Reader Mailbag: Pulling Up Friends

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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 rental property
2. Building focus
3. Using a bad 401(k)
4. PMI or empty emergency fund?
5. NCAA tournament brackets in office
6. Employer 401(k) matching
7. Tiredness
8. Board games with kids
9. Math on retirement gains
10. Borrowing from a 401(k)

As I move forward with my novel, I’m trying to find ways to use it to help out friends and acquaintances. I have two old friends doing editing, another friend doing cover art (and perhaps other art), and another friend doing some promotional work for it. These people do these things professionally already.

The biggest reason I’m trying to do things this way is that if the book is a successful one, it’s not just my boat that will rise. The boats of some of my friends will rise, too.

Not only that, it will be a lot more fun to have a bunch of friends on a conference call than a bunch of people I barely know.

Q1: Buying a rental property
My husband and I are wondering if now is the time to buy a rental in our area (in Washington state). My husband is self employed in construction and has thankfully been able to stay busy but now it is slowing down. We don’t have any debt except for our house (5 acres with old farmhouse we have lovingly restored) We refinanced at 4% 30 year owing $229K and we have $16,000 in savings/budget. I am wondering if I should cash in my retirement ($13,000) for a down payment on a rental. We are hoping to have this rental and maybe another to fund our retirement. Our banker friend said we just need 25-30% down and its a go. Or we could maybe borrow from an uncle for the down payment. What is your opinion. We also have 3 kids (9,7,4.5) FYI

- Claire

I would absolutely not cash in your retirement to buy a rental home.

If you do cash in your retirement, you’ll have to pay taxes on that retirement money (assuming it’s in a 401(k)) as well as an additional 10% penalty for early withdrawal. Your $13,000 will become $8,000 pretty quickly. Not only that, you’ll have nothing put away for retirement, putting you way behind the curve for retirement savings. That $13,000, if left alone at 7% a year, will be $100K in thirty years. To turn $8K into $100K over the same timeframe, you’d have to have a roughly 9% annual return, which isn’t anything you will realistically find in any legal investment.

Providing a short-term bump for buying a rental home is not worth the rather large dip that will appear in your long-term retirement plan.

Q2: Building focus
How exactly did you build up the ability to focus for so long? You often write how you can make yourself slip into a state of intense focus for hours. How did you teach yourself to do that?

- Mike

For the most part, I didn’t teach myself to do that. I just created an environment where it easily happened.

The big keys for me are to find projects that interest me, then turn off all possible distractions when I settle in for work. If I am working on something engaging and I can’t be interrupted, I inevitably fall into a work “zone.”

I’ll admit that part of it might be how my mind works, but that’s really my recipe for success.

Q3: Using a bad 401(k)
I make $100k/yr and put approximately 10% of that into our company’s 401k. I also max out my Roth IRA on an annual basis. I would further use an IRA for tax sheltering if I could, but my income precludes me from any tax benefits (as I understand it). I also have an individual investment account that I put money into as well, but I don’t necessarily count that as part of my retirement savings; or more accurately I’m not counting on that money for retirement.

I’m pretty happy with my level of savings and my general financial situation. The only part of my current scenario that bothers me is my company 401k. First off, there is no matching policy. Secondly, the investment options in it are sparse and all have fairly high management fees (0.8% up to 1.5%). None of the options are particularly intriguing to boot. The problem is, I think I’d be remiss to bypass contributing to the 401k for the tax sheltering it provides. As far as I can tell, I can’t seem to find another way to shelter my income from taxes for retirement savings.

As I see it, I have to utilize the 401k for the taxable benefit it provides, but otherwise it’s a pretty weak program as it stands. The only thing I can do to improve the scenario is try to appeal to my company’s financial managers to attempt to offer a better suite of investment options, right? Obviously I’d love a matching program too, but that’s obviously not something an employee request could fulfill. Being that I’ve lived in the financial arena professionally as well, I’m not overly confident that changing the investment options will be all that easy either. Is there anything else that I should look into doing to try and find a tax-sheltered vehicle for my income?
- Tom

You’re basically right. The biggest advantage that a 401(k) has for you is that it defers your taxes until much later in life, which is fairly important for you in your income bracket (28%).

However, you’re not getting anything else out of this. All you’re getting is a tax deferrment to a time where your income level and tax rate are completely unknown, and to get there you have to put your money into some awful investments. You’re also restricted on when you can withdraw that money.

If I were you, I’d just put the money into an ordinary taxable investment account and invest it in some lower-cost investments. If you can save 0.8% a year in costs, over 35 years you’ll have your 28% in income taxes back. There are also the benefits of complete flexibility in how you use it and the strong possibility of being able to take advantage of long term capital gains tax rates.

You might also want to consider investing in things like municipal bonds, but be careful to stick to bonds with a high rating on them. Municipal bonds earn a solid return that’s often tax-free.

Q4: PMI or empty emergency fund?
I want to buy a home. I want to know should i pay the 20% down payment and keep very few thousand dollars in my account. or is it too risky? And shall I pay just 10% amount and keep a lot of money in by saving account, that means that extra 10% in my savings account for a bad day. I know that I have PMI to be paid if I do a down payment of 10%.

- Leland

Unless you specifically know what home you want to buy right now, I would be patient.

I would keep saving at a vigorous rate while I shopped at my own pace for the perfect home in my price range. Don’t settle for something that doesn’t suit you.

When you do find that place, you’ll likely have spent several months searching. You’ll have the perfect place, plus you’ll have several months of saving in your account which means you won’t completely destroy your emergency fund to make a full down payment.

Patience is the key, as always.

Q5: NCAA tournament brackets in office
At my office a large number of my coworkers fill out an NCAA basketball bracket each March. They have a betting pool based on the brackets. I could not care less about basketball and I don’t want to waste the money on the pool but I feel guilty about saying no to this. How would you handle it?

- Fred

Don’t look at it as money “wasted” on the pool. Look at it as money invested in building a stronger bond with coworkers.

In most careers, it is absolutely worth $10 once a year to spend a few weeks bonding closely with a group of coworkers, plus having the chance to occasionally touch on it again throughout the year. It does depend on the career path, but many careers depend a lot on the relationships you build, and this kind of thing can be a powerful relationship builder.

If you don’t know the first thing about college basketball, just wait until the brackets are out, pick the favorite in most of the matchups, and use Google to find a few upsets that pundits are predicting along the way. You probably won’t win, but you’ll do pretty well with that bracket.

Q6: Employer 401(k) matching
I know that I should contribute to my companies 401k to receive the maximum match that they will provide, so I am hoping that you could check my math below. I believe that I am going beyond this target and would like to move anything for future contributions beyond what I am getting a match for into a Roth. I know this will increase the amount I currently pay in taxes, but I believe this small increase will be wothwhile when I look to retire.

My employer matches 50% of my contributions up to 2.5% of my salary. If I earn $70,000/year my math says that in order to receive the full match, or $1,750, I only need to contribute 5% of my salary to the 401K.

If this is the case, I can move the remaining % of my contribution (currently I contribute a total of 14% to the 401K), a total of 9% into the Roth for all future elections? However, I believe the max contirbution for people under 49 (I am 31 years old, married with a 9 month old), is 5,000. So if I contribute 7%, which gets me to $4,900 per year, I can keep my 401K contribution at 7% as well?
- Ed

Your math is completely correct.

Furthermore, doing things this way hedges your bets against future taxation. We don’t know exactly what income tax rates will do in the future. If they go up, then the Roth was your better bet. If they hold steady or drop at all, then you’ll be happier about the 401(k) money.

If you put all your eggs in one basket, you might be thrilled, but you might deeply regret the bet. That’s not something you want to do with your retirement money. Diversification is always a good idea.

Q7: Tiredness
A while back, you mentioned that you have some amount of seasonal affective disorder and that it was particularly bad one winter before you discovered what it was and how to handle it. I’ve been utterly exhausted the last few months and I’ve been wondering if it is like what you had. How did you figure it out? What did you do to treat it?

- Kelly

The winter of 2008-09 was utterly miserable for me. I had a severe illness in November which kept me inside for most of the month and after it was over, we were locked into a terrible December and January for weather. My sense of day and night was completely out of whack and I was tired most of the time except for occasional periods where I felt completely fine, most of which popped up in the evenings around 9 PM.

My doctor suggested several things, but two things worked really well for me. One was a light box (this model, more specifically), which I use for an hour or so every morning starting in early November through February each year. I just sit it next to my computer monitor and work normally, and it switches off after an hour. It helps to adjust my brain to the idea that it’s morning, which means my body stays on some semblance of a normal day-night pattern in winter.

The other is simply getting outside as much as I humanly can. Thus, in mild winters (like this one), I barely notice it. In harsh winters (like 2008-09 and 2010-11), I notice it much more because it’s more difficult to get outside.

The more sunlight I get, the better, particularly in the morning. Nothing beats the real thing, but the light box is a very good substitute for grey winter mornings and harsh winter months.

Q8: Board games with kids
A few days ago, you mentioned playing a game called Flash Point Fire Rescue with your six year old son, and you also mentioned that it had rules for families and kids as well as advanced rules to make it a more compelling game. That sounds really interesting – a game I could play with my seven year old and five year old and also with my brother that I used to play Risk with. Are there any other games that balance “family” rules and more challenging rules like that?

- Tim

My best approach is to look for games that I can enjoy with my wife, then look for simple variation rules for them that I can play with my children.

A good example of this is the game Cartagena, which is by default a fairly thought-intensive game for adults. By simply eliminating the idea of using a hand and simply playing based on the card you draw off the top of the deck, the game became simple enough that my four year old daughter can play it well. There’s still a bit of thought involved, but it’s a much simpler game.

Look for games that appeal to you as an adult, then look for variants that would work with kids. That’s the path I’ve followed.

Q9: Math on retirement gains
I got my TSP statement yesterday and it showed that my total contributions over 10 years was $100,000. The Agency matches 5%. The total value of my TSP was $165,000. When I do the math, it says that over 10 years I made a 60% return…is this right? If so, the funds did very well even before/after the crash in 2008-2009!

- Virginia

Let’s just ignore the agency matching for a moment. Let’s say you’ve contributed $10,000 a year over the last ten years to your account. Let’s also say that your average annual return was 8%. Your balance after ten years would be very close to $150,000.

Given that I don’t perfectly understand how your agency’s contribution works, your conclusion seems reasonable. I don’t think there’s anything out of whack with those numbers.

2008 was a disastrous year, don’t get me wrong. The S&P 500 dropped 37.22% of its value. However, in 2009, it gained 27.11%. In 2010 it gained 14.87%. By the end of 2010, you’d gained back everything you lost in 2008 and then some. Before 2008, there was a run of five strong years in a row, including 2006 (+15.74%) and 2004 (+28.72%).

The stock market fluctuates like crazy. Your returns seem reasonable, but I would guess that right now they’re a bit above what I would consider the long term average. Warren Buffett predicts the long term annual return on a broad-based stock investment to be 7% going forward. You earned somewhere around 8% over the last ten years.

Q10: Borrowing from a 401(k)
I received a diversification election form from my employer as I am over 55 with 10 or more yrs under the Profit Plan. This gives me the opportunity to take a partial distribution of up to 25%. I only need to borrow $5000 but not if it will greatly impact my retirement. I know I will be paying a penalty tax as I am not 59 1/2 and the money will be taxable if not rolled over to an IRA which it won’t since I need this money for other uses. Please advise me of your suggestions.

- Alice

It depends on several things. How strong is your retirement savings right now? Are you on track to retire at the age you want with the money you have saved? How vital is your purpose for wanting the money now?

Rolling the money into an IRA and waiting five years is going to save you the IRS tax penalty. If you can wait five years for whatever it is you’re going to use the money for, then that’s what I’d do. I’d withdraw it as soon as I was eligible to do so from the IRS and move forward with whatever my plans were.

If you need the money, taking this money out is no different than tapping your other retirement savings. The IRS penalty really makes this a financial loser, but sometimes life intervenes.

Got any questions? Email them to me or leave them in the comments and 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 hundreds of questions per week, so I may not necessarily be able to answer yours.

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66 thoughts on “Reader Mailbag: Pulling Up Friends

  1. @Q3: I know of a book that might be helpful in your situation. Stop the Retirement Ripoff, author Loeper, includes essentially a step-by-step guide to getting your company to change its investment options for its 401K. There are 2 editions of the book, not sure if the 2nd is out yet, but the author talks you through figuring out the fees and expenses of each fund, and how to talk to the HR dept where you work about offering better options, as well as how to recruit co-workers to your cause (because while HR hearing from 1 person doesn’t mean much, 3 is a trend and 4 or 5 become downright important, from an HR perspective). Apparently there is also some kind of labor law or regulation that says companies have to offer “good” retirement plan options, and the book even talks you through contacting the right government agency (anonymously) about your company’s plan. No, my last name isn’t Loeper — I just think the book is very helpful.

  2. Q3: If you’re already maxing out a Roth IRA, you wouldn’t be able to contribute to a traditional IRA anyway, even if you weren’t over the income limit.

    Maybe it’s just your stilted writing style, but I was struck by your complaint that your 401(k) options aren’t “intriguing.” Saving for retirement isn’t supposed to be intriguing. If you’re looking for intrigue in your retirement investments, it’s possible that you’ve crossed the line from investing into gambling.

  3. @Trent: Let me get this straight. Your friends have already built successful careers as editors, artists, and promoters. You, on the other hand, are essentially still an amateur novelist. And yet you’re hoping to “help them out” and “pull them up” with your novel?

    Either you don’t mean what you say, or you’re even more arrogant than I thought you were.

  4. Ugh to Trent’t comment on working with friends. It’s the easiest way to lose a friendship! It’s the reason my husband didn’t go into business with his college roommate/best friend more than 20 years ago! The friend has done extremely well financially, and we’re doing fine, but the friendship is still intact, and that’s the most important thing for me – they’re still best friends.

    Q5 – I disagree on the assumption you have to play, that it’s good for bonding, and that it’s an acceptable thing to do at work. It’s gambling, for one thing, which some people object to for a lot of reasons. Also, can I assume you’re doing this bracket thing on your own time (ie lunch hour) and your own computer (not the company’s)? Otherwise you’re stealing from the company just as much as if you’re taking home computer paper for personal use or padding your expense account. Nobody says the office has to be some gloom and doom dungeon, but I think there are things that don’t belong there. The other thing is that the whole sports bonding thing is primarily dominated, at least in my experience, by one kind of male. Women by and large and men who aren’t sports fans are very much left out. That causes another whole set of problems.

  5. Q5: If you don’t like basketball, don’t pretend you do. Lying about it won’t build bonds between you and your coworkers like Trent claims. And if they find out the truth, they may not trust you anymore.

    I don’t understand why Trent would encourage you to waste money betting on something you don’t like, just to impress people. Seems to go against everything he claims to stand for.

  6. Roberta is right about not mixing friendship and business. Friends make lousy critics; they will often not tell you what you need to hear. On the other hand, if they are honest, the friendship will suffer. Better to use an unbiased professional.

    Q. 1–A 7% rate of return and a 9% rate are equally unrealistic these days. This sloppiness undercuts the point–which is, after all, an accurate one. The writer should not pull money out from a retirement fund to underwrite a potentially ruinous purchase of rental properties.

  7. Q5: Just say no. “Sorry, I need to sit the bracket pool out this year. I haven’t really been following the basketball season, so I wouldn’t have a clue how to fill out a bracket.”

    If you can’t stand up to peer pressure over something as trivial as this, how are you ever going to do it when there’s something more important on the line?

  8. In most offices, no one will care if you don’t chip in to the betting pool. Just smile and pass it by. When the winner is announced, join in the congratulations and move on.

    Don’t make a big deal about your refusal to participate (really–don’t cast it in moralistic terms) and it won’t matter at all.

  9. @Q5: It’s a basketball bracket, you can fill it out completely randomly in less than 15 minutes. I have friends who fill them out from their pets’ perspectives. All the teams with cat mascots win — and one year a family’s cat won it all when a Cinderella with some kind of cat mascot made it to the Final Four. It’s supposed to be fun! Pick something random as your winner and run with it. Navy blue always beats light blue, animal mascots beat inanimate object mascots — make up a system and have fun with it. If there’s a kid on one team who has the same name as your child/best friend from grade school/family friend, that team wins it all. Whatever.

    And #4, seriously? I am a woman, and regularly win/ have come close to winning the brackets at my various work places over the years. Heck, my mother’s craft store (do I have to say that they’re mostly women?) co-workers do brackets. They’re fun. Sure, I love college basketball, but the brackets are a lot about luck, not skill or knowledge (sure, a #1 seed has never fallen to a #16, but #2s lose to #15s occasionally, and a #12 beats a #5 almost every year).
    Most people spend more time surfing the web every day from work than it takes to fill out a bracket. And here’s a handy piece of trivia for you — more vasectomies are performed the Wednesday before the men’s tournament starts than any other day of the year. Great excuse to stay home and watch 2 days straight of basketball. Frankly, I wish I’d planned my pregnancy a bit better ;D

  10. Q3, you should check this out with your accountant and benefits department, but I believe some 401(k) plans allow “in-service” direct rollovers into traditional IRAs. Direct rollovers are not treated as taxable events.

    I agree with Johanna that intrigue is not a desirable attribute of an investment program. “Intriguing” usually means offering the promise of an extraordinary return or investing in some novel investment vehicle. Since you are maxing out a Roth, you have about a third of your retirement contributions available for such options. That’s more than enough.

    I also agree that if you continue maxing out your Roth, you wouldn’t be able to contribute to a traditional IRA, but you could choose to lower your Roth contributions. Again, check with your accountant, but as long as neither you nor your employer make contributions during your tax year, you are not “covered” by an employer retirement plan. Basically, you’d have to stop contributing to your 401(k) completely AND stop contributing to your Roth, to be able to deduct the maximum traditional IRA contribution. If you’re currently contributing $10,000 to your 401(k) and $5,000 to your Roth, you’d end up cutting your total retirement contributions by two-thirds, just in order to get more investment flexibility for what’s left. Definitely not a good idea.

  11. Response to Q1: “To turn $8K into $100K over the same timeframe, you’d have to have a roughly 9% annual return, which isn’t anything you will realistically find in any legal investment.”

    Really? That is an utterly incorrect statement. There are thousands of clever investors making deals or buying assets every day which will return well over 9%, and are perfectly legal and ethical. Just because you can’t go down to the corner store and buy your fill of 9% risk-free bonds doesn’t mean that there’s no such thing as an investment that will give a great return. And incidentally, rental real estate is one of those investments, if done well.

  12. If everyone else in the pool treats it very casually and you’re not the only non-fan then joining MAY be a means to bond with others.

    If the others in the pool are all real fans and / or take it seriously then they are unlikely to appreciate your uneducated participation unless you also intend to take it very seriously and really learn what you’re talking about.

    And really, isn’t spending money to fit in with the group part of what Trent blames his original financial problems on?

  13. Q9: You need to look not only at your contributions but your agency contributions to compute your rate of return. If your salary was 100K/year for 10 years, and you contributed 10K and your agency match was 5% of your salary or 5K, then the total amount input into the account was $150K over 10 years, not 100K. Which makes your gains from 150 to 165 only 15K, not 65K.

  14. Q3, I forgot to mention that Trent’s math on recovering your 28% tax with a .8% fee savings over 35 years seems to be off. My calculations show that earning a .8% higher return on a contribution taxed at 28% does NOT pay off. Over 35 years, it results in about a 15-17% smaller retirement nest-egg. Not to mention that in your tax bracket, future tax rates are likely to be higher.

  15. Q1, the housing market in Seattle is still not low enough to make investing in residential real estate a safe thing for an undercapitalized person to do. And even if you were to put all of your after-tax retirement money and all of your savings into this project, you would still be undercapitalized for that market, unless you have a VERY substantial equity in your home on which you can set up a line of credit for any problems.

    There are places in the country where you can expect to receive rents equal to 1% or more per month of the house value – rent of $1,000 a month on a house worth $100,000. That’s enough to generate some positive cash flow, assuming no major problems. But that’s not the Seattle area.

    If you want to invest in residential real estate, check out some of the publicly traded REITs (real estate investment trusts). Those invest in real estate chosen by experts, managed by professional managers, and even then, aren’t always profitable.

  16. Hopefully you’re paying them for the editing/cover art/promotion. The weirdness of “The biggest reason I’m trying to do things this way is that if the book is a successful one, it’s not just my boat that will rise. The boats of some of my friends will rise, too.” makes me think maybe you’re not.

    Plus, seriously, if they’re already professionals, it sounds more like THEY will potentially help your boat rise. It sounds kind of skeevy to me.

  17. #10 Could you be confusing a want with a need? That 5K will be the most expensive money you’ve ever obtained. It will do you more good in your retirement account than in practically any other use. Unless you are in life-or-death and cannot get the money any other way situation, I’d pass. Your future self will thank you for not spending the money.

  18. #10 The amount of time spent surfing the web every day if it does not relate to your job duties is also theft from your company. The fact that a lot of people do it doesn’t make it right.

  19. Q4

    The answer doesn’t match the question at ALL!

    I would pay the 20% down, as long as you still have at least a few thousand in your savings after (which it sounds like you do) – it will lessen your monthly payment as well as eliminate the need for PMI. Calculate the difference between the two different payments and make sure you’re sending those straight into savings (in addition to whatever your currently saving) and you should build your account back up fairly quickly.

  20. Roberta, speak for your job; plenty of us have are, for instance, salaried and don’t get paid by the hour (we just have to accomplish a certain amount). Plenty of other people have legitimate downtime where they need to be at work but not accomplishing anything in particular. And anyway, studies show that people who take small breaks during the day are more productive than people who don’t; that includes breaks for websurfing.

  21. Q5 – If you can’t comfortably say no to someone, here’s an easy way to weasel out:
    Almost all of these brackets are managed online now, through ESPN or CBSSports, or insert sports website here. Just never log in and set it up. Chalk it up to forgetfulness or how busy work has been.
    Note: This isn’t to say deceit is a great idea; I imagine most workplaces and coworker relationships lend themselves to a simple “No thanks, maybe next time” being a sufficient response for anyone who wasn’t interested in the first place.

  22. Q10, you mention a “loan” from your 401(k). This is not a taxable distribution unless you fail to pay it back. If you are taking out money for diversification, then it should be a rollover, also not a taxable distribution.

    If your question is about taking out $5000 just as an early distribution, then it is taxable. If you really really need it, then take it as a loan and pay it back as quickly as possible.

  23. Q5, how does it build strong personal relationships to fake an interest in a sports event or in gambling? Assuming a personal relationship does develop, how long does the deception continue? Sooner or later your co-workers are likely to learn that you really don’t care about sports, or dislike gambling. And most people are more unforgiving about such small deceptions and inauthenticity that does involve them than they are about larger ones that don’t involve them. You cheated on your spouse? Well, it’s not nice but none of my business. You lied to me about liking the color of my new car? What a two-faced scam artist! How can I trust anything you say?!

  24. Participating in a bracket that you’re not particularly interested in isn’t necessarily faking it. With a good attitude it’s fun. There is no need to hide your lack of sports knowledge. Admit you’re just in it for a laugh and have fun.

    My coworkers who are interested in it take care of tracking everyone’s progress and everyone gets a good laugh when the people who don’t know much get lucky and win over those who do know.

  25. I would guess the friends are more professionals on the level of Brittany’s photography company than established professionals with a decent day rate.

  26. I am not into brackets, but I will always fill one out if the group needs more players. If enough are already playing, I pass.

  27. Q1 – We became “landlords” when we purchased a house in the country in 2007 and did not want to sell our “city” house in a depressed market. We have since purchased 3 more rental/investment properties. All properties are returning very very well, approximately 9% on average.( after taxes, insurance, mgmt fee, and 10% of rent put away for future repairs.. two houses have a mortgage)
    You will have to crunch the numbers after educating yourself on the market in your area as to whether or not to finance, how much down, what area, what price to pay, rental potential, etc.
    Without knowing what type of retirement plan you are talking about it may or may not be beneficial to cash in your “plan”.

  28. It’s all well and good that some people enjoy taking part in bracket pools even if they’re not into basketball. But that’s not the situation Fred is in.

  29. #24.
    I fake an interest everyday with almost all my co workers… Some more so than others in order to create a happy work environment.Playing a office pool when you don’t care for sports is not deceiving. More than likely the sports buffs who are heading up the pool knew a long long time ago which co workers are into the sports thing and which aren’t, they just need to sell the brackets. It is just a fun thing to do at work…much better than the Christmas Party which I REALLY need to pour on the FAKE.
    Three options: (1) you participate because you love sports and/or gambling (2) you don’t give a crap about basketball but you participate because it’s something going on at the office and who know something good may come from it… new friend who hates basketball also, you win the cash, helped build a network, etc. or (3) Just say no, I think I’ll pass this year or No, { insert any appropriate excuse here}.
    Personally, I would go for the second option unless I was strapped for cash.. which would be my appropriate excuse.

  30. If Fred feels guilty about something and he has the option of not doing it, then he should not do it. Only Fred knows whether ten dollars is a fair price to pay for guiltlessness.

    Here, he will receive sound and well-meaning advice telling him to do one thing and equally sound and well-meaning advice telling him to do the opposite thing. This will merely compound his guilt with confusion.

  31. Yeah, somehow I feel like this is like the time he asked artists to donate art to the website for no compensation other than the free publicity.

  32. Q1 : Cashing out your retirement is not a great idea. You’ll pay your top marginal tax rate and a 10% penalty. That could easily be a $5000 tax bill.
    If that rental is a good buy and you can afford it and you want to be landlords then go for it, but don’t get your down payment by early cash out of a traditional IRA or 401k. Make sure you have a cash cushion for that rental and that you’ve accounted for ALL the possible costs related to a rental such as vacancies, damage, unpaid rent, etc.

    Q5 Fred : It depends on the workplace, but generally there should be no problem with simply declining. You are not obligated to participate in workplace gambling and you should have no reason to feel guilty about it. If your coworkers try to cajole you into it then maybe they just want you to have fun with them or maybe they need more people to make the pool bigger. Sometimes however workplaces can be full of stupid office politics or cliques and it could be in your best interest to just play along and give them $10 but thats probably more the exception to the rule. I’ve never been in a workplace where anyone would really care if you said no to a betting pool, but I imagine some workplaces full of guys with a ‘locker room mentality’ then not playing could make you the lone man out and hurt your situation.

    Q7 Kelly : I hope you go to a doctor to ask them about your tiredness. You could be tired for a 100 different reasons.
    Remote diagnostics via the internet from personal finance bloggers does not make for good medicine.

    Q10 : This whole question and answer is all confused.
    They got a “diversification election form” and have a “profit plan”. They then refer to getting a “loan”. They do not say anything about a 401k.

    What you *probably* have is an Employee Stock Ownership Plan (ESO). Those plans are NOT the same as 401k’s. They are plans where the employers setup a retirement account that accumulates ONLY stock of the company in question. When you hit age 55 and have 10 years in participation the plans are required to allow you to diversivy at least 25% of the money. You can pull it out in cash, roll it into an IRA, put it into other investments. If you take out cash then its treated as an early withdrawal.

    If you take cash then its a withdrawal subject to penalty. You are NOT borrowing the money and it is not a loan.

    The writer seems set on cashing out the money and say they ‘need’ it and that they will not roll it over to an IRA. So I’m not sure what the question here is since you already decided to cash out your retirement. You’ll pay a 10% penalty and taxes. It will undercut your retirement. Theres no way to get your money now and have it later too.

  33. Two comments:

    As concerns winter tiredness – have you had your vitamin D levels checked? I up my vitamin D intake in winter (doctor’s recommendation, plus lots of articles) and it makes a huge difference to both my energy levels and immunity.

    Secondly, I’m from Canada. One of our great folk singers, Connie Kaldor, one said “Where I come from (Saskatchewan), you can die of exposure”. As an artist myself, I’m offended by the approach of asking your friends to do what they do for a living, for you, for free. Make no mistake, this is for your benefit; saying that you’re “helping them out” is disingenous at best, and arrogant as well.

  34. @Ellen K #33: The way I see it, if he’s not paying them (at least) 100% of their standard rate, he has no business claiming that he’s the one doing them a favor.

  35. Trent only says his friends work in their fields professionally. That doesn’t mean they are particularly successful. To say someone does something professionally only means they do it for financial gain. e.g. I could say that my friend is a professional athlete and that would be true if he was in minor league baseball making league minimum of $850 a month.

    You could just as easily assume that ‘professionally’ means successfully. But Trent could be using the word to explain how his friends have actually been paid for their work in the field and are not rank amateurs.

    The fact of the matter is we don’t know the specifics. People are reading it one way and it could be another.

  36. Funny, you just told Al in Q9 of last Monday’s Reader Mailbag that “friendships and finances rarely mix.”

  37. Q3: I think Trent advice is not correct for this question. Please feel free to review my comment and let me know if I am missing something…

    The main reason to invest in a 401(k) (as opposed to a regularly taxed account) is NOT the deferred taxes: it is the fact that dividends, interest and capital gains are not taxed. Dividends and interest are taxed annually at your regular income rate. At a federal rate of 28%, if your non-sheltered account returns 1.5% in interest and dividends you will end up paying 0.42% per year in federal taxes.

    Now the capital gain taxes: let’s assume a modest return of 5%, and an investment period of 30 years: that’s a total return of 332%. After a 15% long term capital gain tax (assuming it is the same 30 years from now), your total return is 282%, that is, 4.57% per year, 0.43% down from your initial 5%.

    So 0.42% in taxes to dividends and interest, and 0.43% in capital gains tax, means 0.85% in federal taxes per year, more than your 0.8% commission. In addition you still need to pay state taxes and the fund commission, which may be small but will still be something. In other words, by switching from a 401(k) to a fairly standard (6.5% annual returns) non tax sheltered investment, you are just paying taxes instead of a commission. If the fund performs any better than what I estimated, then you will end up paying a higher proportion of your money in taxes.

    And there are other reasons why you may want to stay in the 401(k). Are you planning on working for the same company for the rest of your life? Because if you switch jobs you can roll your 401(k) over the IRA of your choice, in which case you will be able to find better commissions. And of course there is a chance that your company may switch to a better 401(k) manager that will offer you better options. If any of those two things happen you will be able to just move your money to a better fund and stop paying commissions. However if you put your money in a non-tax sheltered account you will have to pay taxes (about 0.85% annually according to my back of the envelope calculation) for life.

    And then there is the tax deferral. This is the hardest aspect to quantify, since it is impossible to predict future taxes. 1% down in future taxes (that is, paying 27% instead of 28% 30 years from now), would be equivalent to a 0.04% of extra gain. Not a lot, but if the taxes go down significantly it would be worth it.

    In summary, it is not clear that switching to a taxed account is a better option at all. Or in other words, even a bad 401(k) plan is better than no 401(k) plan at all, particularly if anything changes down the line (you switch jobs or your company changes plans).

    BTW, I am also confused by what Trent means about being able to take advantage of the long term capital gains tax: in a 401(k) you avoid that tax completely.

  38. @jim

    The thing is, if he’s not paying them, he’s not doing them any favors – no matter how successful or unsuccessful they are professionally.

    If he IS paying them, it’s weird that he says that IF his book is successful, it will have an impact for them as well. If he’s paying them, it should have an impact on their situation whether or not his book is successful.

  39. If Trent is paying them a fair wage then a successful book would also benefit them by giving them a successful book on their resume. He refereed to ‘raising boats’ which is vague enough to mean almost anything.

  40. True, the key is if he’s paying them 100% of their regular fees. That was my original point – he may be, but his wording doesn’t make it sound particularly so.

    (Of course, even his idea of having them all on a conference call is weird and random.)

  41. About Trent working with his friends on the novel: I think most comments here are assuming too much: Trent does not say that he is not paying them. Just from reading Trent’s articles I doubt very much that that it the case. Also Trent is in a better position than us to see who is helping who…

  42. @jim: If they’re working in their fields professionally AT ALL – even part time for a pittance – they’re ahead of where Trent is in his novel-writing “career.” So it’s still funny to think that he’s doing them a favor by allowing them to work for him.

  43. Other Jonathan #12 is right. While you should not EXPECT to get 9% long term, you can certainly do so without breaking laws. I mean even the S&P 500 has grown over 10% annually in the past 30 years even with the horrible return of the past decade. Buying and holding the S&P 500 for the past 30 years was not a crime.

  44. Q3: about Trent’s advice of investing in municipal bonds: most likely the return of those bonds will still be much less than the return of investing in a stock fund, even after discounting the 0.8%-1.5% fee.

  45. “I mean even the S&P 500 has grown over 10% annually in the past 30 years even with the horrible return of the past decade.”

    What is it that they say about past performance and future results?

  46. Referring to his friends as “professionals” would indicate to me that they have been paid for their work on at least an occasional basis. Or heck, at least ONCE.

    So how they could be be “pulled up” by a novelist who has never published nor made a nickle off of his novels is a bit of a head scratcher.

  47. You can argue all day in circles if you want, but we do not know what Trent is paying his friends and any assumption about the wages is really just pure speculation (or maybe at best educated guesswork). You can’t interpret what he wrote here to prove or disprove anything about the payment arrangements.

    Fact of the matter is that we simply do not know.

  48. “I mean even the S&P 500 has grown over 10% annually in the past 30 years even with the horrible return of the past decade.”

    What is it that they say about past performance and future results?

    “While you should not EXPECT to get 9% long term”

  49. “You can argue all day in circles if you want”

    To whom are you referring? I think everyone but you is arguing in a straight line.

  50. Q2: Not everyone has the ability to focus on a single task like writing for hours at a time. I personally do best when I work on a project straight through, with as few interruptions as possible. My husband, on the other hand, can’t focus for more than about an hour before he needs to just get up and do something else for a few minutes (maybe 5 minutes out of every hour), then come back and keep going.

    There are distinct advantages and disadvantages to both:

    Me: In college, I could sit down and write a report (engineer – few papers, lots of reports) straight through in a day. Disadvantage? It was hard for me to come back to the work in chunks, so if I didn’t have a whole day, it took me more hours than if I could focus intensely for that single block of time. Professionally, this is not a great strategy, since it’s very unusual to have hours of uninterrupted time. So I had to learn a different method for projects after college, and especially after having kids.

    Husband: He couldn’t just sit down and write like that. So he figured out a compromise – he would plan ahead, write out an outline, then work from the outline over the course of several work periods, usually spread over a week or more. He had figured out how to work with/around interruptions before finishing college, which set him up much better for life in the real world, especially life with kids.

    So don’t view an inability to sit down and work continuously for hours as a disadvantage. See it for what it can be – a great motivation to learn how to work ahead in small blocks on a larger goal.

  51. Johanna, about the brackets I meant that were I in Fred’s situation, I’d pay the $10 and fill out a bracket if it kept the league from falling apart so my co-workers could enjoy it, but otherwise I wouldn’t feel bad because it would go on just as well without me.

  52. I actually enjoyed the “Not only that, it will be a lot more fun to have a bunch of friends on a conference call than a bunch of people I barely know” part more.

    It’s like what a 12 year old thinks work should be like.

  53. Q3: Be sure and look into an inservice rollover of your 401(k). Not all employers let you do this, but it’s a great option if your company allows it. You roll your 401(k) directly into an IRA so that you can diversify into investments that you choose. Since you’re rolling the $ directly into an IRA, it’s not a taxable event. We plan to do another rollover next year once the maximum 401(k) contribution and matches are met. As far as I know, there is no limit on the number of rollovers you can do.

  54. @Roberta: Thank you for reminding me why I put up with the struggles of self-employment; it’s worth not having to deal with petty and ridiculous workplace rules.

  55. Q1 – There’s not enough information provided to determine whether cashing out a retirement vehicle to invest in a rental property (also for retirement) makes sense. While the downside of cashing-out is clear (pay income tax plus 10% penalty), there’s nothing stated about the rental opportunity, so how could Trent possibly make a good recommendation here? He can’t. The correct answer is “Be cautious because of the risks, but it depends upon the specifics of the rental opportunity.” It might be far better or far worse than keeping funds in the retirement account.

  56. Kelly wondered: “I’ve been utterly exhausted the last few months and I’ve been wondering if it is like what you had. How did you figure it out? What did you do to treat it?”

    Don’t look for medical advice on the Internet: anyone who’s competent to advise you won’t advise you without an in-person checkup. If you can’t afford medical care (commmon in the U.S.), see if there’s a local medical school with a teaching hospital; it’s dimly possible you can find a student who will examine you for free or for a greatly reduced rate as part of their training, *under supervision of a trained doctor*. Don’t know if this is possible for doctors; I know it’s possible for dentists and optometrists.

    Speaking as someone who studied science in university, and who’s taken a few medical-relateed courses and done a lot of technical reading: I’m wise enough not to play doctor, even on the internet. If I suspect something, I’ll see my doctor and ask about it. You can’t learn medicine from books (or Web articles); about the best you can do is become an informed consumer of medical services.

  57. Sounds to me that Trent is just “buying local” for his novel production. I’m not sure where anyone got the idea he was underpaying/not paying his professional friends, but as jim says, you can’t make those assumptions based on the 5 sentences he wrote.

    The “I’m pulling them up” attitude is a little pompous, though.

  58. Geoff Hart, it’s true that Trent can’t properly diagnose Q7′s medical condition, and a definitive diagnosis may be obtainable only from a physician (if at all), but in my experience unless you want to get extensive testing done the doctor is going to identify the most statistically common causes of exhaustion and recommend standard protocols for those. And most of those CAN be identified from the Internet by anyone with solid research skills. The extensive testing is cost-prohibitive in the U.S. and almost surely not allowed in single-payer health care countries as not medically indicated.

    A basic preventive care check-up with basic lab work, before it became mandatory for health plans in the US to pay for them, cost about $250-300 if you shopped around a little, even without insurance. Getting that done every two years or so is hardly unaffordable to most people in the U.S., who spend on average two to three times that much on their cell phones per year. Now, under most plans, the cost is far less.

  59. Q4: It is better to have an emergency fund because you never know what unexpected expenses will come up after buying a home (and there will be some!). It’s better to have to pay PMI than be stuck when those unexpected costs come along. Once you pay off enough of the loan so you own 20% you can talk to your bank and stop paying PMI.

  60. @#56 Gretchen: Great comment. When I read that line I thought of Tom Hanks in the movie “Big.”

    Also, surely Trent’s not giving the cover artist a cut of the profits based on sales, so all we can assume is that he/she only gets paid if the book sells well enough. Or perhaps he’ll give him/her a bonus if it hits a certain number of sales. I think it’s a very odd view of the industry. When my book was published, I didn’t even get to choose the cover art. Usually the publisher does that. A new writer doesn’t have much say in the process.

  61. Q3 Trent’s math may be right *if* you stay with that same employer for your entire career, and you never convince that employer to get a better 401(k).

    If I were you I would continue funding your 401(k). You get 28% off now. Then when you leave the job after the average 3.5 years, you can roll it into an IRA at a low-cost brokerage. When you retire you can withdraw it and use it to “fill up” the lowest couple tax brackets in the future, which will still exist as long as we have a progressive tax structure like we do today. For instance today the lowest brackets are 0% (exemptions and deductions), 10%, and 15%. Why would you pay taxes at 28% now to avoid taxes at 0% or 10% later?

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