Roth IRA, Old Credit Cards, Wealth, and Tactics

Reader Mailbag

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Buying a house for mom
2. Is Roth IRA enough?
3. Serenity prayer
4. Ice machines and hotels
5. Using a small clothesline
6. Question editing
7. Wealth and tactics
8. Guilt from covering needs
9. Buy it for life: pens
10. Rental property decision
11. Old credit cards
12. Saving to care for parents
13. Secure data backup
14. $2 bills
15. Propane budgeting troubles

My greatest financial fear, for a long time, has been “what will my children do if I were to suddenly pass away?” I have had a term life insurance policy with a nice face value, but I was still left with worry.

Here’s the reality: if I pass away, Sarah would be left raising three children by herself on a teacher’s salary. I know Sarah – she’s going to put that life insurance money away for each child’s future.

Our solution has been to see if we could live as a family off of Sarah’s income while banking all of my income – and, for about three years, we’ve been able to successfully do that. Because of that, our savings have been ratcheting up quite nicely.

This morning, I ran those “what if…” numbers again and, for the first time, I felt okay about things. If I were to suddenly pass away in a car crash or something, my children would be okay. I don’t think Sarah would have any difficulty raising them to adulthood. If something happened to both Sarah and myself, they would still be in good hands.

That’s a big relief to me – a big one.

Let’s get to today’s questions.

Q1: Buying a house for mom

I’m currently 29, well paying job $100k+, with some minor debt. I have some student loans that are paid each month and pay off my credit cards every month in full. All in al I’m in a stable financial position. The question I have is regarding my mom. She has a full time job but to a large extent I support most of her bills for herself and my younger siblings. She is currently renting a house for $2000 a month and hates the owner of the property. I have always had a goal of buying her a house once I am financially able to. Currently I am right on the cusp. I have the money to put down for the house and have an above average credit score so should get a decent mortgage. However if I had to pay both my rent (2500) plus the mortgage (~2000) then I would be in a tight spot (relatively) for probably about 2-3 years. My thinking is that if I buy the house now while she is still working full time then whatever she is able to pay a month will essentially be free money for me. I’m not sure how long she will work full time so I’m worried if I wait till I’m 100% in a position to buy the house I will be missing out on an opportunity to have her help pay off the house.

Is it wrong to think that way? That when I eventually do sell the house, the money she put in, whatever that may be, will essentially be profit for myself?
– Keri

So, your plan is to buy a house and let your mother move there while you continue to rent.

So what happens if you do this and your mother just doesn’t pay you? What do you do in that scenario? Not only are you suddenly in a giant financial pickle, you are on extremely unsteady ground relationship-wise with your mother.

By doing this, you are putting a ton of trust in your mother. You’re giving her a ton of power over your financial future. If it turns out okay, you’ll gain some money. If it doesn’t, you’ll have a disastrous relationship with her and potentially be in financial ruin.

In my eyes, it’s not worth it. I would only do this if I were buying a house and my mother were to live with me and pay rent. That way, even if she doesn’t pay a dime, I’m not at risk of sinking financially.

Q2: Is Roth IRA enough?

I am 23 years old and have just started my first “real job.” My job doesn’t offer a 401(k) matching plan so I am planning on just maxing out my Roth IRA. Given my age will that be enough for retirement? I am making $33K.
– Henry

A Roth IRA alone (or with a small Social Security check) isn’t enough for most people to retire on, even with 45 years of contributions. You’ll still need quite a bit more income.

In today’s dollars, and assuming you’re getting a 7% annual return from your Roth IRA, you’ll be able to start drawing about $17,000 per year in perpetuity from your Roth. If you’re okay with drawing it down in 25 years (emptying it by age 92), you’d be able to pull out about $21,000 per year. I have no idea what Social Security will net you or if it will even be solvent in 45 years.

If you are in good health and live really lean, you could scrape by on that. Most people would not consider that enough.

Q3: Serenity prayer

I have been enjoying your site for a few months now and I wanted to share a prayer that my mother taught me that seems right in line with what you talk about. It is called the Serenity Prayer. Here it is:

God grant me the serenity
to accept the things I cannot change,
courage to change the things I can,
and wisdom to know the difference.

Your site is all about finding the courage to change the things you can control so that you’re not overwhelmed by the things that you can’t.
– Vi

That’s an excellent little prayer and it does actually match my philosophy in life quite well.

Life is going to hand you things to deal with that are out of your control. Don’t waste a second of your energy raging about it or worrying about it. Instead, plan for it. Do what you can today to make your future easier.

I am actually familiar with the prayer, as it is often used in Alcoholics Anonymous, of which I’ve known a few members.

Q4: Ice machines and hotels

Many motels and hotels forbid filling up one’s cooler at their ice machine. I imagine their diligence in enforcing it varies widely, but just thought I’d bring it up. Some (few) have a sign saying “not from the ice machine,” but it goes on to offer to fill it from their kitchen freezer instead.
– Kim

By all means, abide by the rules of the hotel you’re staying at. There’s no reason to get an extra charge on your bill or cause other problems over a little ice.

However, I don’t recall ever seeing such a rule posted in any hotel I’ve ever stayed in.

If you decide to utilize the ice machine at a hotel, check for signs indicating appropriate usage. I may have just not noticed such postings, as I usually just take my ice bucket and the cooler to the ice machine, fill the bucket two or three times, and dump it straight into the cooler.

Q5: Using a small clothesline

I read about your misadventures with a clothesline in your backyard. Have you considered putting in a small parallel clothesline like this one? I have it and you can just sit it in your yard when you want to dry clothes and you can just fold it up and put it in the garage when you don’t want it out there. I use it to dry shirts and pants and socks and it works great.
– Jeremy

For those who weren’t around during the clothesline era, I live in an area with a fairly open shared backyard with a few other families. Our only option for placing a permanent clothesline was right in the middle of that area, as spots near the house got very little wind, so we chose not to install one. We mostly use an electric dryer and a clothesline and clothing rack in our basement.

That being said, this is a great solution to our problem. We could easily put this out there on school days, for example, and simply move it when the yard is in use. It’s very compact, but it should work well if you don’t overload it with clothes.

I am very, very tempted to give one of these a try!

Q6: Question editing

How much do you edit questions in the Reader Mailbag? Some questions seem to use poor grammar and spelling so why don’t you edit them?
– Andy

It varies a lot.

Some questions require very little editing and I post them almost directly. Some questions require me to edit out some personal information and, once in a while, I’ll alter it when it’s relevant to the question. I don’t want anyone to get in some sort of personal trouble because of a question on The Simple Dollar.

I do a bit of grammar editing, but mostly I want people’s voices to come through. I don’t expect perfect grammar and spelling.

Thankfully, most of the readers who write in are pretty articulate, so I don’t have to rewrite questions. I can only think of a few times where I’ve basically completely rewritten a question, and that’s happened after a long series of edits to fix grammar and eliminate personal factors.

Q7: Wealth and tactics

My question is this: “At what wealth level do normal personal finance strategies break down?”

The current thinking is that a very successful way to grow wealth is to invest in low-cost index funds within a risk-tolerance-based “asset allocation” (e.g. 70% stocks / 30% bonds)

That strategy will work if you’re investing thousands, tens of thousands, or hundreds of thousands of dollars.

What happens when one gets to the millions, tens of millions or hundreds of millions? When should someone change their approach to money management?
– Jim

I don’t think there’s a particular threshold and I don’t think there’s any one particular recipe.

Most people who are extraordinarily rich have a large percentage of their assets tied up in the company that they’ve built, for example. I think when people diversify away from that, they have a lot of ways of doing it.

Some wealthy people use hedge funds, but hedge funds come with a lot of risk. Others just buy up lots of real estate. Others invest hard in specific companies and get involved in managing those companies at the board of director level.

Mostly, they invest in things that, because of scale or risk, don’t really make sense for individual investors. It’s not going to break Warren Buffett to lose a billion dollars, for example, so he’s going to invest a little differently.

Q8: Guilt from covering needs

I love reading your blog! My parents share your life philosophy and I’ve learned it from them and I love reading websites written by people who also have those ideas. It’s all about knowing needs and wants and improving yourself all the time.

As I have gotten older I have found it harder and harder to justify every expense. I’ll go to the grocery store and buy what is just basic essentials for meals and feel guilty for it. I have saved up more than enough to live on and now I give away a lot of money to charities so I feel guilty as though I am directly taking food from the mouth of someone more needy.

How can I get past this? I want to feel happy again.
– Bianca

This sounds more like a touch of depression than a personal finance issue. My sincere suggestion is to talk this over with your doctor a little bit.

Most mild forms of depression are treated without medication. My doctor calls it “melancholy,” and I get in moods like that sometimes. I lift myself out of them with lots of walking.

You should never ever feel guilty about putting basic food in your mouth. No matter how hard you try, there will always be need. You should look at your charitable giving as being like the parable of the starfish on the beach. Your goal should be to throw a lot of starfish back, but you’re never going to be able to throw them all back, and you can’t throw any back if you don’t take care of yourself.

Q9: Buy it for life: pens

Do you have a suggestion for a pen that will always work and will last forever? I understand that I will have to eventually replace ink. All of the pens that are recommended are stupidly expensive.
– Marcus

I have two recommendations based on my own experiences.

If I’m just sitting at my desk writing normally, I have yet to find a pen that comes anywhere close to the “bang for the buck” of the Uniball Signo 207 Ultra Micro. I love this pen and I use it for almost everything I do. It is actually one of the best pens I’ve ever used, period, and I’ve used pens costing in the hundreds of dollars. The best part? They’re about $0.85 a pop if you buy a bunch at once (which I do). When one runs out of ink – and it can take months – I just move to the next one. They come with little plastic dots on the tip to prevent the ink from drying out before you use them. This is just the best pen around, particularly in terms of “bang for the buck.” Considering that I end up having to toss about half of the pens in a bag of cheap Bics within a few uses because the ink clogs and dries up, they’re not really very expensive at all.

The only problem is that most pens tend to not suffer pocket wear and tear very well, especially in the hip pocket. For those situations, I like to use the Fisher Space Bullet, which has never, ever leaked in my pocket and always writes, no matter what. I’ve ran over them and dropped one in a lake without any problems. The drawback here is the price ($18 or so) and the fact that … well … I tend to lose them. If I sit down a Uniball Signo 207 and walk away, I don’t regret it… with a Fisher Space Pen, I do.

Those are my two picks. I use the Uniball Signo 207 for virtually everything.

Q10: Rental property decision

My husband and I are very fortunate to live overseas with nearly all of our living expenses paid by our employers. Because of this, we have significant non-retirement savings that we’d like to make sure we’re investing wisely. We have $150k in target date retirement funds and we plan to continue to max out our accounts each year. We also have $250k in other savings mostly invested in index funds with a large cash reserve. We do not own a home and we have no debt. We’re 32 and 33 and we plan to start a family soon.

We worry about having everything we own in equities, even in a well balanced portfolio. We’re considering buying a rental property for diversification. We understand that as absent landlords we’ll have a low return since we’ll have to pay management fees, so there’s no way a rental would beat the stock market. We’re looking at paying $150k cash for a property that would yield maybe 3% a year after vacancies, taxes, management and condo fees, maintenance, etc.

Does it make sense to accept a lower return in exchange for greater investment diversity and peace of mind? Also, do you think it is even possible to have peace of mind as a landlord (even an absent one with a good management company)?
– Diana

What do you mean by “lower return”?

My understanding is that your estimate of a 3% return on the property is a short term estimate based on what the property market is supposed to do over the next few years. Beyond that, it depends a lot on other factors – political change, gentrification, changes in the job market, and so on, right?

With stocks, they’re incredibly volatile over a three year timeframe. You can find three year timeframes with a 40% increase. You can also find three year timeframes with a significant negative return in stocks. The volatility is huge. You only start approaching something close to a stable 7% return over a long period, much longer than a decade.

I don’t think you’re making a mistake by diversifying. I also don’t think that you should assume that your real estate will do worse than the stock market. In fact, unless we’re in the longest bull market of all time, the stock market is due for a bit of a tumble.

Q11: Old credit cards

My wife and I have carried two credit cards since 2003. One of them has maintained the same rewards program – in fact it got better in 2007 or so. The other has been really downgrading the rewards over the last few years and we’re done with it. We’d like to replace it with as minimal of an impact on our credit as possible. Ideas?
– Arthur

Given that you’re keeping at least one card that’s older than seven years, you’re not going to affect the length of your credit history.

The only change that might occur on your credit score is a very short term dip due to the credit check, then a possible change due to the shift in your total credit limit of the old card limit going away and then the new card limit appearing. I don’t think the overall change will add up to much.

In other words, I’d go for it. You’re almost assuredly going to gain more through a better rewards program than you’d lose from a 5-10 temporary drop in your credit score.

Q12: Saving to care for parents

I’m in my late 20s watching my late 50s parents care for my 80+ grandparents. My parents have been shelling out thousands of dollars for my grandparents to cover all sorts of things that have been cropping up over the past few years. This is concerning to me, only because they are trying to prepare for their own retirement.

Since I’m in a relatively good financial position for my age, what options do I have to start saving for my parents later life expenses? I’d like to be able to anticipate those types of things now – a sort of “Mom & Dad Emergency Fund” if you will.
– Carla

There aren’t any special accounts out there that can help with this kind of saving. You can save in a normal savings account or invest with an investment firm. Since the timeframe is such a long one – 20 to 30 years – you’ll probably want to invest in stocks.

Another option to consider is having them purchase long term care insurance now when they can get it for cheap. This type of insurance pays for long term care expenses (the specifics of which depend on the policy) for the elderly, but it gets more expensive the longer you wait. This is something for which you could split the cost with your parents.

The best thing you can do is be candid with your parents. They’re going to go through all of this in 20 to 30 years. What preparations have they made for themselves? That’s a vital question for you to consider, too.

Q13: Secure data backup

I have lots of things on my computer like tax returns that have personal data. How can I back this up securely so that if my house burnt down I would still have the data but that I don’t have to worry about it being stolen?
– Gary

You have to decide for yourself whether you want to trust a company with a big chunk of your encrypted data. If you’re fine with that, you have a lot of options.

The method I use is to save an encrypted backup of my key files to Dropbox each night. I keep a backup that’s a year old, one that’s a month old, and a daily one on there – so I actually have a January 1, 2013, a July 1, 2014, and a current one on there. That link explains how to set it all up if you’re pretty technically savvy. This method is basically free.

If you don’t want to trust a company, your best bet is to just get two external hard drives, make a backup to one of them, put that drive in a safe deposit box, then make daily backups to the other one. Swap the two drives every month or so. That way, you’ll always have a backup that’s a month or less old in that safe deposit box. You might want to encrypt that, too.

I have heard good things about using Duplicati for this kind of backup, but I already had my own homebrewed system set up.

Q14: $2 bills

Are $2 bills really rare? My grandmother gives my kids $2 bills all the time and tells them that they’re really rare and they should keep the $2 bills safe. My kids think they’re worth a bunch of money but I think they’re not worth more than $2.
– Amie

$2 bills aren’t rare at all. They’re just not in wide circulation – banks just provide them upon request for novelty. A bit under 1% of all paper currency produced by the U.S. Mint is $2 bills, which means quite a lot of them are made.

However, the myth persists. As Wikipedia describes it, Today, it is seldom seen in circulation. Fewer than 1% of all banknotes currently produced are $2 bills. This comparative scarcity in circulation, coupled with a lack of public awareness that the bill is still in circulation, has also inspired urban legends and occasionally has created problems for people trying to use the bill to make purchases.

Comparatively scarce does not mean rare or valuable in any way. It just means there are more $1 bills out there than $2 bills.

Q15: Propane budgeting troubles

My propane company recently sent me a notice that I could sign up for their budget payment plan, probably not a bad idea to consider at $135/month. Here’s the oddity: they claim that I’ll get 6% APR on any credit balance on my account. If I’m doing the math correctly that means if I put a credit of $1200 on my account, I’ll earn enough interest during the year to cover the remaining balance of $420. If I put ~$2800 on my account I’ll be paying my propane bill with the interest alone!

Obviously this all depends on whether I trust the company, whether I think they’re going to go under, etc. They’re a local company that’s been around for ~100 years and I’ve had nothing but good experiences with their staff and service. Can you see anything obviously wrong with paying a big chunk up front? It almost seems too good to be true.

Also, they have a preferred service club where you pay ~$23/month and get a free yearly furnace cleaning, free parts and labor for most repairs, and free emergency service. Considering that they charge ~$120 for just the yearly cleaning (I got a quote for $150 from another company) this also seems like a fairly good value — for roughly $14/month (after factoring in the $120 cleaning charge) I don’t have to worry about the vast majority of problems with my heating system. Since an emergency service call is likely to start at $150-200+ it seems like it might be worth it. Again, am I missing anything here? It also seems too good to be true (unless I never ever have any problems with my furnace!)
– John

I’m almost certain that there’s going to be a pretty low upper limit on how much you can put into your account to earn that kind of return.

However, I think you’re figuring the interest wrong – it compounds annually, I’m sure. That means that if you put $1,000 into the account, you’ll get $60 in interest over the course of the year.

That’s still incredibly good, far better than a bank will give you. This is actually a bill that makes sense to prepay, at least a little. You’re still trusting that the company stays in business, of course, but paying a few months in advance will net you far better than the money would sitting in a checking account.

Got any questions? The best way to ask is to email me – trent at thesimpledollar dot com. I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive many, many questions per week, so I may not necessarily be able to answer yours.

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