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I'm hoping to contribute $25K to my Roth (the maximum I can) and at least an equal amount in my Individual 401K by the time I turn 30. I don't know how successful I'll be at this, but that's what I'm shooting for.
First, if your investments are earning on average over the years 8-10% or better and your mortgage is at 5% like ou's is, extra money is going into our investments. You LOSE money otherwise, and it could be serious money if you are talking 5% over 30 years. If you plan right your mortgage could easily be paid off by retirement and if not that extra 5% you earned over time will MORE than cover your entire mortgage.
There is something nice about having your mortgage paid off but if you are strictly taking from a financial standpoint, it doesn't make sense to do that. You can still live in your home if you are making a mortgage payment last time I checked.
Your plan sounds good on paper. There's an assumption of 8-10% growth from your investments. Not everyone believes that will be the case. In addition, emotion plays a lot in that. How many people pulled their money when the market tanked? Quite a few cashed out at a low point. So, your 8-10% will only work if one has the discipline to ride out the roller coaster through many many years. So, it really depends on the individual and their appetite for risk. There is a certain peace of mind security that comes with a paid off home mortgage that is priceless. It is certainly not a one size fits all plan.
I'm 28. I got $0 contributed towards my employer's version of a 401K. Did I mention they don't do matching? I do save around 30% of my net income into a regular savings account. That will probably die when the kids arrive. At any rate, liquid is king for Generation Y; I can afford saving that much for a rainy day, but I can't afford half of that to a penalty-withdrawal retirement fund. Sucks living on 45K as a 30-something with a wife and the expectations of having children. Oh well. If my income doesn't outright double by the time I'm 32 I'm hosed. Add me to the roll of save me feed me. And I went to college (twice), go figure LOL. Seriously though, my plan is getting some sort of pension, maintaining myself as cash rich as possible (meaning my housing expecations will always be "cheap"), no out of state education for the kids, and a healthy savings rate. And the rest is up to timing and luck, as it always was.
Jest aside, I think you'll be alright. 2035 America (right when the first GEN Y reach retirement age, unadjusted for the boomers screwing the timeline to the right) will be a very different country than what we see today. It will be, in my estimation, highly "europazied". Taxes will be high but so will be safety nets, two generations of households will become the norm (like present-day Brazil, Argentina, Spain, Holland) and thence the pressures of retirement will not be as great as they are today in "401K underfunded by a million bucks? You're hosed" America. Devolutionary indeed but that's what happens when you cut people's pensions and offer them a paycut to fund their retirements, never mind at the mercy of the capital monopolists that play with your money for the false promise of "double your money while you sleep". Keep a fund for a rainy day, but don't overdo the retirement contribution, it'll drive you crazy and you'll never get to a number that'll take you through 20 years of retirement with a 401K.
Location: Chapel Hill, NC, formerly NoVA and Phila
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Save the maximum that you can. At the very least, put in up to what your employer matches. If you can, put in the max. that your company will allow. By the time I was 30 (in the late 1990s) I had $50-$60K in my 401(k) from what I contributed (13% of my salary), what my employer matched (3-4%), and the earnings on those contributions. This was based on a salary between $20K and $38K. Is that what everyone should have? No. Was I better off than most people financially? Probably, yes. Am I happy about it now, 10 years later, that I saved so much? You betcha!
Your plan sounds good on paper. There's an assumption of 8-10% growth from your investments. Not everyone believes that will be the case. In addition, emotion plays a lot in that. How many people pulled their money when the market tanked? Quite a few cashed out at a low point. So, your 8-10% will only work if one has the discipline to ride out the roller coaster through many many years. So, it really depends on the individual and their appetite for risk. There is a certain peace of mind security that comes with a paid off home mortgage that is priceless. It is certainly not a one size fits all plan.
If you're only expecting 8-10%, it seems silly to keep money in there while you're paying 5% or more for a mortgage (remember when 8% was the norm?).
By the time you subtract another 3% for inflation, you're only left with a 0-2% return for gambling your money on Wall Street. After you subtract the taxes you'll eventually have to pay on the "gains" that offset your mortgage interest and inflation, you're more likely to have a negative net return than a positive one....and that's if you get lucky enough to make an annualized 10%.
Your plan sounds good on paper. There's an assumption of 8-10% growth from your investments. Not everyone believes that will be the case. In addition, emotion plays a lot in that. How many people pulled their money when the market tanked? Quite a few cashed out at a low point. So, your 8-10% will only work if one has the discipline to ride out the roller coaster through many many years. So, it really depends on the individual and their appetite for risk. There is a certain peace of mind security that comes with a paid off home mortgage that is priceless. It is certainly not a one size fits all plan.
That seems fine, but you're forgetting to mention the tax treatment of each of these things. Since the 401k and the Roth 401k grow tax free, and mortgage interest is tax deductible, you kind of have to look at that. If you live in a high tax state like California, a middle class person would be in the 25% Federal + 9.55% CA state tax rate. For every dollar of interest a person in that tax bracket doesn't pay, they have to pay some 34.5 cents in taxes. So you're not really getting a net return of 5% on your 5% mortgage, you're getting a net return of 5 * (1 - .3455) = 3.2725% return on paying down the mortgage. If you get 4% return on your 401k, that is 4% tax-free, of course there is something to say about a guaranteed return, and a non-guaranteed return (though there was a time not long ago when and IRA CD gave you 5%) the other benefit is if you retire and move to a place with no taxes, like WA, or TX, you saved yourself 9.55% right there, no the income taxes to pay to any state. Clearly if you're already in WA or TX, then the numbers might be more favorable to paying down the mortgage, and less favorable to putting it in the 401k (nowhere to move to to avoid paying taxes). Something to think about when you do the calculations.
Your plan sounds good on paper. There's an assumption of 8-10% growth from your investments. Not everyone believes that will be the case. In addition, emotion plays a lot in that. How many people pulled their money when the market tanked? Quite a few cashed out at a low point. So, your 8-10% will only work if one has the discipline to ride out the roller coaster through many many years. So, it really depends on the individual and their appetite for risk. There is a certain peace of mind security that comes with a paid off home mortgage that is priceless. It is certainly not a one size fits all plan.
Ever since I started taking business courses in high school almost 20 years ago, people trot out the graphs that stock market has appreciated every year at 8-10% or whatever range they come up with. The reality is that I know several people that were totally wiped out in the tech crash in 2001 and just about everyone out there last fall took a big hit, some 50% or more.
In the ten years since I have graduated college I have seen two recessions with major market corrections.
So for me it doesn't matter much what happened last fall, but I pity the fool at 65 that just had half his 401K wiped out. Granted some of that probably came back if they didn't panic, but how many people retire early thinking they are set when that turns out not to be the case?
Your plan sounds good on paper. There's an assumption of 8-10% growth from your investments. Not everyone believes that will be the case. In addition, emotion plays a lot in that. How many people pulled their money when the market tanked? Quite a few cashed out at a low point. So, your 8-10% will only work if one has the discipline to ride out the roller coaster through many many years. So, it really depends on the individual and their appetite for risk. There is a certain peace of mind security that comes with a paid off home mortgage that is priceless. It is certainly not a one size fits all plan.
Historically the stock market shows an 8% growth over time. Too many people are applying short term thinking to a LONG term investment, mainly because the stock market HAD been doing so well and people were doubling their money in a very short time. If you invest in mutual funds for the long haul, an 8% return over say 30 years is not out of the question-providing you are well diversified. People that pulled their money out at the bottom of the market last year were foolish. Keep your emotions out of your investments and you will be much better off.
Quote:
Originally Posted by wanneroo
Ever since I started taking business courses in high school almost 20 years ago, people trot out the graphs that stock market has appreciated every year at 8-10% or whatever range they come up with. The reality is that I know several people that were totally wiped out in the tech crash in 2001 and just about everyone out there last fall took a big hit, some 50% or more.
In the ten years since I have graduated college I have seen two recessions with major market corrections.
So for me it doesn't matter much what happened last fall, but I pity the fool at 65 that just had half his 401K wiped out. Granted some of that probably came back if they didn't panic, but how many people retire early thinking they are set when that turns out not to be the case?
If you were 65 and have your money in such volatile investments that you lost half of your 401K you really need to sit down with someone that can help you get your money in the right places. Also, who ever said that the stock market gains 8-10% every YEAR???? If you average out the past 20 years you will see that kind of return, or better for the past 20 years. Again, like I said above the stock market is a LONG term investment, not something you look at month to month or year to year, more like decade to decade.
I'm the OP and this discussion has become very interesting. It brought up another question I have. I know that it is better not to stretch yourself to put money in your 401K because if you get in financial trouble they charge the heck out of you to take it out. I have been really thinking what the “safest” way to handle my money is lately. Due to some recent deaths, I don’t have anywhere I can run to anymore if I loose my job or apartment. I rent and have a car payment. My rent is really low and I have a good job. Should I be saving more for retirement or trying to pay back my car loan or save for a house?
I have high interest on my car loan (it was used) and it would be easier to save for a house if it was paid off. I have only had it for a year and still owe $12,000 on it. I had to get a new car my old one I had +200,000 miles and I really got a great deal on this one. Where I live a car is a necessity.
I got all but one of my credit cards paid off and I only owe like $500 on it. I'm also not planning on paying any extra on my student loans because the interest is like 3%.
Historically the stock market shows an 8% growth over time. Too many people are applying short term thinking to a LONG term investment, mainly because the stock market HAD been doing so well and people were doubling their money in a very short time. If you invest in mutual funds for the long haul, an 8% return over say 30 years is not out of the question-providing you are well diversified. People that pulled their money out at the bottom of the market last year were foolish. Keep your emotions out of your investments and you will be much better off.
If you were 65 and have your money in such volatile investments that you lost half of your 401K you really need to sit down with someone that can help you get your money in the right places. Also, who ever said that the stock market gains 8-10% every YEAR???? If you average out the past 20 years you will see that kind of return, or better for the past 20 years. Again, like I said above the stock market is a LONG term investment, not something you look at month to month or year to year, more like decade to decade.
Are you saying that if you invest money in 30 years you will only have 8% more money then when you first invested it (I assume after inflation) or are you saying that it increases on average 8% every year? I know over the long haul home prices stay flat with inflation.
Please explain I don't know very much about investing.
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So you're not really getting a net return of 5% on your 5% mortgage, you're getting a net return of 5 * (1 - .3455) = 3.2725% return on paying down the mortgage. If you get 4% return on your 401k, that is 4% tax-free, of course there is something to say about a guaranteed return, and a non-guaranteed return (though there was a time not long ago when and IRA CD gave you 5%) the other benefit is if you retire and move to a place with no taxes, like WA, or TX, you saved yourself 9.55% right there, no the income taxes to pay to any state. Clearly if you're already in WA or TX, then the numbers might be more favorable to paying down the mortgage, and less favorable to putting it in the 401k (nowhere to move to to avoid paying taxes). Something to think about when you do the calculations.
