Savings, Debt and Retirement

[Marcus Agrippa]

I have no student loans (I was not a student), and I am self employed. So, any money I would be saving goes to the IRS since I do not have tax withheld. Since I pay both halves of the payroll tax, I am taxed at a way higher rate than normal people, and being self employed means no benefits. I buy my own health insurance, and if I had a retirement plan, it'd just be a thing I had to set up myself. So, I have no savings of any kind.

Punishing. If I were you I would start considering a way to um, be creative with tax breaks. There are ways to insure you can cut yourself below- volunteering, business related costs, or even reinvestment. Corporations use tax laws in ways even I can't process

[Fez]

Punishing. If I were you I would start considering a way to um, be creative with tax breaks. There are ways to insure you can cut yourself below- volunteering, business related costs, or even reinvestment. Corporations use tax laws in ways even I can't process

 

Not just corporations. It came out in 2012 that Romney had an IRA with somewhere between $20.7 and $101.6 million in it, which is quite an accomplishment considering the $5,500 annual contribution cap (though, being over 50 and working for himself, the cap would be quite a bit higher for Romney). Turns out, as of last year, there are over 9,000 other IRAs that have at least $5 million in them. 

 

Seems the trick is to get a hold of a bunch of assets that you know will be worth a lot and transfer them to the IRA when they are essentially worthless. For instance, temporarily privately valuing some class of stock prior to an IPO at fractions of a penny, transferring it to the IRA, then set the IPO at whatever its actually supposed to be. Suddenly less than a penny can be worth hundreds of thousands or millions.

[Fragile Bird]

I see a lot of people with this strategy, and honestly, it makes little sense to me for a younger person with inadequate savings to focus on paying off the mortgage first.  It CAN make sense, but if you have a 30 year fixed with a low interest rate, then your focus should probably be first on savings and second on paying off the mortgage early.  Because..  compounding.
 
This is not true in all situations, but paying off the mortgage first is simply not always what makes sense.

The wisest thing to do is pay off your highest interest debt first. Pay off all your credit card debt ASAP. Don't carry a balance. Then, presumably, any higher interest loans, usually a car loan, then, possibly, student debt.

As for savings v. your mortgage, if you can get interest on a savings account that's higher than your mortgage, that might make sense. You should build up your emergency fund so that you have 6 months to 12 months worth of expenses covered. Many people really suffered in the last downturn because they lost their job and didn't have enough savings to see them through. But the amount of interest you'll save if you pay off your mortgage early is staggering. Many banks have mortgage payment calculators that will show you how much money you'll save. Just switching from monthly payments to bi-weekly payments will have a large effect, and making weekly payments will have a bigger effect, especially if you take your monthly payment and divide by four, because that way you make 13 months of payments instead of 12. (Instead of taking a year's worth of monthly payments and dividing by 52).

There are many articles you can find on the internet listing the pros and cons of paying off your mortgage versus saving for your retirement. Historically speaking, if inflation is high your house increases in value, your wages go up and your debt shrinks in real terms. However, in times of crisis and recession, the value of your house can drop dramatically leaving you with debts greater than the value of your asset, as many people on this board can attest to.

[Marcus Agrippa]

 

Not just corporations. It came out in 2012 that Romney had an IRA with somewhere between $20.7 and $101.6 million in it, which is quite an accomplishment considering the $5,500 annual contribution cap (though, being over 50 and working for himself, the cap would be quite a bit higher for Romney). Turns out, as of last year, there are over 9,000 other IRAs that have at least $5 million in them. 

 

Seems the trick is to get a hold of a bunch of assets that you know will be worth a lot and transfer them to the IRA when they are essentially worthless. For instance, temporarily privately valuing some class of stock prior to an IPO at fractions of a penny, transferring it to the IRA, then set the IPO at whatever its actually supposed to be. Suddenly less than a penny can be worth hundreds of thousands or millions.

That's a nice trick. You would have to be very skilled or have somebody very skilled to do it however. Where I know a lot of people who are compenent in the stock market- you would have to warren buffet or somebody who is near his level. Interesting.

[Iskaral Pust]

 

Not just corporations. It came out in 2012 that Romney had an IRA with somewhere between $20.7 and $101.6 million in it, which is quite an accomplishment considering the $5,500 annual contribution cap (though, being over 50 and working for himself, the cap would be quite a bit higher for Romney). Turns out, as of last year, there are over 9,000 other IRAs that have at least $5 million in them. 

 

Seems the trick is to get a hold of a bunch of assets that you know will be worth a lot and transfer them to the IRA when they are essentially worthless. For instance, temporarily privately valuing some class of stock prior to an IPO at fractions of a penny, transferring it to the IRA, then set the IPO at whatever its actually supposed to be. Suddenly less than a penny can be worth hundreds of thousands or millions.

 

I've heard of this.  Venture capitalists and start-up entrepreneurs especially like to do it.  Perhaps you could also do it with bankruptcy turnaround specialists, although that's trickier because they usually buy debt that is converted to stock -- I don't know if that still qualifies.

 

I don't think it's a case of fraudulently under-valuing the securities.  I think it's more about lottery ticket investments that are very, very cheap at the outset when their future is very uncertain but could result in massive gains.  You transfer all the lottery tickets investments into the IRA so that you can keep 100% of the gains if they do occur.  Of course, we don't measure all the lottery ticket investments that went bust but it does look like a situation where there should be limits on how much you can accumulate in tax-free gains before CGT should be introduced.

[Fragile Bird]

I've heard of this.  Venture capitalists and start-up entrepreneurs especially like to do it.  Perhaps you could also do it with bankruptcy turnaround specialists, although that's trickier because they usually buy debt that is converted to stock -- I don't know if that still qualifies.
 
I don't think it's a case of fraudulently under-valuing the securities.  I think it's more about lottery ticket investments that are very, very cheap at the outset when their future is very uncertain but could result in massive gains.  You transfer all the lottery tickets investments into the IRA so that you can keep 100% of the gains if they do occur.  Of course, we don't measure all the lottery ticket investments that went bust but it does look like a situation where there should be limits on how much you can accumulate in tax-free gains before CGT should be introduced.

There's a well-known philanthropist and mining entrepreneur here in Canada who maxxed out his RSP every year since they were started in 1957, Seymour Schulich. It's rumoured his RSP is worth $250 million dollars. Securities commissions filings showed he bought $29 million of mining shares one year and $30 million in an oil exploration company the next. Many of the companies he held in his RSP would have started as penny stock, and presumably there were times when those early shares carried rights as well. He apparently put his shares of Franco Nevada, which he co-founded, in his RSP.

Schulich donated $15 M to York University in Toronto to upgrade their business school in 1995, now the Seymour Schulich School of Business, and I gather, much more since, $25 M to the medical and dentistry school in London, Ontario, also now named after him, $20 M to his alma mater, Dalhousie Law School in Nova Scotia, now renamed, similar amounts to the McGill Library of Science and Engineering, now renamed, and their School of Music, also now renamed. He has also announced a $100 M scholarship program for students in STEM studies in Canada and Israel.

Now there's a way to get rich, be a brilliant businessperson with Law degrees and an MBA, become an investment dealer and mining entrepreneur. And don't forget to give back to the community.

[mcbigski]

 We don't know how far we can push life. The next 20 years could very well could make people live till we're 85 or 90 as the average age. We gotta start looking at the big picture.

 

That's actually not as big as a concern as one might think.  You'd just need to accumulate enough so that you're not dipping into principal (on average).  Then you effectively have a perpetuity.  It's really only a problem if life extension isn't accompanied by improving health for the elderly.  If we spend money to live longer but don't end up increasing our overall lifetime productivity, then it's all cost, but presumably healthier older people could work longer if they needed to provide for a longer retirement.

 

It'd be bad for pension plans, Social Security, and issuers of immediate annuities (at least until they took updated mortality rates into account) though.

 

 

 

I see a lot of people with this strategy, and honestly, it makes little sense to me for a younger person with inadequate savings to focus on paying off the mortgage first.  It CAN make sense, but if you have a 30 year fixed with a low interest rate, then your focus should probably be first on savings and second on paying off the mortgage early.  Because..  compounding.

 

This is not true in all situations, but paying off the mortgage first is simply not always what makes sense.

 

Just comes down to rate of return on an investment portfolio versus the interest cost of the mortgage.  If you have decent credit and a non-shitty interest rate, you're more likely to come out well ahead by paying a 30 yr amortization on schedule and investing extra money to earn a higher rate of return than you'd save by lowering the amount owed.  But compounding works on both sides there - compare 360 X the monthly payment of a 30 yr fixed mortgage to the amount borrowed.

 

That also assumes that you actually save and invest the extra money and don't blow it all on crap.

 

 

Not just corporations. It came out in 2012 that Romney had an IRA with somewhere between $20.7 and $101.6 million in it, which is quite an accomplishment considering the $5,500 annual contribution cap (though, being over 50 and working for himself, the cap would be quite a bit higher for Romney). Turns out, as of last year, there are over 9,000 other IRAs that have at least $5 million in them. 

 

Seems the trick is to get a hold of a bunch of assets that you know will be worth a lot and transfer them to the IRA when they are essentially worthless. For instance, temporarily privately valuing some class of stock prior to an IPO at fractions of a penny, transferring it to the IRA, then set the IPO at whatever its actually supposed to be. Suddenly less than a penny can be worth hundreds of thousands or millions.

 

You can get a lot more than $5500 annually into an IRA, if you're rolling over a qualified plan balance.  Quick google tells me that the 415(c) contribution limit for DC plans is $52,000 this year.  You could roll that amount over, plus growth, every year if circumstances aligned.

 

I'd suspect that a large portion of the +$5,000,000 IRA balances involved heavily concentrated positions in stocks that did really well.  (My rough figures if you put $50k into MSFT in 1986, that'd be worth about $30,000,000 today, based on a split adjusted share price of 7 cents a share in 86).  Which sounds great, but if you picked Worldcom or Enron instead, you lost.  And very, very few stocks have returned 20%+ compounded for 30 years either.

[Mudguard]

 

I've heard of this.  Venture capitalists and start-up entrepreneurs especially like to do it.  Perhaps you could also do it with bankruptcy turnaround specialists, although that's trickier because they usually buy debt that is converted to stock -- I don't know if that still qualifies.

 

I don't think it's a case of fraudulently under-valuing the securities.  I think it's more about lottery ticket investments that are very, very cheap at the outset when their future is very uncertain but could result in massive gains.  You transfer all the lottery tickets investments into the IRA so that you can keep 100% of the gains if they do occur.  Of course, we don't measure all the lottery ticket investments that went bust but it does look like a situation where there should be limits on how much you can accumulate in tax-free gains before CGT should be introduced.

Yeah, Romney made his money as a venture capitalist.  He put shares of his venture funds into his IRA, and because his funds performed so successfully (average returns of 50%-80% a year for many years), he made a boatload of money.  His funds provided the seed capital for Staples and some other very successful companies, which more than made up for any the investments that didn't pan out.  

[baxus]

There is a hefty tax called the payroll tax. If you are an employee, you pay half of it, and your employer pays half. If you are self employed, you pay all of it. This puts my effective tax rate at like 23%, someone making the same amount for someone else pays about half what I do to the IRS

 

In Serbia, taxes, health and pension and all that come about 65% of the net amount you get.

Those 65% are paid 50-50 by employer and employee, but since our system is such that you negotiate your net salary, it basically comes down to employee never even seeing this amount.

One would think our health and pension systems were extraordinary given how much our salaries are taxed. One would be wrong.

 

I see a lot of people with this strategy, and honestly, it makes little sense to me for a younger person with inadequate savings to focus on paying off the mortgage first.  It CAN make sense, but if you have a 30 year fixed with a low interest rate, then your focus should probably be first on savings and second on paying off the mortgage early.  Because..  compounding.

 

This is not true in all situations, but paying off the mortgage first is simply not always what makes sense.

Ok, let's talk numbers.

My 30 year mortgage is at 4.5% + 6M EURIBOR (adjusted every three months) yearly.

If I were to put my money in the savings account, I'd get about 1.5% yearly interest.

If I were to take let's say 5,000€ and pay off part of my mortgage, then the amount I owe and on which the interest is calculated would reduce and my monthly mortgage payment would reduce.

That would amount to basically paying the bank interest-free.

Do you see why I would think that paying off my mortgage earlier would be a better investment?

 

Sure, we won't do all this without putting some money aside just in case.

Also, we still have some minor debt and plan on investing a bit more in our apartment which will put a dent into our budgets but still.

[Fragile Bird]

Here's a mortgage calculator that will give you a some idea of how much money you can save depending on how often you make your payment. As I suggested up thread, enter your loan amount and your monthly payments. Then try entering weekly payments based on your monthly payment divided by 4, so you actually make 13 months of payments and see how much you save in interest and how many years you cut off your payment schedule. Even if you simply divide your payment in half and pay twice a month you'll save interest and shorten the mortgage period.

https://www.rbcroyalbank.com/cgi-bin/mortgage/howlong.cgi

[Maithanet]

If I were to put my money in the savings account, I'd get about 1.5% yearly interest.
 

This is where most financial advisors would say you're going wrong.  If you invest your money properly, you can expect returns over the long term of much much better than 1.5%.  Based on general historical trends from the past 75 years, 5% return is virtually guaranteed, and 8% isn't out of the question. 

 

Now, I'm not attacking you, putting money into the mortgage is the risk averse choice, and I do it too.  It is reliable, and the idea of owning your house debt free is really really nice.  Plus your house is a great way to diversify your assets.  But you shouldn't forgo stock/bond investing to pay down a 4.5% mortgage. 

[baxus]

@Maithanet:

You are aware that I live in Serbia?

Investment options are much more limited than in USA, for example. ;)

 

Plus, it's not 4.5%, it's 4.5% PLUS a 6M EURIBOR, which is at an all time low at the moment, but that might change in a few years and make it much higher.

[Maithanet]

@Maithanet:

You are aware that I live in Serbia?

Investment options are much more limited than in USA, for example. ;)

I was aware you are in Serbia, but I do not know much about how that limits your investing options. 

 

Anyways, I'm not trying to say that putting money into the mortgage is the wrong call in your situation, I obviously have no idea.  But it is hard for me to believe that 1.5% is the best you could get on your money otherwise.  And even if that is the case, that would probably not apply to most boarders here. 

[baxus]

@Maithanet:

For starters, stocks trading in Serbia is next to non-existent.

To paint a picture, I worked for a company who made software for tracking stock markets  and we never tested in on Serbian stock market because trading was so infrequent.

 

Sure, I could invest into a business of my own or partner up with someone else but I have no inclination to do that.

[Maithanet]

@Maithanet:

For starters, stocks trading in Serbia is next to non-existent.

To paint a picture, I worked for a company who made software for tracking stock markets  and we never tested in on Serbian stock market because trading was so infrequent.

 

Sure, I could invest into a business of my own or partner up with someone else but I have no inclination to do that.

You don't have access to other stock markets?  Or to firms that would invest for you for a commission?  Although I suppose the trustworthiness of such firms might be a problem.

[baxus]

You can't trade on your own in stock markets, you MUST do it through broker firms.

There are such firms, one of my best friends worked for one.

 

Still, most of those firms are not run by people I'd feel comfortable handing my money to.

[Iskaral Pust]

We need a quick reminder for Americans: the rest of the world generally has very little access to investment options that we take for granted (e.g. mutual funds, stock brokerage accounts, ETFs, structured notes, etc), and what they do have costs a lot more in fees, offers poor quality and is often bundled in some oligopoly industry.

 

I was shocked when recently help my parents convert their Irish pension savings into post-retirement income.  The options were terrible in quality, very limited in choice, very expensive and required jumping through so many hoops.  The govt even requires that you also pay an independent advisor to demonstrate that you know what you are investing in and cannot sue the investment provider for miss-selling -- and those advisors demand 1% of your assets every year for the rest of your life for doing pretty much nothing.  (Luckily an old friend of mine offered to sign off for them at no fee)

 

Most people outside the US, even in well developed economies, have very inefficient investment options.  I proposed that my firm consider expanding our investment platform to a retail offering outside the US, but the legal cost in each and every country just isn't worth it.

 

 

Maithanet: you need to recalibrate your expectations.  5% and 8% are accurate figures based on history but won't be available for the next 10-20 years.  Starting from these low yield levels will drag on asset returns for a long time.  From 1981-2015 we had the opposite: a tailwind from 35 years of yields declining from an all-time high.

[Eyron]

I have a separate investment account, private pension savings in another investment fund, two pension funds (stocks) from employers (we don't lose them after moving on to another employer, thanks unions!) on top of the basic state pension, the apartment in a popular area that will yield up to 75% profit when sold because it was bought in an opportune moment and renovated by ourselves mostly and thanks to that we have negotiated a very low interest on the mortgage.
I saved about 35% of income in a savings account until now for another renovation project but now some of that will be spent on a new bathroom. I will split the rest into accessible funds and mixed investment funds and keep saving even more for the future. I don't make things difficult since I don't want to spend time worrying about my decisions all the time. I don't spend a lot (I am good at finding bargains) but never have to be cheap. This is also partly thanks to having a two person household and no kids, even though my income isn't high at all.
I might venture into the stock market on my own since I have a brother who is making a career of that but we'll see.
I have a few years left on my national student loan, but there is not a high interest on those and the uni's are free here so it's not a big loan. I have full private insurance, in case of death, sickness, accidents etc, and it is a very low cost thanks to the union group insurance.
Even though I don't make a lot, and my parents couldn't save almost anything for me, I think I am well off. This is a good example of the *omg* social democratic state.

[Marcus Agrippa]

 

That's actually not as big as a concern as one might think.  You'd just need to accumulate enough so that you're not dipping into principal (on average).  Then you effectively have a perpetuity.  It's really only a problem if life extension isn't accompanied by improving health for the elderly.  If we spend money to live longer but don't end up increasing our overall lifetime productivity, then it's all cost, but presumably healthier older people could work longer if they needed to provide for a longer retirement.

 

It'd be bad for pension plans, Social Security, and issuers of immediate annuities (at least until they took updated mortality rates into account) though.

I agree in part with you- but there is a problem- the future of Jobs is going to be a different world. Humanity will be either be living in a ronotics or AI dominated age and well need to restructure out economic system. Thought thats nearly impossible as of now anyway.

[Guest]

A question born of ignorance:

 

If one gets to the point that one has a nest egg in retirement funds through a 401(k) or something similar and one gets to the age where they get that money without the penalty for taking it early, where does the money actually go?  Is it like "OK, you're retired now, so we give it to you in a check" or does it stay where it is somehow and you just get to start accessing it?

 

If you do just get it, what happens if you put it in an account but it's bigger than the $250K that the FDIC insures?  Do you choose between risking the deposit to keep it in one place or do you risk breaking it up?  Does your return suffer if you break it up?

 

For what it's worth, I am nowhere near having this issue right now.