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. 401(k) and retirement age
2. Overaccumulation of wealth and guilt?
3. Investing outside of 401(k)
4. Stage fright
5. Non-recourse loans
6. Frugal but healthy diet
7. Student loan repayment conundrum
8. Maintaining old workplace contacts
9. Supplemental insurance when renting car
10. Avoiding political talk
There are few things I enjoy more on a lazy afternoon than finding somewhere comfortable and curling up with a good book. I like spreading out a blanket under a tree somewhere, stretching out, opening up a book, and diving in deep.
In fact, this basically describes my plans for this afternoon while my children play at the park.
Q1: 401(k) and retirement age
If I want to retire early (ideally 55 but more realistically 60) would I calculate based on retirement age (55) or withdraw age (59 1/2)? It is my understanding the current law says to avoid penalty one must be 59 1/2. So for 5 years I would not be able to withdraw from my 401k.
Calculate based on retirement age.
IRS Rule 72(t) basically says that you can start taking withdrawals early from your retirement accounts without penalty as long as you follow some straightforward rules. Basically, it means you start taking regular withdrawals for at least five years or until 59 1/2 – whichever takes longer.
This article explains the basics, but you’ll want to talk to a financial advisor to make sure it’s set up right for you.
Q2: Overaccumulation of wealth and guilt?
I’m 27 years old and I’ve got $125,000 in the bank thanks to the great advice I’ve found on The Simple Dollar and some other sites. The problem is that now I feel kind of guilty, as though I’ve spent my twenties trying to get rich instead of enjoying my twenties. Any advice?
Do you personally feel as though you’ve missed out on anything you really care about – or care about enough that you’d trade your money in the bank for it?
Remember, to have whatever it is you’re thinking about, you’d have to lose the security you’ve built up. Also, you already have the enjoyable things you have in your life regardless of whether you spend the money or not – you’re just striving for something more in exchange for your security.
For me, it wouldn’t be close to worth it. The opportunities in front of you as a 27 year old with more than $100K in the bank are incomparable.
Q3: Investing outside of 401(k)
My company does a 401k match up to 6% of my contribution, and does an annual payout of profit sharing into my 401k of about 2-4% of my annual salary. My question to you is, if I have a 3-6 month emergency fund, and am contributing 6% of my salary to my 401k, would it be financially advisable to invest another portion of my income regularly into something like an Vanguard index fund? While I know saving for retirement is important, shouldn’t I also attempt to grow my pre retirement savings? Or should I focus on contributing 10-15% of my gross income to retirement, even though my employer only matches up to 6%?
Assuming your employer is doing a 100% match of that 6%, you’re effectively saving 12% for retirement right now, which is pretty good.
I’m not sure of your age and how much you already have saved, but if you’re looking at alternately contributing to an index fund in an ordinary taxable account, that seems completely reasonable to me, particularly if you have clear goals for that money prior to retirement.
In fact, that’s more or less what I’m doing. I’m investing retirement excess into a normal taxable account so I can use it for other things (such as building a home sooner rather than later).
Q4: Stage fright
My job offers many opportunities for presentations at conferences and the people that volunteer to do them – usually the same few people – are the ones that are getting promoted a lot and getting raises. I want to get on board but I have terrible stage fright. Do you have any suggestions on working through this?
You need to work away from that stage fright by having successful speaking opportunities.
The best way to do that in an easy environment is to join Toastmasters, which is a civic group dedicated to public speaking. They help each other practice public speaking and find simple opportunities to engage in it.
You should also try for very small speaking opportunities, such as ones within your office. Are there chances to present just to coworkers to get your feet wet and your confidence up?
Q5: Non-recourse loans
My friend and I are looking into purchasing some investment property. We are both short on cash, but have IRA’s. He told me about IRA Non-Recourse Loans as an option. What are the advantages of these and are there any disadvantages of this? I feel like I would rather spend the money and get some real property than play the gamble of wall street. After watching Frontline’s The Retirement Gamble, I am a bit leery of investing in mutual funds.
It’s a loan where you’re using your IRA as collateral if you can’t pay it back. You’re restricted from “carving out” your IRA while using this type of loan, which means you can’t get a loan like this, empty out your IRA, and then walk away.
The disadvantage is obvious – you’re putting your retirement at risk. If you use this to buy a property and then find you can’t sell that property quickly in a situation where you don’t have any cash flow – if you’re fired, for example – then you’re in a pickle.
I consider this far more risky than using an index fund to invest for retirement. Investments within your IRA might go up or down, but you’re not putting the entire account at risk.
Q6: Frugal but healthy diet
It seems to me that you basically have four factors when it comes to eating: it’s either cheap, healthy, tasty, or fast. You can’t have all of them, so you have to choose two or three.
It depends on your definitions of “fast” and particularly “tasty.” Everyone has different ideas on what “tasty” means. There are foods I find delicious that no one else in my family really likes, for example.
The key is to spend the time finding what cheap and easy-to-prepare foods are tasty to you. Start with the things that are objective – price, healthiness, speed of preparation – and then try lots of options until you find things you really like.
For example, there are a ton of cheap crock pot recipes that I absolutely love. I just toss in the ingredients in the morning, let it sit all day, and eat it in the evening.
Q7: Student loan repayment conundrum
You recently answered a question from two young people who were faced with paying off school debt or saving for retirement. You mentioned they should save 10% then pay back the school loans etc.
My wife and I are in a similar situation. She is getting ready to graduate from grad school at Harvard. This has a nice price tag of $56,000. Granted, it is the best program in the country.
I am in grad school as well but mine is completely covered. Her Harvard loan will be around 7.9%. We have a small car loan of $5,000 and my undergrad loan of $8,000 at 2.9%
Logic dictates we will pay off her Harvard loan as soon as possible. The way my grad program works and how I am compensated dictates we should have the Harvard loan down to around $38,000 by July of 2014 and paid off by July of 2016. This is very aggressive but will allow us to be in a position to have no debt by the time we are 30 years old and a combined income of at least $120,000.
We will have very little saved for retirement though. I had thought it would be better to pay off all debt by 30 then start massively paying into retirement with at least 50%-75% of one of our incomes to make up for lost time. Just seems to make more sense and pay less interest so we can save for a house etc.
Thoughts on not doing the 10% plan?
The problem with this scenario is it relies on the assumption that you’re both just going to immediately get high-paying secure jobs with no risk of unemployment.
Let’s roll the clock forward to age thirty. Let’s say you didn’t find work as easily as you thought and you still have most of that debt at age thirty. If you’re still committed to paying it off, you’re now looking at age thirty five or later before you’re debt free and begin saving for retirement. At that point, you’re going to have to save 20-30% of your income to make it.
Saving for retirement all the way along works better because it unclogs your finances when you hit age forty far better than waiting on retirement does. If you start saving now, you will have a few more years where you’re still dealing with debt, but you’ll be clear of it by age 40 or so and you won’t have to save more than 10% a year for retirement.
Q8: Maintaining old workplace contacts
Is there any value in maintaining old workplace contacts? I am friends with a bunch of old coworkers on Facebook and I rarely say anything to them. Should I try to build some sort of connection or just unfriend them?
Could those contacts have value in the future of your career? Are there realistic scenarios where you’d really need to tap those contacts?
It really depends on your career path, their career path, and many other factors. You’re going to have to assess on your own where you’re going and where they’re going.
If it doesn’t harm anything, there’s no reason not to maintain the Facebook friendship with them and say hello once in a while.
Q9: Supplemental insurance when renting car
My wife and I don’t own a car. In fact, we haven’t since 2009. Occasionally, though, we have to rent a car. Since we don’t have car insurance, I always face the question of whether or not to purchase supplemental “insurance” from the rental company.
My understanding is that the car owner is responsible for liability coverage in just about every state. The coverage follows the car, not the driver. So I assume that I’m covered when I drive their car.
Additionally, I always rent with my Visa card, which seems to have a pretty solid rental “insurance policy” attached. I’ve read the document carefully several times, and as far as I can tell, they will cover any damage (including the Crash Damage Waiver), even if it’s my fault (exceptions for DUI, of course). And since I don’t have my own insurance, Visa would be the primary.
The last few times I’ve rented a car, I haven’t taken out any supplemental insurance. When I tell this to people, the blood drains from their faces and they tell me that I absolutely must have my own insurance or buy the rental company’s. When I tell the rental companies about my situation, I almost need to revive the clerk with smelling salts.
Is this something that you can get to the bottom of? Am I putting myself at huge financial risk, or are the rental companies just trying to sell me another product?
Before you rent again, I would contact your Visa card issuer and make sure what they cover with regards to rental coverage and follow their guidance.
Often, people are unaware of what protections their credit card really offers them, so they’ll often find themselves double- or triple-insured in a rental situation.
For those wanting to see the details, this describes the coverage that Ronald is talking about.
Q10: Avoiding political talk
How do you avoid political talk in the office? People sit around and spout off crazy political opinions that I basically find disgusting but I know if I start shooting back there will be more problems than it is worth.
Don’t “shoot back.” It’s not worth it.
Just mind your own business. If they try to draw you in, just give a brush off response and walk away.
Political differences of opinion can turn nasty very quickly and should stay out of the workplace. I can understand the desire to have a conversation with a like-minded person to build camaraderie, but when you do that, you’re probably alienating some of the people around you who don’t agree with your views. It’s not worth it.
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.