
that car purchase. You may need to delay the purchase in order to be able to
pay cash, but you thinking of paying cash is wise. You'll have a new house,
but houses have a way of eating money in unanticipated ways. Decide on an
amount that seems reasonable for home maintenance and start making those
"payments" too.

Elizabeth Richardson

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On May 7, 9:43*am, Bill Woessner <woess...[at]gmail.com> wrote:
- quote -

If any part of your 401(k) contributions are matched by your employer,
I hope that you will continue to continue to contribute enough to
capture all of the match. Not doing so is just like giving away money.

- quote -

My wife and I are 65 and 64, and we are glad that we contributed to
our retirement accounts years ago. You'll be glad, too, when you
retire. In that sense, it probably isn't possible to contribute too
much to retirement accounts. Just consider that you are on track to a
successful retirement.

- quote -

I have decided that what I want in a car is reliable transportation
with reasonable comfort. To me, a car is not a status symbol, so I
pick reliable cars and drive them at least 8 years (we currently drive
a Camry and a RAV4). You are right that it is nice to pay cash, so
save the equivalent of a car payment every month and accumulate the
money in advance.

- quote -

Just accept the complexity of having multiple retirement accounts with
different rules as one of the things you have to accomodate, learn
enough about the rules to get along, and go with the flow. Take a
couple of aspirin if the headache gets too bad. :-)

Dave

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