Herpes Reasons
Banned
Just did the exact calculation and $261k is what I got. Not sure where you get $651k. And so you wouldn't want to leave anything to kids or grandkids? Ok.
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How to Invest for Retirement
- Thread starter Piecake
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Just did the exact calculation and $261k is what I got. Not sure where you get $651k. And so you wouldn't want to leave anything to kids or grandkids? Ok.
Are you for real? You sound like a fucking pyramid scheme and its embarrassing.
Again who is offering a perm life policy that you can have guaranteed withdrawals after 35 years (at 300 a month premium) for 50k a year. Or guaranteeing a 12% annual return. I work for an insurance company and I recently got quotes at another large insurance company and your figures are complete and utter bullshit. Either put up or shut up.
Stop with the one liners and scam style posting. Show us who is offering these quotes.
Randolph Freelander
Member
Your calculator is broken.
Darren870
Member
Your calculator is wrong then. I checked multiple sites.
$300 a month, compounds monthly, 10%, 30 years.
Well I would have $651k at this point. Plenty of things to do with it at that if I wanted to give some to my kids or grand kids.
Herpes Reasons
Banned
I too work in the industry and no, I'm not going to divulge which company. Nobody is forcing you to accept what I'm saying. I have the exact policy that I described. I'm P&C, Life/Disability licensed. Where did I say guaranteed 12% return? I didn't. I said if you were to get a 12 % return IN THE STOCK MARKET over those 30 years.
And yep, life insurance is terrible for retirement... oh...
Unlike the market, with perm life insurance (Index Universal/Whole Life) you do have a guaranteed interest rate (whole life guaranteed interest rate, IUL guaranteed floor)
And pyramid scheme? Ok. Because I'm trying to sell what to who on this forum? Exactly.
But this is the last post from me in this thread. Have fun.
James Sawyer Ford
Gold Member
Vast majority of people will have lower taxes in retirement due to less income. Pensions are a thing of the past for most people, and if you are retiring early you can structure a Roth IRA conversion ladder and pay no taxes if you have no income for the year.
Hilarious that you're peddling annuities and other insurance products. Now that, for the most part, is a complete waste of money. You know how those annuities make money? Investing in stocks and expecting to not have to pay out anywhere near as much as their own gains. Average person is much better suited investing themselves.
You did the math wrong. Use Excel or any basic financial calculator to run the inputs. I also suggest you either become dramatically more precise and thorough in your posts on the subject, or refrain from continuing (as you have indicated doing). Most of what you have said makes very little sense.
RumblingRosco
Member
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Same conclusion that I came to when someone was trying to sell me on a VUL policy as a retirement strategy. There was no realistic case where the returns in that policy after fees could be higher than investing in a tax advantaged account with low fees. Once you have maxed all tax advantaged options, then it could be worth it but if we're talking about that level of wealth its splitting hairs.
Buying a home in my area of the US seems like a really bad idea right now. I put about $650 into my retirement every month that my company matches 50%. I also put $575 into personal savings that are liquid. Is it a good idea to stop saving my liquid money and instead buy a home? Because that is what I would have to sacrifice. It should be noted I don't live check to check. On an average month my checking account grows by about $200 even while I'm saving. Every quarter I shave off anything above $2,000 and invest it.
I want to do a quick recap of general information so others don't come in and misunderstand why Herpes' life insurance plans were shot down.
Fear of Stock Market Crash
This isn't unfounded, the market will rise and fall. The Type of account you have (401k, IRA, Roth) are all going to be affected equally by any crash or boost in the market.
You can prepare for such an event by keeping some of your investments in Bonds and other funds that aren't pure stocks. This allows you to make decent interest, but your returns will be less than stock options.
You can make yourself completely immune to a crash by keeping all your money in a Savings account, or buying an insurance plan, but your returns on such accounts are incredibly small in comparison.
From what I can research based on links supplied by Herpes above and my own googlefu, Life Insurance IS NOT a retirement plan. It is a way to insure your family is provided for after you die. Some plans may offer funds back while you're still alive, but this is VERY small when compared to returns earned by true retirement investment funds.
The biggest advantage for life insurance is that it is not taxed when inherited. It is a great way to make sure your children or spouse are left with a lot of non-taxable money.
How do you prepare for a Crash?
You see a lot of conversation about being aggressive or securing your investments. This is about the balance of Stocks to Bonds. When you are young you want to buy into stocks, when the market is low you want to keep buying stocks. As you grow older you want to convert those stocks to Bonds, which have a lower return, but are more stable and can even increase during a crash.
Go read the OP or read more into this thread for better advice than I could give.
Why do some people use Life Insurance?
The best reason is that they have so much already saved, that to make sure their family can inherit tax free, they pay it into Life Insurance which allows them to pass it on.
It's a balancing act. You lose money by purchasing a life insurance plan. The insurance company invests your money on their own and takes the cream off the top.
The money lost in those lower returns is probably very low compared to the amount that would be taxed for some people.
For most of us, this is not a likely situation, and we would be better of investing in the Market/Bonds and leaving our loved ones our taxed savings.
Fear of Stock Market Crash
This isn't unfounded, the market will rise and fall. The Type of account you have (401k, IRA, Roth) are all going to be affected equally by any crash or boost in the market.
You can prepare for such an event by keeping some of your investments in Bonds and other funds that aren't pure stocks. This allows you to make decent interest, but your returns will be less than stock options.
You can make yourself completely immune to a crash by keeping all your money in a Savings account, or buying an insurance plan, but your returns on such accounts are incredibly small in comparison.
From what I can research based on links supplied by Herpes above and my own googlefu, Life Insurance IS NOT a retirement plan. It is a way to insure your family is provided for after you die. Some plans may offer funds back while you're still alive, but this is VERY small when compared to returns earned by true retirement investment funds.
The biggest advantage for life insurance is that it is not taxed when inherited. It is a great way to make sure your children or spouse are left with a lot of non-taxable money.
How do you prepare for a Crash?
You see a lot of conversation about being aggressive or securing your investments. This is about the balance of Stocks to Bonds. When you are young you want to buy into stocks, when the market is low you want to keep buying stocks. As you grow older you want to convert those stocks to Bonds, which have a lower return, but are more stable and can even increase during a crash.
Go read the OP or read more into this thread for better advice than I could give.
Why do some people use Life Insurance?
The best reason is that they have so much already saved, that to make sure their family can inherit tax free, they pay it into Life Insurance which allows them to pass it on.
It's a balancing act. You lose money by purchasing a life insurance plan. The insurance company invests your money on their own and takes the cream off the top.
The money lost in those lower returns is probably very low compared to the amount that would be taxed for some people.
For most of us, this is not a likely situation, and we would be better of investing in the Market/Bonds and leaving our loved ones our taxed savings.
Randolph Freelander
Member
It's a good question. I'm personally biased for home ownership, and I was finally able to buy a home this year. But there are those that would argue against it due to a variety of factors, such as if houses in your area are excessively expensive, or if you could just invest the amount you would do as a down payment instead.
I say just run the numbers. I don't know how much houses run in your area, what's your budget, but you can play with a scenario in Excel (or your spreadsheet/financial calculator of choice) just to get an idea.
Before going into the numbers, consider that the usual decision is owning versus renting, and with home ownership, you're building equity, but you're also responsible for home maintenance and repairs. With renting, your landlord is responsible for the latter, but you're not getting the former. With home ownership, your payment (for principal and interest) is fixed (unless you opt for an ARM [and don't]), but your rent will rise generally with inflation over time.
I constructed a scenario using a house at $200,000 with you putting 10% down. I plugged in an interest rate of 4.25% for 30 years. Based on that, I put your payment for P/I at $885.49, but that's not all of your payment. In addition to this, you'll pay an amount for escrow that would cover property taxes and perhaps insurance. For simplicity, I plugged in an additional $300 to cover this escrow, making your total monthly payment to be $1185.49. It would, of course, be higher or lower depending on how much you actually put down up front (reducing the P/I payment) or what your property tax rate might actually be. (The additional good news here is that property tax and interest is tax deductible under current law, which reduces your tax liability if you itemize and is another financial benefit to home ownership).
The question to ask yourself now is could you afford that payment? How does it compare to rent you might already be paying? How does it compare to what your rent might look like as it grows with inflation in 5 years? 10 years? 20 years?
The opposing scenario I constructed was instead investing that down payment amount ($20,000) for the 30 years, and I held the rate of return at 9%. In this case, the future value of that investment comes to $265,353.57. That looks good! However, recall that during this 30 years, your rent is continuing to grow with inflation, and you're not building equity (so at the end of the 30 years, you continue to pay rent, while your mortgage would be gone).
But speaking of inflation, what would your house perhaps be worth at the end of that 30 years? For that, I held inflation at 2% and simply assume housing prices will fall in line. At 30 years, the $200,000 home will be worth $362,272.32, which is nearly $100,000 more than the investment option on the down payment.
These numbers may not be realistic for you, obviously. But I encourage you to play with the numbers and compare it to what your goals are, what your rent may be, etc., and what your other options would be. Also consider the flexibility that renting gives you, as you'll have less of it with home ownership (it's easier to move when you don't have to find a buyer of your old home).
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As I mentioned at the top of the post, I'm biased for home ownership, so the above is probably completely dripping with that bias. Keep that in mind. I also live in an area (Charlotte, NC) where home values are quite affordable.
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Off that topic, you mention you are adding $575 in liquid savings each month. Do you have a cap on that, or is it growing higher and higher every month? Regardless of what you do with your housing decision, consider directing a portion of these funds towards retirement accounts, either to your 401K or a Roth IRA or both. If you're building towards a possible home down payment, continue to do that. If you're building your savings to cover a few months expenses, continue this, as well. If you've already got a sizable portion in savings for either of these needs, then it's time to consider putting those additional funds you're accumulating to work for you.
TangoAlphaLima
Member
This is a pretty good calculator for this type of thing offered by the New York Times:
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?abt=0002&abg=1
If home prices are reasonable where you live, it's almost impossible for home ownership to not be the better value for the long run.
I just wanted to say the first video is pretty funny honestly, and very informative! That's all. This thread has taken a shit on itself and honestly that's a bit of shame. I've learned alot from it over the course of the year and while I lurk for the most part, I truly appreciate GAF's insight and knowledge in it. Let's put this in reverse!
My stocks liked the election, but personally speaking the election results sucks. Meh. :/
PflargBlarg
Member
Talk of home buying reminds me of potentially my biggest mistake.
4 years ago I purchased a new condo in a popular suburb of Vancouver for 270,000. 3.09% 30 year mortgage with 20% down. Construction finished this year and I don't actually live there, I'm renting it out right now for around 1300/month. I keep thinking that I would have done better to invest that down payment instead and not buy this condo.
I was barely into my twenties at the time of the purchase and I got kind of caught up in the excitement and my life changed a lot in the intervening years. I'm wondering how this is going to turn out for me as I'm not convinced that it was a great idea.
4 years ago I purchased a new condo in a popular suburb of Vancouver for 270,000. 3.09% 30 year mortgage with 20% down. Construction finished this year and I don't actually live there, I'm renting it out right now for around 1300/month. I keep thinking that I would have done better to invest that down payment instead and not buy this condo.
I was barely into my twenties at the time of the purchase and I got kind of caught up in the excitement and my life changed a lot in the intervening years. I'm wondering how this is going to turn out for me as I'm not convinced that it was a great idea.
Randolph Freelander
Member
If you don't plan to ever live there, and if you put the full 20% down (54,000), then I think your worries are valid. My rough math says your P/I payment is around $921. If property tax and insurance is comparable in Canada, then I'm wagering you're probably paying enough so that the $1300 in rent you're getting is just enough to cover your P/I + escrow payment, though maybe you're eeking out a small monthly profit.
Let's just hold that the rent is covering your expense for the moment. Rent will continue to grow (which, in this case, would be in your favor), but let's ignore that for now. At 2% inflation, your condo would be worth $489K in 30 years. If you invested your down payment of $54K instead, then (at 9% return) it would grow to $716K.
Incidentally, if you had put a smaller amount down, say 10%, then the tables are turned. You could still invest the other half of the down payment ($27K), which would grow to $358K in 30 years. Add that to your condo's value (still $489K), and the total net value is $847K, which is better than the prior scenario.
Lesson learned: Put less down.*
*If you can. And if it doesn't result in a higher interest rate that eats away your margin. And if PMI (or a Canadian equivalent) doesn't do the same.
Of course, I haven't factored in everything, so there could be more to the calculations than this.
Walter White Walker
Member
Just my perspective but I think the difference between investing the money and owning a home is closer than indicated.The costs of owning a home are a lot higher than renting. Property taxes will go up every year (and is tax deductible, but still). Homeowners insurance is a lot more expensive than renters insurance (around here it's around $700ish for the average annual homeowners policy, while a renters policy with $20,000 in contents is like $120) and will go up over time. Utilities are a lot more expensive - water/sewer/garbage is part of my rent but at my last house was about $200 a month. At my last house I paid around $120 each month (averaged out) for gas/electricity while at my current apartment it's more like $45 a month for electricity. Even when you have the mortgage paid off you're still going to have all these ongoing, increasing costs.
You also have to factor in maintenance costs for a house you don't have while renting (at least directly). There's recarpeting, repainting, new roof (an asphalt comp roof is good for like 25-30 years), new appliances, maintaining the yard, etc. There's also the investment of time in a house - the few hours of yardwork a week (I hate yardwork so that was no "fun hobby" for me), fixing things that break - and your time doing this stuff has value.
Owning a house is fine - I've owned a few houses and I might own one again someday, but as a financial move I don't know that it's necessarily any better than investing that money (the initial down payment plus the extra money you're not spending on the above over time).
You also have to factor in maintenance costs for a house you don't have while renting (at least directly). There's recarpeting, repainting, new roof (an asphalt comp roof is good for like 25-30 years), new appliances, maintaining the yard, etc. There's also the investment of time in a house - the few hours of yardwork a week (I hate yardwork so that was no "fun hobby" for me), fixing things that break - and your time doing this stuff has value.
Owning a house is fine - I've owned a few houses and I might own one again someday, but as a financial move I don't know that it's necessarily any better than investing that money (the initial down payment plus the extra money you're not spending on the above over time).
TangoAlphaLima
Member
But those costs are going to be far, far less than what rent will be for a similar residence. And that's a permanent reduction in costs, given that a renter doesn't stop paying rent unless he's willing to live on the street.
For your hypothesis to be true, at least for myself, the NYT calculator I posted above would have to be way, way, way off in its calculations. Renting costs for a residence similar to my home would have to be a third of what going rates are given what the calculator suggests for a break even point. The added costs you seem to think are missing would have to be MASSIVE. Home ownership isn't cheap, but it's also not that expensive.
Walter White Walker
Member
It's true I'm not comparing similar things - I'm not comparing owning a house vs renting a similarly sized house. I'm comparing from what I did, which was downsizing from a (for us) way too large house down to a smaller apartment that actually fits our needs. Didn't remember that when typing out my response, D'oh.
On the other hand I don't think I could find a reasonably sized house around here that was built in the last 30 years. Apparently the current home building philosophy is go big or bust.
On the other hand I don't think I could find a reasonably sized house around here that was built in the last 30 years. Apparently the current home building philosophy is go big or bust.
PflargBlarg
Member
Yeah, I'm hoping that the differences would end up being less. Under 20% would have meant a higher interest rate and PMI. I'm just not sure what I should be planning on. I think ignoring the rent increases is a factor here. That should keep going up while my mortgage payments stay the same. That could end up being a not insignificant amount of income per year. And once the mortgage is gone it's pure profit (minus ongoing maintenance and municipal costs).
I mean, there's no sense in worrying about whether I should have bought it or not, that's already done and gone. My conundrum now is whether I should hold onto it for its lifetime as an income property or try to sell if after say 10 years and get my money out to push into my index funds instead.
I'm also hoping that the increases will beat inflation
Real estate is kind of crazy here so that's good, but speculating on that is not a retirement plan.While the rent vs. buy decision is in large part one of finances, to Nexttothecheddar's point it's also one of life style. There are maintenance costs with any home, even newer ones. (A home is a project, the saying goes.) So if the washer dies, that's on you. But if you want to remodel/landscape/etc., you have that freedom (and cost).
For this reason I caution that the rent vs. buy decision should not be a purely financial calculation. It's about the lifestyle you want to live. The investment aspect is a critical component (and one Randolph Freelander covered very well). But you have to factor in how you want to use that home as well. And that may be the deciding factor above all for some.
I'm steeply biased toward ownership, but that's because I enjoy home projects and remodels a great deal, as well as the freedom to work on our land. They can be costly, however, as can the maintenance. You can control for some of this by buying a home that is in good condition, but home inspections only go so far. It really comes down to how you want to spend your time. If you're fine with apartment condo living and abhor yard work/home maintenance, all the math in the world won't make buying a house worthwhile.
For this reason I caution that the rent vs. buy decision should not be a purely financial calculation. It's about the lifestyle you want to live. The investment aspect is a critical component (and one Randolph Freelander covered very well). But you have to factor in how you want to use that home as well. And that may be the deciding factor above all for some.
I'm steeply biased toward ownership, but that's because I enjoy home projects and remodels a great deal, as well as the freedom to work on our land. They can be costly, however, as can the maintenance. You can control for some of this by buying a home that is in good condition, but home inspections only go so far. It really comes down to how you want to spend your time. If you're fine with apartment condo living and abhor yard work/home maintenance, all the math in the world won't make buying a house worthwhile.
TangoAlphaLima
Member
But you don't have to take care of any maintenance or yard work on your own. You can hire services to do that work for you. You can pay for a home warranty on your major appliances/fixtures. You can pay for a lawn mowing service. If your house needs to be painted, you can pay for that to be done. All those things, and practically anything else you can think of, have a price tag attached to them if you aren't a do-it-yourselfer.
While the calculations are going to vary from region to region regarding home ownership vs. renting, all these extraneous factors are calculable. In the region I live, at least, even if I was to pay for all of these services, I would still be better off buying a home rather than renting. It's that drastic of a cost savings for me, but obviously will vary under different circumstances.
RumblingRosco
Member
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I think you misunderstood my central point, but I do agree with this. The point is - if you buy you still have to deal with all that; It's the added responsibility. (How you deal with it is up to you.) If you rent, you don't. I don't think you can put a price on that as it's going to vary widely from person to person. It is, again, a lifestyle choice.
Roth or Traditional IRA.
Deciding which one can be somewhat tricky, and it mostly depends on your income level. If you make over a certain amount and are eligible for an employer retirement account (which you are), a tradional IRA can be basically useless since you can't deduct contributions if you make over a certain amount.
My employer is responding to employee requests to alter where our retirement account funds go, to include index funds. They don't do a 401k match (though we have a 401k). Rather, they have a retirement fund where they deposit a % of our gross income each year. The upside is we don't have to match to earn it, it's just added. The downside is it's been locked in a single, global fund that has high expenses (1.5%+) and is diversified like someone in retirement would want it (lots of bonds, hedge funds, etc. to moderate swings - but also growth).
In January I can take 10 years of contributions and get them into a Vanguard index fund with a 0.02% expense ratio. I'm thrilled, as I've been lobbying for this for years. Around 45% of my retirement funds are tied up in the fund.
In January I can take 10 years of contributions and get them into a Vanguard index fund with a 0.02% expense ratio. I'm thrilled, as I've been lobbying for this for years. Around 45% of my retirement funds are tied up in the fund.
RumblingRosco
Member
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Randolph Freelander
Member
1.5% lost to expenses. I don't even understand how or why they thought that was a good fund for everyone.
Or anyone.
It's funds (and limitations!) like that that give 401Ks a bad reputation.
Or anyone.
It's funds (and limitations!) like that that give 401Ks a bad reputation.
negreenfield
Member
Backdoor roth.
Ohh yeah, always forget about that. Seems so silly that that loophole exists and they don't just let people have a Roth at all income levels.
Easystride
Member
I will be starting a new job in 2 weeks, and I was debating what I want to do with my 401(k) at my old job. I guess my two options are rolling it to my Roth IRA, or rolling it to my new company's 401(k). It's only at $5,300 since I just started there last year.
At the age of 25, rolling it to a Roth and having it grow tax free for the next 35-40 years sounds pretty good. I am just worried a bit about the tax aspect of it as that $5,300 will be taxed. Has anyone done this before? Can you have pay the taxes out of a checking account on Vanguard rather than out of the investment balance?
At the age of 25, rolling it to a Roth and having it grow tax free for the next 35-40 years sounds pretty good. I am just worried a bit about the tax aspect of it as that $5,300 will be taxed. Has anyone done this before? Can you have pay the taxes out of a checking account on Vanguard rather than out of the investment balance?
You should also be able to rollover into a regular IRA, which might be a better option depending on your tax rates.
TangoAlphaLima
Member
A Roth is a much better investment for someone your age than a traditional IRA or 401(k) (excluding company matching amounts). Without crunching the numbers for your specific case, I'd probably say that if it's the difference between contributing the max to your Roth for the 2014 tax year or not, then I'd probably roll it into a Roth.
Easystride
Member
Well' I've maxed my Roth IRA for 2014 and I will in 2015, but rollovers don't count towards your contribution limits, so that is why I am strongly considering it. So I could put almost $11,000 in my Roth next year between the 2015 contribution and my 401(k) rollover.
I am fairly certain you can't rollover a 401k directly into a Roth IRA. If you roll it over, and you should, it first has to go into a traditional IRA then you can transfer it to a Roth IRA if you want. Not sure if that is covered by the yearly limit though. I'd call up Vanguard/fidelity or whoever you are with and make sure what you want to do is something that you can do.
greendomo's ghost
Member
I know this thread is about retirement, but there was also mention of life insurance. My wife wants me/us to get life insurance as she is a stay at home mom and I am the sole breadwinner. If something happens to me she's shit out of luck financially.
Does life insurance cover that loss of income were something to happen to me, or is that not worth it?
I know that cash policies are bad investments compared to even a basic savings account, but my question would be is it worth doing a term life insurance policy and putting the difference into a savings account or IRA, or is a term life insurance policy not even worth it?
Thanks.
Does life insurance cover that loss of income were something to happen to me, or is that not worth it?
I know that cash policies are bad investments compared to even a basic savings account, but my question would be is it worth doing a term life insurance policy and putting the difference into a savings account or IRA, or is a term life insurance policy not even worth it?
Thanks.
RumblingRosco
Member
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What's the return been like on the 0.02% expense fund? Just out of curiosity
RumblingRosco
Member
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My wife and I got some term life insurance policies last year before our first child was born. We decided on term life essentially under the principle that we are insuring against a possible risk, not trying to make money on insurance. We pay something like 1600 a year in premiums for 1.5MM in coverage for me and 1MM for my wife (meaning if I die she gets 1.5MM, if she dies I get 1MM, and if we both die theres 2.5MM for our beneficiaries). We set it up in a tiered structure, such that our level of coverage and cost will decline over time. My 1.5MM policy for instance is comprised of a 10 year plicy for 500M, a 15 year policy for 250M and a 30 year policy for 750M. The durations and coverage levels of each arent particularly important, but as we progress in our lives and "consume" our lifetime earnings potential, if we are saving appropriately our need for insurance declines and the policy is set up to reflect that.
negreenfield
Member
Agreed but I do it every year. There's debate on timing but I honestly do it right away to avoid any tax bill or minimal tax bill.
negreenfield
Member
At my company Total Stock Market Index is 0.02%. They just lowered target funds to 0.07% for 2015 so we have some awesome options.
RumblingRosco
Member
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Hypothetical question for you investment gurus: suppose you had the opportunity to take a job where there was no retirement plan, you would not be allowed to invest in stocks or any other financial instrument, and you could not borrow to invest in real estate (but you could still buy real estate for cash). You can buy any physical object you have the cash for, including precious metals, artwork, etc. You can buy time deposits at your bank. Otherwise, your life savings sits in a regular savings account paying 0.01%.
What kind of salary premium would you ask for to take this job? (Or, stated another way, if you worked a job like this, how much less money would you be willing to accept to return to a job where there are no restrictions on investment?)
How would your opinion change if you were committing to this job for one year, five years, or 20 years? How about if the job offered good old-fashioned guaranteed lifetime employment and you could be fired for cause, but never laid off?
I work in such a job right now, and am curious to hear some opinions.
What kind of salary premium would you ask for to take this job? (Or, stated another way, if you worked a job like this, how much less money would you be willing to accept to return to a job where there are no restrictions on investment?)
How would your opinion change if you were committing to this job for one year, five years, or 20 years? How about if the job offered good old-fashioned guaranteed lifetime employment and you could be fired for cause, but never laid off?
I work in such a job right now, and am curious to hear some opinions.
Randolph Freelander
Member
They would have to pay me a lot. Over 20 years, the compounded earnings will grow substantially, and since you're not allowed to invest, you're not getting any of it.
I put in two models and projected over 1, 5, 10, and 20 years. In both models, I ignore inflation, hold the investment rate of return at 9%, and consider that you'd meet the 2015 level maximum personal contribution for a 401K ($18000). In the first model, I ignore any potential employer match, and I ignore any additional investments (such as a Roth IRA). You can see the "future value" of that series of payments at the specified growth rate, and what that averages to per year, and a rough idea of how much more you might need to be paid to offset it (the per year average after growth minus your own investment amount).
Code:
Years FV Per Year Premium
20 $920,882.15 $46,044.11 $28,044.11
10 $273,472.73 $27,347.27 $9,347.27
5 $107,724.79 $21,544.96 $3,544.96
1 $18,000.00 $18,000.00 $0.00In the second model, I'm giving you a employer match of $7000 per year and including a Roth at $5500 per year, which is again the 2015 maximum. In this case, the "premium" is the per year average with growth minus your 401K and Roth investment amount (your funds only, not the employer match).
Code:
Years FV Per Year Premium
20 $1,560,383.65 $78,019.18 $54,519.18
10 $463,384.36 $46,338.44 $22,838.44
5 $182,533.67 $36,506.73 $13,006.73
1 $30,500.00 $30,500.00 $7,000.00Your mileage may vary, your contribution target may vary, But whatever it is, the longer you stay in that job, the more you premium compensation you would actually need. At $18,000 per year, the most you could save at next to 0 growth for 20 years is $360,000. The difference between that and an amount with growth is substantial, and (all things held equal), you'd want your pay to reflect that, as you're looking to build your nest egg essentially in cash.
That job better pay you well.
It's the Vanguard Institutional Index Fund, specifically the Institutional Plus Shares (symbol VIIIX). It's an S&P500 index fund, with the expense ratio at 0.02%.
I'm ecstatic that I can move to that instead of the custom, high cost global fund. I'd rather have access to total market and international indexes, but I have those in the IRA, so I'm okay going all into the S&P500 with the 401k and retirement fund.
Randolph, thank you for this excellent answer and its detailed models!
Depends on what you mean by "well" -- though I admit that in year 20, the massive $54k+ premium when compared to a job with retirement plans and an employer match is all by itself more than I will be paid for my labor.
Your numbers are roughly what I had mentally estimated -- work more than 5 years without being able to invest, and you're already feeling the effect.
But -- I'm not trying to be a critic and really appreciate your efforts -- is it OK to ignore inflation and assume a 9% return in the market? 9% above the change in CPI? And since the return on savings accounts will never match the inflation rate (as it once did, in the '80s), I fear there will be a point where savings will be devalued by inflation faster than you can replenish it.
In case you're interested, I didn't know that this would be the case when I took my job. I work in the finance industry for a Japanese company in Tokyo. Around 2001, IRS reporting requirements for Americans overseas became enough of a hassle that my broker (that is, my employer) stopped allowing Americans to open accounts or make trades. But employees are not allowed to open accounts with any other financial institutions. Thus an American employee cannot invest at all. The stocks I bought in 2000 sit frozen in my account; I can't add to them. (They're worth far less than they were when I bought them thanks to the NASDAQ crash of that year; if further purchases were permitted, I could have dollar-cost-averaged my way out of that hole.)
In hindsight, I probably should have taken a different job, even at much lower pay, the moment I lost the privilege of investing back in the early 2000s.
Given that I work with stocks and financial records all day long and know full well that you can't predict market movements, I'd be happy to just toss my savings in an index fund and sit back and watch it grow.
SomewhatGroovy, I must confess that I don't understand the second part of your comment. Does the phrase "legacy plan" have some special meaning? (Some kind of savings plan for leaving money to heirs?) If I die tomorrow I don't have to worry about estate taxes, thanks to my wealth not being able to grow all these years. ^_^;
Depends on what you mean by "well" -- though I admit that in year 20, the massive $54k+ premium when compared to a job with retirement plans and an employer match is all by itself more than I will be paid for my labor.
Your numbers are roughly what I had mentally estimated -- work more than 5 years without being able to invest, and you're already feeling the effect.
But -- I'm not trying to be a critic and really appreciate your efforts -- is it OK to ignore inflation and assume a 9% return in the market? 9% above the change in CPI? And since the return on savings accounts will never match the inflation rate (as it once did, in the '80s), I fear there will be a point where savings will be devalued by inflation faster than you can replenish it.
In case you're interested, I didn't know that this would be the case when I took my job. I work in the finance industry for a Japanese company in Tokyo. Around 2001, IRS reporting requirements for Americans overseas became enough of a hassle that my broker (that is, my employer) stopped allowing Americans to open accounts or make trades. But employees are not allowed to open accounts with any other financial institutions. Thus an American employee cannot invest at all. The stocks I bought in 2000 sit frozen in my account; I can't add to them. (They're worth far less than they were when I bought them thanks to the NASDAQ crash of that year; if further purchases were permitted, I could have dollar-cost-averaged my way out of that hole.)
In hindsight, I probably should have taken a different job, even at much lower pay, the moment I lost the privilege of investing back in the early 2000s.
Given that I work with stocks and financial records all day long and know full well that you can't predict market movements, I'd be happy to just toss my savings in an index fund and sit back and watch it grow.
SomewhatGroovy, I must confess that I don't understand the second part of your comment. Does the phrase "legacy plan" have some special meaning? (Some kind of savings plan for leaving money to heirs?) If I die tomorrow I don't have to worry about estate taxes, thanks to my wealth not being able to grow all these years. ^_^;
For the purposes of a conservative estimate of how much you are losing out on, yeah. Any increase inflation just makes the number bigger unless all of your money is in inflation protected securities, which if I am understanding your situation correctly you would be able to purchase if you bought them directly from the treasury without going through a financial institution. Of course that doesn't give you much flexibility, as you have to buy when there is a bond issue instead of just being able to buy them off the market.
Along those lines, have you thought about direct investment? The number of companies that will sell stocks directly to individuals is not massive, but it is miles better than leaving all your cash in a savings account to be eaten away at by inflation.
Randolph Freelander
Member
It was a quick and imperfect model, I admit, and inflation impacts not only your cash savings (negatively), but also your ability to save in certain approved retirement vehicles (positively, as those limits themselves grow over time). The Fed is having a tough time hitting an inflation target of 2% at the moment, but if we back that 2% out of the rate of growth to account for inflation and hold inflation-adjusted returns at 7%, the model changes to the following, with and without employer matching and Roth.
Code:
Years FV Per Year Premium
20 $737,918.86 $36,895.94 $18,895.94
10 $248,696.06 $24,869.61 $6,869.61
5 $103,513.30 $20,702.66 $2,702.66
1 $18,000.00 $18,000.00 $0.00
With Roth and Employer Matching
Years FV Per Year Premium
20 $1,250,362.52 $62,518.13 $39,018.13
10 $421,401.66 $42,140.17 $18,640.17
5 $175,397.54 $35,079.51 $11,579.51
1 $30,500.00 $30,500.00 $7,000.00And, of course, mileage may vary. As said, we're not hitting inflation targets, and the non-inflation adjusted growth rate may be more or less than 9%. Also still not shown above would be how being able to invest would impact your tax liability due to the potential of deferred income. Any taxes that are avoided is money in your pocket and would actually increase your "premium" requirement.