Why does everyone here think being a millionaire means you (transaction, safest)
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A million dollars isn't much. It's been said one needs 1-2 million for retirement alone. In reality the average working stiff in America will never see that kind of money.
There are many people for whom this advice is no better than saying they should go become pro basketball players.
So don't take out big loans, but scrape together enough to put down on a house? Assuming you mean a down payment, wouldn't #5 and #6 contradict each other?
To take it further, I don't believe buying a home should be a recommendation for achieving a million dollar net worth. Home ownership is more a lifestyle decision than a financial one, there are far too many variables to proclaim either buying/renting superior over the long term.
Okay I was going to bring out of an example of why become a pro sport player, popular singer, or actor but I did not because I figured people would understand. All I am going to say is I have witnessed and saw people go through college and obtaining these professions (and a good percentage of them were C/B performing students at state level colleges and some even hated the major). You cant be an average basketball player and expect to get pro. Weather the person has the aptitude to put through it is on the individual.
Also I really hope no one plans on following my advice because there is more to life then money. No need to pursue a field you hate just for money. What I was suggesting is that 1 million is very much attainable just by working a 9am - 6pm office job/ lab. And these jobs are not like ultra rare or special on average. These are jobs/fields that help comfortably achieve 1 million and there are lots of these jobs out there, you can obviously go the very frugal route if you please.
I can see how #5 and #6 contradict each other. And they are related. Houses are kind of an investment so I approve of it when it comes to housing since people need a place to live and it decreases their living expense when house is fully paid. However this does not mean to take loans on very expensive houses and losing money to interest. A house loan helps with building net worth because with renting you are throwing away your money to borrow a place. I will explain more below.
Now on the topic of renting vs buying when it comes to net worth.
When renting you lose all your money. So if you are paying 2.2k rent a month that is 26.4k per year. So in 20 years you loss about 530k in renting. Lets add 10 more years, now you loss 792k renting.
Now lets assume you have a property that cost $650k. Person puts 140k down for a 30 year loan so monthly payments are 2291 a month (1416 goes to principle and 874 goes into interest). Now in the course of 20 years 340k is in principle and 210k goes into interest. Amount left in loan is 170k. It is very likely that if this person (if the person was watching their spendings) can afford to pay off the loan, so lets assume the person does. Now the person has no more payments and saves 27k a year. So lets add 10 years. So now the person has a net worth of 270K + 650K = 920k. Lets subtract 170k since that was a random I added so now the persons net worth is 750K.
Here is seems that it is financially better to own a property then rent. By the way the reason I picked 650k is because I wanted to match the monthly payments to the price of the renter. The buyer could have easily chosen to purchase a cheaper property which would mean less money lost to interest. Even if the person decided to no pay off the loan earlier the person would have lost 314k to interest. I do not see the financial benefit of renting. Also renting makes retirement more expensive because you have to pay for shelter were in a paid home you do not. And if you paid off your house you can be saving that money spent on payments. This is why I recommended getting a house.
However you need to get a house that fits with your budget comfortably. You should not get any house just for the sake of owning a house. Now you are right there are other ways to build net worth to 1 million and perhaps much more faster but they tend to be more risky compared to owning a house. Owning a house is known to be the best and safest way for the middle class to gain wealth. Also banks only insure a certain amount of money so you need to put a large stack of cash somewhere. Its kind of weird how America is changing. It use to be that people want to own their things but now people are more interested in borrowing because it involves a smaller down payment. Now they have phone plans were people borrow phones!
Okay I was going to bring out of an example of why become a pro sport player, popular singer, or actor but I did not because I figured people would understand. All I am going to say is I have witnessed and saw people go through college and obtaining these professions (and a good percentage of them were C/B performing students at state level colleges and some even hated the major). You cant be an average basketball player and expect to get pro. Weather the person has the aptitude to put through it is on the individual.
A lot of people just don't have it in them to excel at things like engineering, math, medicine, etc. and that is why it isn't reasonable advice to say hey just go become an software engineer they make great money. They would struggle in school, many would flunk out, and many that did land a degree will be outperformed by their peers who have a natural aptitude for it.
Quote:
Originally Posted by plot
When renting you lose all your money. So if you are paying 2.2k rent a month that is 26.4k per year. So in 20 years you loss about 530k in renting. Lets add 10 more years, now you loss 792k renting.
Now lets assume you have a property that cost $650k. Person puts 140k down for a 30 year loan so monthly payments are 2291 a month (1416 goes to principle and 874 goes into interest). Now in the course of 20 years 340k is in principle and 210k goes into interest. Amount left in loan is 170k. It is very likely that if this person (if the person was watching their spendings) can afford to pay off the loan, so lets assume the person does. Now the person has no more payments and saves 27k a year. So lets add 10 years. So now the person has a net worth of 270K + 650K = 920k. Lets subtract 170k since that was a random I added so now the persons net worth is 750K.
What about home maintenance?
What about homeowner's insurance?
What about property taxes?
What about home improvements?
Why does the homeowner in your example start with $140k that the renter doesn't have?
Let's add in maintenance costs at 1.5% of purchase price = $9,750 annually
Property taxes at 1% = $6,500 annually
Homeowner's insurance = $1000 annually
$17,250 * 30 years = $517,000 in additional expenses related to owning a home over 30 years.
To make it fair let's give the renter $140k to start out with too, but she doesn't use it for a down payment instead investing in the stock market and over 30 years has average annual returns of 8%, that $140k grows to over 1.5 million dollars. We could keep going and assume 3% annual increase in real estate values, and apply inflation adjustments to the taxes, maintenance, insurance, and rent but this is starting to sound like actual work so forget that. Bottom line = there is a lot more to the financial side of own/rent than assuming a homeowner has no additional costs than the mortgage payment, and it certainly isn't a reasonable comparison to give the homeowner a $140k head start. I'm not saying renting is better, nor am I saying buying is better... but the notion the claim that either is better for wealth accumulation doesn't stand up to scrutiny, there are far too many variables.
Quote:
Originally Posted by plot
The buyer could have easily chosen to purchase a cheaper property which would mean less money lost to interest. Even if the person decided to no pay off the loan earlier the person would have lost 314k to interest. I do not see the financial benefit of renting. Also renting makes retirement more expensive because you have to pay for shelter were in a paid home you do not. And if you paid off your house you can be saving that money spent on payments. This is why I recommended getting a house.
Well the renter could have easily chosen to rent a cheaper property.
There would be a financial benefit to renting if the total cost of owning is greater than costs of renting for similar residence and the renter invested the difference gaining greater investment returns than the increases in property values. Homes can also go down in value or stagnate. If someone bought a house in Phoenix Arizona ten years ago they'd probably still be underwater, but those payments invested in the stock market every month they'd have greatly increased their net worth.
As far as cheaper living in retirement, let's take two people one with a $600k paid off house and another with $600k investment portfolio. Using the 4% rule the $600k renter could pull $2,000/month from their portfolio to cover rent, and in the overwhelming majority of historical 30 year periods the $600k would grow significantly since 4% rule is compensating for worst case scenarios. So if the renter can build savings over time by renting (which is entirely possible) they can accumulate sufficient stash to cover their rent costs, making it a wash in terms of expenses in retirement.
A million dollars isn't much. It's been said one needs 1-2 million for retirement alone. In reality the average working stiff in America will never see that kind of money.
Yet all these people manage to retire with social security and savings far less than a million bucks, how is this possible? Why aren't there millions of senior citizens living under bridges in cardboard boxes?
it all depends on your location , what you expect from your retirement and most important your health insurance situation . there is lots of wiggle room depending on the variables .
how i expect to live in retirement and where i live does not take a million dollars , it takes multiple million dollars as i want a 100k plus income in retirement .
this is the last down of the game and we hope to fill at least some of the wishes on our punch list .
we all had different wants and needs when working , it is the same in retirement .
it also depends on the margin of safety of sustaining that income . you may need 500k with a 50/50 mix to sustain a 4% daw but if you do not want stocks you will need 1 million to develop the same income stream reliably .
you may think you will draw 5 or 6 % from savings in retirement but if markets are below average and you have poor sequencing you may be very wrong and again , you need a whole lot more money .
most of the amounts you see recommended are large amounts and that is for good reason .
a lot of that money may end up having to be kept unspent to allow for sequence risk . there can be as much as a 15 year difference in how long your money will last based on just the order of the gains and losses . to compensate for that it requires keeping quite a lot of powder dry , at least early on until you clear the early sequence risk hurdles .
counting on only the most favorable outcomes is not a solid plan . hope is never a strategy .
so the amount of money you want is not just all about for spending . it is for protection against sequence risk in retirement which has filled the retirement graveyard with failed retirements over time .
if you think it sucks working at 62 or even 66 or is hard finding a job try it at 82 if you have to .
Last edited by mathjak107; 03-24-2016 at 03:09 AM..
A lot of people just don't have it in them to excel at things like engineering, math, medicine, etc. and that is why it isn't reasonable advice to say hey just go become an software engineer they make great money. They would struggle in school, many would flunk out, and many that did land a degree will be outperformed by their peers who have a natural aptitude for it.
What about home maintenance?
What about homeowner's insurance?
What about property taxes?
What about home improvements?
Why does the homeowner in your example start with $140k that the renter doesn't have?
Let's add in maintenance costs at 1.5% of purchase price = $9,750 annually
Property taxes at 1% = $6,500 annually
Homeowner's insurance = $1000 annually
$17,250 * 30 years = $517,000 in additional expenses related to owning a home over 30 years.
To make it fair let's give the renter $140k to start out with too, but she doesn't use it for a down payment instead investing in the stock market and over 30 years has average annual returns of 8%, that $140k grows to over 1.5 million dollars. We could keep going and assume 3% annual increase in real estate values, and apply inflation adjustments to the taxes, maintenance, insurance, and rent but this is starting to sound like actual work so forget that. Bottom line = there is a lot more to the financial side of own/rent than assuming a homeowner has no additional costs than the mortgage payment, and it certainly isn't a reasonable comparison to give the homeowner a $140k head start. I'm not saying renting is better, nor am I saying buying is better... but the notion the claim that either is better for wealth accumulation doesn't stand up to scrutiny, there are far too many variables.
Well the renter could have easily chosen to rent a cheaper property.
There would be a financial benefit to renting if the total cost of owning is greater than costs of renting for similar residence and the renter invested the difference gaining greater investment returns than the increases in property values. Homes can also go down in value or stagnate. If someone bought a house in Phoenix Arizona ten years ago they'd probably still be underwater, but those payments invested in the stock market every month they'd have greatly increased their net worth.
As far as cheaper living in retirement, let's take two people one with a $600k paid off house and another with $600k investment portfolio. Using the 4% rule the $600k renter could pull $2,000/month from their portfolio to cover rent, and in the overwhelming majority of historical 30 year periods the $600k would grow significantly since 4% rule is compensating for worst case scenarios. So if the renter can build savings over time by renting (which is entirely possible) they can accumulate sufficient stash to cover their rent costs, making it a wash in terms of expenses in retirement.
Okay I want to point something out with the stock market. I make my living off of the stock market and the way you phrased it made it seem like free money. When I make 100k from the stock market in a tax year I get taxed on that, you do not get taxed on house equity. So that 140k to 1.5 million is not that realistic at all. I also did some hindsight and looked at companies that you can expect with that gain from and it definitely be hard to get 1.5 million after taxes if you had 140k. Heck assuming you were never taxed trying to get 1.5 million would be difficult (1.1M - 1.3M is more believable). So in reality it would probably be 800k-1000k if you managed to pull 1.5 million before taxes. Actually it is probably less then that because you need to sell sells in order to pay for those taxes. You are assuming that the person is paying these taxes on their income but their income may be tied to things, like bills, rent, child expense, utilities, gas, car stuff etc, and cant afford to pay the tax in order to keep their shares.
Okay so that housing cost issue. I forgot this, but banks when they give loans they include the property tax in the payment. So lets adjust that. Buyer buys 550k house, 140k down. monthly payments 2300 (principle: 1138, interest: 702, property tax: 458). I have no idea what maintenance you are doing to get the 10k figure but that is high. Lets assume 3000 maintenance and 1000 insurance so 4k annual. So in 30 years there net worth is 430K. I used an online calculator and put 3% annual return on a 550k house for 30 years and it returned 1.3 million (subtract 120k for house maintenance and property tax and we get 1180K). Primary residents are not taxed.
Also as house values can go down and so can stocks so eh. Also if we are considering a moving economy renter prices can go up too, fixed mortgage do not change.
don't forget decades later when you pay off a home that mortgage you paid off was originally a big amount . 30 years later that paid off mortgage may represent 1/2 a utility bill in the affordability scheme .
homes when we first bought in the 1970's in long island were 35k . your mortgage was a couple of hundred a month , today taxes are 12-15k on that house so the fact you paid off a less then 300 buck a month mortgage represents very little of your monthly nut .
you also can't spend your living room , so it is great you have this equity but without creating more expenses by taking loans it is basically trapped .
in order to get the money you need money so being house rich and cash poor can suck .
what you really want is a balance .
hopefully the home acts as a cost cutter and your market investments create cash flow .
now that the investments we made with the money not trapped in a house while renting grew nicely we retired . now we are no longer the aggressive investors we were so now the tide shifts and we are considering buying a co-op next year which would hopefully bring costs down eventually .
right now the money we spend for the co-op will no longer be producing income so while the cost of owning is 6k a year less the reality is we will give up almost 12k in income on the money so renting and investing is still the better deal but we are looking down the road and hopefully that will switch at some point .
Last edited by mathjak107; 03-24-2016 at 04:35 AM..
Mmm I thought there was a law that helped reduce the effects of property tax hikes.
I know a man who owns a house in a expensive neighborhood. He bought the house years ago when it was like 50k, now it is 1.5 million. He now works retail but I guess he works because he has to pay those taxes?
People who are working can probably handle this since there income should be increasing but how are retired people handling this issue? Sounds like you actually need to be rich to retire comfortably.
some states restrict taxes but that is a local thing if at all .
but taxes on real estate are high not in a vacuum but because property values are high , which is because the area's are desirable and they usually are desirable because that is where the high paying jobs are .
so many retirees sell those nice expensive paid off homes and relocate to cheapsville eventually and live like kings .
that is the plan of many in the tristate area . they can't afford to stay here even with paid off homes . at this stage decades later that relatively small mortgage may represent very little of the monthly expenses .
Why does everyone here think being a millionaire makes you part of the "Evil Rich"** <-real title.
Everyone here seems to think its 1964 still where 1 million dollars in net worth makes you a jet setting ultra-wealthy person who drives a Cadillac Coupe Deville, owns a coach wallet, gold watch, lives in a 5 bedroom estate on Star Island in Miami and has vacation homes on the SF Peninsula and a New York City Penthouse..
Because most people cannot comprehend 1 million dollars as a amount other than understanding the number itself. It's a lot of money and I can buy a bunch of crap live like a king. Sure. For a while but you gotta keep the wheelbarrow filled otherwise you run out. It's my firm belief that given 1 million dollars at least 1/2 the people will simply squander it. When you live in a area where the average house price is 60,000 that's a lot of money and CAN go a long way. When you live in a area where the average house price us 680,000 well that's gets you a house, maybe a few nice cars and some money to put away for kids college and some retirement. But you're still working.
Look at some of the people that get windfalls or all of the sudden get a high paying job or lottery win. Some just go nuts spending.
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